Auto: Hit pause

Automakers have raised prices again citing the usual suspects—rupee depreciation and sky-high freight rates. The most recent hike led by Indus Motors and followed by Honda and several new players was significant ranging from 10 to 15 percent across the fleets. Honda told dealers and consumers that it was “unavoidable” circumstances because costs have inflated beyond control.

Dependence on imported CKD kits, and other materials such as steel and plastic makes auto assemblers and auto part vendors alike vulnerable to international prices, rupee-dollar parity and freight rates, the latter of which have surged uncontrollable in the aftermath of covid and the supply-chain crisis that materialized as restrictions lifted, and even more since war broke between Russia and Ukraine. All the while, the industry has been facing a shortage of semi-conductor chips that has restricted supply for many models.

While sales growth thus far has been positive (read: “Auto: Pipe dreams”, Mar 15, 2022), it is nowhere near where demand was expected to be. With new price hikes—and this may just be the beginning as the global situation unfolds—demand will come under pressure. Earlier, car financing was enabled by lower interest rates and overall auto credit had been hitting record peaks as a result. But a lot has changed on that front as well. SBP has raised interest rates several times and has also put curbs on financing for luxury cars and on CBU imports. This probably will push some hopeful car buyers away. But the fact that these very same cars are sold at premiums (or ‘own’) in normal days when delivery is delayed suggests that there will always be demand in certain segments. The sensitivity to changes in prices for these vehicle buyers may not be very high, though sensitivity to changes in income may come into play more.

The future is bleak for players like Suzuki that deals in smaller cars, supposedly in the “affordable” segment though, it is doubtful that middle class cash buyers can buy the small cars offered by the assembler. Margin-wise PSMC is already under tough waters, having recently come out of the incurring losses. In fact, its CY21 financials show profits for the first time in three years.

Cumulatively, in the quarter ending Dec-21, the three listed auto makers had 51 percent of pre-tax earnings coming from “other income” consisting of advance payments and bookings which indicates that demand is still very much present. Cash buying in rural setting will dominate selling. Though, there is certain to be a slowdown in the overall industry as too many factors are working against car buyers.