Bad romance

In the last recorded quarter (Jun-23), none of the three listed automotive assemblers in Pakistan was in losses, though their combined sales had been steadily dropping month after month. For context, in FY23, volumes across passenger cars, SUVs and LCVs shrank 55 percent during the year as vehicles prices on average ballooned by roughly the same—51 percent to 59 percent. Assemblers spent much of the year keeping their plants closed down as they didn’t have enough materials (imports of CKD kits pending clearance) to make the goods. Believe it or not, with import restrictions now easing, trouble has only just started brewing.

In the first quarter of FY24, volumes that had previously contracted 49 percent in 1QFY23 year on year are even further down, 40 percent in 1QFY24 year on year. Compared to FY22—which granted was a phenomenal year for automobile sales—market has shrunk by 70 percent or slashed by 3x. At the current pace, the market will land at less than 100,000 units. The last time, volumes were at these levels, American pop singer Lady Gaga had just come out with her hot single “Bad Romance”. Music listeners of more eclectic, nay refined taste in music would remember buzzing to Imran Khan’s Amplifier. Obviously, kidding about the eclectic part. One should get the drift, basically, it was a long time ago!

The industry was close to these numbers in FY20 at the height of covid but was able to recover from it fairly quickly. But it seems FY23’s bad luck may follow into FY24 as most demand drivers indicate there is simply not enough market for newly assembled vehicles. Cost of borrowing is prohibitively high which would shift most of the burden of buying onto cash buyers that are few and far in between.

There are two very specific segments where demand seems to still exist. Though Alto sales are down (27% in the first quarter), it’s share in total volumes has grown to 32 percent from last year’s 27 percent and 23 percent in the year before that. Folks may be trading out their bigger cars for a smaller engine such as Alto which is considered to be highly fuel efficient. Alto also continues to be slightly cheaper than other similar (in terms of engine and mileage) imported small cars such as Mira or Nissan Dayz.But with the second-hand market also experiencing a lull, there isn’t enough evidence that this “trading out” is actually taking place. Daily commuters may just be diving into their savings as they watch petrol prices skyrocket.

The other segment is the SUV segment that has seen growth in terms of its expanding share in the shrinking pie. SUVs and LCVs assembled in the car in 1QFY24 occupied about 24 percent of the market while this was 18 percent last year and 16 percent the year before that. There is evidence to support that with new players entering the playing field with more options and categories in the SUV segment, it is grabbing onto more and more of the pie that was previously dominated by passenger cars. Accessibility to new options in the SUV category, at various price points, certainly created the buzz for car buyers which was prominently visible during FY22. Whether this buzz can be maintained in the coming months is certainly a question. While Hyundai Tucson and Porter show resilience, Chinese new comers like BAIC and Chery already display lethargy.

Whether it is investors purchasing cars or car buyers coughing up their savings to buy a new vehicle at this time (and not later) are all economic decisions that will come into play over the next few months. It seems hard to picture a flourishing automobile market in the near future, even as car makers mull over whether they should reduce prices or give discounts/other offers to sell more, quietly hoping for this storm to pass.