Price reductions, less expensive car financing and new product line-ups from emerging players is translating to an impressive growth pattern in the automobile industry with nearly all segments in the business enjoying double and triple-digit growth. Volumes of passenger cars together with LCVs and SUVs have nearly doubled in the two-month period in FY22 compared to the corresponding period last year. The tides have turned almost dramatically for the industry, but in line with expectations of industry leaders.
For one thing, automobile assemblers are not producing any more than they could sell. The closeness between production and sale volumes suggests that assemblers are either very closely forecasting their demand or they are just producing less. It is true that demand in the industry—especially at this time—is likely a lot more than what assemblers are manufacturing. Car buyers seem very receptive to changes in industry dynamics. Demand showed restraint toward the end of the fiscal year FY21 and in June as buyers waited patiently for the much-hyped new policy to come into effect. That policy—or rather a series of measures--has been a temporary game changer for auto volumes. Prices across the vehicle range dropped between 3 and 7 percent as the government decided to slash FED and other taxes on the dear persuasion of the auto lobby. Assemblers are happy policymakers are finally listening. The government hopes to make up for these tax cuts through greater volumes.
Looks like that might actually happen with the way cars are flying out of showrooms. The winner in the volumes game is the unlikely Suzuki that was turning losses for eight consecutive quarters since FY19 due to subdued demand. But demand is coming and it is coming in droves. Though August’s sales have not been as intense as those recorded in July which saw an almost sudden jump, the cumulative numbers are nothing to scoff at for the two months. Suzuki drew in 148 percent more sales in 2MFY22 against Toyota’s 68 percent growth. Suzuki’s turnaround makes sense as one major driver for volumes is more affordable car financing. That together with the price cut has offered a much-needed breather to mid-income car buyers. Honda with fewer more expensive models will catch up with the two soon. In August, the company sold 60 percent more Civic +City than the previous month.
Here is the caveat though. Car buyers cannot rely on government tax reductions to sell more vehicles. After all, by their own assertion, they raise prices when cost of imports increases due to currency depreciation or when input prices in global markets go up. Dependence on expensive imported content, therefore, will continue to burden the domestic car buyer until large investments are made into localization. Assemblers believe that will happen when volumes reach desired levels and their investments can yield returns. But until such a time, the industry will remain in the vicious cycle of never-ending price increases; government taxes or no taxes. While it is unrealistic to expect that they would never raise prices—for one, a lot of the inputs for parts manufactured domestically are also coming from abroad—the frequent price hikes during FY18-FY20 were excessive and eventually resulted in demand skidding to a halt. Localization will not replace imports entirely but it would certainly reduce costs to a great extent—something that assemblers ensure us they are thinking about. As Asghar Jamali, CEO of Indus Motors likes to say: “localization has to make economic sense”. Hopefully, the renewed excitement in volumes will sustain and bring that economic sense whirring into action.
The second more immediate concern is the international chip shortage that has shaken the global automobile industry which is catching up to Pakistan. Delays such as this would result in reduced production that would put a dampener on volumes over the next months. Lastly, Monday’s policy rate revised upwards may not be too concerning in the short-term since it’s a small change but further rate hikes will affect auto financing costs for car buyers in the future. Best to lock in those loans before that happens! One great news here is Indus Motors signed an agreement with HBL for better rates and priority delivery on Toyota cars. Such partnerships can go a long way to facilitate consumers and indicates the company’s proactiveness.