Autos: Post-growth

Based on 11M volumetric sales, the automotive industry is set to register a more than reasonable growth this fiscal year, with sales growing at least 1.5 xs compared to last year, landing at roughly 270,000 units. That is a record and it does not even include sales for new players like Kia or Changan. The real number should cross 300,000 in the fiscal year. Volumes have certainly persevered despite policy pivots, and rising vehicle prices (read: “Autos: start-stop”, June 20, 2022) mainly due to demand pent-up from last year which saw covid restrictions and slow car deliveries amid semi-conductor shortage in the global market.

Among the three established players, Suzuki had the greatest recovery despite facing substantial setbacks due to chip shortages. Strong Alto and Wagon-R sales raking in the volumes together with Cultus turned the winds in Suzuki’s favours after having a rough two years. A number of factors have contributed to Suzuki’s demand recovery—lower cost of borrowing at the start of the year, small used cars becoming not only substantially more expensive but also dropping in volumes due to government restrictions, and more recently, the knowledge that cars will become more expensive and buying now rather than later is the way to go. There also may be a “moving down” phenomenon coming into play where corporate and consumers may be moving down an engine size or model to shoulder the burden of the substantially more expensive vehicles. Though, given how expensive even the smallest engine car is right now, by no means can Suzuki vehicles be called “budget cars” now. Meanwhile, Honda’s new civic model has contributed to its growth while Toyota’s Yaris remains a hot commodity despite frequent price increases.

This growth however cannot endure given present circumstances. Not only have auto financing rates surged, the rupee is continuing to weaken which would propel car makers to raise prices even further—having made little headways in localization. Even if there was more localization, inflation is knocking windows and doors of every commodity and industry and undoubtedly, the cost inflation would have translated to higher end-user prices. Let’s also not forget the rising tax incidence in the budget which will affect Toyota and Honda vehicles, as well as Hyundai, Kia and Changan that are operating in the higher-end segment. Given Pakistan’s precarious macroeconomic climate though, the expected decline in growth of the automobile industry would be the least of anyone’s worries. And considering recent tax measures, that sounds about right.