Car prices are increasing. Assemblers are facing cost pressures due to currency depreciation, increase in commodity prices, shortage of integral parts such as semiconductor chips, and a steep hike in freight costs. Recall that the government recently slashed taxes and duties on vehicles to help lower car prices. Obviously, the Ministry of Industries and EDB are not happy at this price increase, so soon after the relief provided to assemblers in the budget. Though at the same time, higher car prices suit the Ministry of Finance and SBP who are in the quest to reduce demand and lower the current account deficit.
Last month, one small player attempted to increase prices, but was snubbed by the government. Now bigger players are increasing prices. One big player that had not increased any of its car price since the launch has already communicated the price increase. Another—the industry leader—has also increased the prices. Others may follow. Expectedly, price increases will become effective from December and January, though not all cars will experience the same level of price hike and not all auto assemblers will raise prices.
This is a dynamic game. There are higher number of players in the market. Some models are selling like hot cakes while others are struggling. In a few cases, supply chain disruption is delaying deliveries – this is true for some models of Suzuki and Tucson. Vehicles that are high in demand have gotten pricier like Toyota Yaris and Kia Sportage. The assemblers may try their luck to sell cars at the same price where they have CKD inventories—true in the case of Sorento and Elantra. And where the delays are long, assemblers may refrain to increase prices – for example Tucson.
The increase in price in percentage terms could be higher for smaller cars – for example Picanto—as the freight cost is relatively higher for smaller cars. In the case of cars which were launched post budget, the assemblers have already kept enough margins in anticipation of cost escalation—this is the case for Honda City and Sonata. There might be no or little price increase in these cars.
Lucky Motor has increased the prices by 7-15 percent. The higher jump is plausible, as the company is revising up the prices for the very first time. Indus Motor has also raised prices by 5-7 percent. Seeing this, Honda may have similar increase in Civic; but City is already at a premium to its competitor Yaris, and Honda may not change the price of that. Suzuki is tempted to increase prices as there is immense pressure from Japanese to do so – but in some models they are struggling to keep commitment on delivery times. Hence, the increase is expected to be less.
Nishat Hyundai is a safe player. It believes in margins, not volumes. The company is not spending top dollar on ECUs and is currently delivering smaller number of cars a month. The consumer is not happy with delays. Any price increase (in Tucson) could be detrimental for the vehicle’s brand image. Meanwhile, the company may not increase Elantra’s price to maintain a price competitive advantage against similar Sedan models in the markets including the newly launched compact SUV by Kia. Smaller players like Master Motors are likely to increase prices too.
The objective of lowering taxes and duties in the budget was to help boost vehicle sales and attain a critical mass of 500,000 cars a year, given that the industry is operating at half the capacity. The theory was that lower car prices, specially of smaller cars, would encourage volumes which are needed for substantial localisation. Specially for new entrants, localisation is pretty low. But if prices are raised again, the earlier move to slash duties would become redundant. This has been highlighted in this space already.
The new auto policy is in the making and soon it will be presented in the ECC and cabinet thereafter. One element in the new policy is the formation of a price monitoring body which would consist of representatives from government, industry, EDB, accountants and civil society. In the new policy, the government might want to get some control on pricing through SROs 655 and 656.
Price controls are tricky and more often than not, difficult to justify. But the auto industry does not operate in a free market since assemblers are protected heavily from imports and domestic competition was non-existent for decades until very recently when new entrants began launching cars. In fact, one could argue, that assemblers haven’t exactly faced true competition from even peers yet. Assemblers have always had pricing power, often at the expense of the consumer. That justifies opening the conversation on price curbs, specially when the recent government “carrots” to cut down its own tax revenue has ricocheted back with prices about to go back to pre-budget levels—which was always going to be happen if one thinks about it. Other important regulatory interventions such as ensuring quality and safety of the vehicles needs to be on the agenda as well.