Mixed signals

Consumers say they don’t intend to purchase motor vehicles in the next six months—well, most consumers, not all; those that participated in the SBP’s monthly Consumer Confidence survey. In fact, more consumers said they won’t be compared to the ones that said they would, and the former’s share has been growing since FY21. But such pessimism is not translating into growth numbers. In 1HFY25, volumes have sustained their climb, up 51 percent for passenger vehicles, and 61 percent for SUVs and LCVs. Cumulatively, the automobile market has expanded 54 percent in the past year. Between then and now, consumer opinions have not changed too much(see graph).

The relationship does not always hold true though. In FY18, automobile demand was at its record highest (till that time) and we saw a gradual and cautious shift toward consumer optimism on spending, particularly in relation to big-ticket items such as motor vehicles. But in FY22—arguably the most successful year for motor vehicle sales—consumers seemed less intentional. This is reflected in the diffusion index for the question: do consumers expect to spend on motor vehicle purchases in six months. We saw the diffusion index moving in the wrong direction, downward and away from the mid-line, or the line of neutrality. This poses the difficulty of taking the survey findings at face value.

Perhaps, with a grain of salt, one can argue that despite consumer pessimism, the automobile market is set to expand in the next six months. However, this is compared to FY24 when volumes were at their 15-year lowest. The fact is the current market expansion is only slightly ahead of 2009, but behind 2010, despite new models, new assemblers, and a market with ample latent demand.

Cars are exorbitantly priced. Consumers now have fewer affordable options than ever before, considering the hefty duties on used imported vehicles and the two-year astronomical price surge in the domestic market. The cost of borrowing is slowly coming down owing to policy rate cuts, but car financing is no longer favorable as SBP’s regulatory controls (read: “Autos: Credit only where it’s due”) have made it tougher on consumers to seek car loans. In recent months, net borrowing for auto loans became positive, indicating increased fresh loans, but in Nov-24, net borrowing became negative again.

Perhaps SBP should take a closer look at the consumer financing regulations, though the Central Bank seems in no hurry to encourage big leaps in demand, as it still has to tread carefully to avoid triggering a fresh bout of balance of payment crises. One thing is clear, FY25 will not be a year when the automobile market recoups, as many would hope. Indus Motors has kept plants shut for days at the end in the past few months due to supply constraints. Suzuki has the volumes, but it doesn’t have sustained earnings. And overall, the industry’s volumes are one-third of what they were in FY22.