The start of the fiscal year wasn’t bad for the automotive sector at all, but it seems the tide has turned for at least a little while. The three car assemblers raised their prices by 9-15 percent across different locally assembled models (more for imported models) between January and July which may have had some impact on demand, though that impact should have been marginal up till now (read: “Third time’s the charm”, July 10, 2018 and “Suzuki testing its fate”, Aug 3, 2018). Car and jeep sales in 2MFY19 according to the industry’s association fell by 3 percent year on year, whereas these together with commercial vehicles and tractors saw a 9 percent dip. Between July and August, the former group saw 17 percent lesser sales, and altogether a 13 percent decline.
Factors that have certainly worked against the auto assemblers looking at numbers in 2MFY19 are Eid holidays and the restriction for the purchase of cars on non-filers—it is a rough estimate that more than 60 percent of vehicle buyers in the country are non-filers. This has derailed the growth and momentum; the sector had created during FY18. There was news that the government may relax this restriction for buyers of cars below 1000cc engine but that relaxation never came through. A share of the slowdown can be associated to consumers and prospective car buyers waiting for new models, or waiting for regulations to relax with the arrival of the new government.
Market leader Pakistani Suzuki (PSX: PSMC) had been riding the wave of massive demand coming from the middle-class with the relatively new Wagon-R, the new model for Cultus as well as the lower engine Mehran and Bolan. But while Wagon-R maintains its growth streak in 2MFY19 (up 26%), Cultus, Mehran and Bolan all could not sustain the numbers Suzuki achieved last year. The company has discontinued one of the models for Mehran and expectedly intends to discontinue the other models by the end of FY19. The total sales for Suzuki in the passenger car and pick up segments nose-dived by 51 percent in 2MFY19 with its market share reducing to 51 percent from 54 percent this period last year.
It isn’t much different for Honda and Indus Motors either. In August, Honda Atlas Cars (PSX: HCAR) saw a 25 percent decline in Honda City and Civic against July, while BR-V which was doing so well witnessed a drop of 39 percent year on year in the 2MFY19 period. But comparatively better numbers allowed the company to snag a better market share this time around. The crossover family friendly SUV has high hopes attached to it, given its double digit growth over the past year, but the vehicle belongs to a niche market and can only sell so much.
Indus Motors (PSX: INDU) was seeing a turnaround as the current fiscal year kicked off with Corolla finally selling more volume and keeping with the demand. The company intends on expanding a little more of its capacity, as it had done last year to cater to seemingly rising demand. Its Fortuner which also has a small niche market has had a phenomenal run too since it was launched. Priced lower than other SUVs that are imported into the country at sky-high duties, Fortuner has been a good bet for many SUV enthusiasts.
While the two months into FY19 paint a less than promising picture, this downturn was expected. Macroeconomic changes in the country with a hike in interest rates and the government’s commitment to austerity may push consumers to save more than spend. Since 40 percent of the car buyers are bank financed, higher cost of borrowing plus the hike in prices may become difficult for consumers to justify, especially those buying smaller cars who already may be a little sensitive to price fluctuations. No one is to say the prices will be kept the same and it comes down to the rising costs of production and the trade-off automakers are willing to make between volumes and margins.
Restriction on non-filers together with evolving economic dynamics, specially an overall economic slowdown—may cause further demand shifts.
This at a time when so many new players are entering the market place to play the game only three had been playing for decades. Perhaps, consumers are waiting for these newly minted models to make more informed decisions and FY19 sales for existing players may get hit as a result.
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