The sudden, almost dramatic, increase in sales in the automobile industry specially in passenger cars is an interesting development. In Jul-21, sales for passenger cars together with LCVs and SUVs grew 114 percent year on year (105% if estimated Kia sales are included). Suzuki has come back with a banger, more than tripling its sales during the month (compared to last year), with Cultus, Alto, Wagon-R and Ravi boasting phenomenal demand numbers.
The visible gap between production and sales however implies this was just pent-up demand coming from a few months ago. Prospective car buyers have sat patiently at home waiting for car prices to come down. With government slashing taxes on vehicles (such as FED and sales levies), most cars cost 3-7 percent less now than they did last year. Cutting taxation is not a sustainable way to make cars affordable especially since automakers can simply raise prices once currency depreciates and their costs of production go up (which is the usual equation), but the rationale here is that the government will make up for the tax through increased volumes, and consumers will get immediate relief. That is true—at least for a little while. If somehow the government can justify this negative tax measure—though it really makes little sense while any government would subsidize car usage—so be it. The government believes that there is immense growth to be had in the automobile industry and is putting a lot of eggs in the auto basket.
The other major driver of sales is cheaper car financing. With a maintained policy rate of 7 percent and a price cut across the industry, this may be the best time to buy a vehicle in Pakistan. Whereas high-end luxury car buyers may not be as sensitive to price changes, middle-income buyers tend to be fairly more responsive to price cuts. In the past, Suzuki sales dropped much more than Honda or Toyota sales due to its very different market dynamics.
Policymakers should be happy with themselves because auto volumes are speaking louder than any words. Market watchers meanwhile should expect sales to continue in the upward trajectory. There is typically a 2–3-month delivery period for vehicles and many of the bookings made in July will materialize over the next few months. The resulting growth will only exceed expectations. Until of course to a point. Let’s see how auto companies will respond to the recent currency depreciation and how they have been planning their production over the past few months in anticipation of the tax cuts. If they planned close to upcoming demand in advance, they would have dodged the depreciation bullet.
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