Pakistan Suzuki (PSX: PSMC) had no words to mince yesterday when it announced to the PSX that it would be shutting down its production plant temporarily basically because its import consignments carrying imported inputs were stuck in clearance at the port; this because of SBP’s imposed restriction requiring assemblers to obtain prior approval for their imported CKD units. The said restriction has been choking up the supply chain for the industry across the board causing delays in shipments to the factory for precious imported inputs used in assembly. Preceding this announcement, other automakers such as Indus Motors already observed several long production halts as inventories dried up.
Putting controls on imports is one of the first steps the SBP has taken to rein in the current account deficit. The outcome is evident already. Automotive volumes are down by 52 percent overall with Suzuki’s sales down 56 percent, Toyota’s down 65 percent while newer companies such as Kia and Hyundai are not faring too well either. Nearly all assemblers have suspended fresh booking for all or some of their models depending upon their existing inventory levels, SBP’s allowed quotas and how localized the vehicle is. But these supply-side hiccups are not the only challenge at hand.
High inflation and increased tax incidence have only reduced the buying power for consumers where potential car buyers have to contend with very steep cost of bank financing (due to the increase in policy rates) and significantly inflated prices for the same vehicles. Rupee depreciation and other cost incidences have persuaded assemblers to hike up prices. It is a market belief (or wistful thinking) that prices may come down as rupee appreciates, though it is not substantiated in any solid promises made by the companies. For one thing, rupee value is in no way stable enough to justify a downward shift in vehicle prices. But more than that, real demand for vehicles is always more than supply in Pakistan causing assemblers to set the prices they desire. There is no reason why assemblers should reduce prices as long as demand exists. But even if assemblers’ lowered prices right now, without a clearer picture on imported inputs (on which they heavily depend), they don’t have much benefit to gain as they cannot deliver on new, or in some cases, old bookings.
Car buyers that would pay hundreds of thousands in premiums or “own” in the market would likely pay the new prices (to a degree), even if demand at the lower end of the market declines due to high cost of buying (which includes the expensive cost of borrowing). But given supply troubles causing production and booking halts, expect volumes to keep sliding down.
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