Autos: Not here to make friends

By 11M, automobile volumes had risen more than 50 percent compared to last year, ready to make a volumetric splash in FY22. Perhaps, FY23 would also make a splash but for all the wrong reasons. Most automotive assemblers have already postponed bookings of their vehicles given rapid rupee depreciation and high freight costs. This was a few months ago. But since May, they have been facing a supply chain issue affecting current deliveries. Indus Motors ran an advert a few days ago apologizing to its customers for prolonged delays in the delivery of their already booked cars as economic conditions and government interventions create an uninhabitable environment for the assembling business to continue as usual.

The SBP issued an instruction to banks that said they had to get prior approval Foreign Exchange Operations Department (FEOD) before initiating transactions for import of goods (i.e., issuing LCs) such as power generation machinery, electrical machinery and apparatus, CKD of mobile phones and CKD of motor cars. Auto assemblers (around the world) have long been operating on a tight inventory management modelcalled “just-in-time” (read: “Autos: Running late on just-in-time”, June 09, 2021) where inputs are bought (and/or imported) based on forecasted demand. This minimizes their inventory costs, even if it means, sometimes they sell less than the demand of the market. The emergence of covid-related supply-chain issues exposed a lot of the vulnerabilities of the just-in-time model that led to the shortage of semi-conductor chips in the global market. This bit into the supply lines of many chip users, including auto assemblers that had stockpiles of cars ready for delivery sans semi-conductor chips.

For context, in Pakistan, it is almost always the case where demand is greater than supply. Supply is not only restricted by continued underutilization of capacity by assemblers, but also the JIT model they use. Since they heavily depend on imported inputs (specifically completely knocked down units which are assembled at home factories), the rupee value against the dollar and its movement affects their costs which in turn leads to frequent price increases each time the rupee falls.Car delivery times in Pakistan, meanwhile, even outside present circumstances, have never been less than 3 months (for most popular cars). The alternative has traditionally been to buy from investors that book vehicles in bulk and sell to thirsty car buyers at premium or “own money”.

Right now, since bookings have already been suspended and assemblers say they cannot meet delivery commitments of already booked vehicles, it is clear that the just-in-time model is being run literally just in time, or more accurately, a few months late.That said, dollar value for CKD imports has risen dramatically since Dec-20. Together with CBU imports of cars, the share of vehicles in total imports on a monthly basis has consistently remained at 3 percent after peaking in Apr-21 at 4 percent. That may not seem like a huge dent but cars are considered a luxury for the Pakistani market and any dollar value luxury usage must be curbed or stalled to stabilize the current account, according to the government.This has necessitated a number of restrictive measures over the past months, someimposed by SBP such as tightening measures for auto loans (reducing the maximum tenor, increase in down-payment requirement, limits in loan amounts, no financing on imported vehicles used or new etc.), and now the LC restriction. Thiswill certainly reduce imports, and volumes in the auto market.The LC restriction isnot a long-term hiccup, but it will cause premiums in the market to increase. Further rupee depreciation will cause prices to rise even further but by then, organic demand will have already driven to a halt. At current headline inflation reaching record levels, and squeezing purchasing power of an average Pakistani—who is also liable to pay a higher tax than before— buying a vehicle is not on the cards right now.