As predicted, auto makers have decided to pass on the impact of the exchange rate to consumers. The PKR has slipped now by a cumulative 26 percent since Dec-17 against the greenback, with the latest depreciation of 7 percent—OEMS have raised prices of their cars four times since then; Suzuki yet to announce its revised prices after the most recent devaluation. For imported vehicles, price changes are much higher while for locally assembled cars, the hike ranges between 7 and 17 percent across a selection of variants, and may be more for higher engine models. Come Jan-19, these prices will be raised even further.
Whereas the industry often boasts about its high localization levels—estimates range from 50 percent to 70 percent—their dependence on imported raw material, semi or completely knocked down units and the ensuing exchange rate fluctuations will make costs of production higher. According to the company notices, they are unable to keep prices the same.
The demand is already witnessing a slow burn. Whereas car sales grew by 16 percent in FY18, in 3MFY19, sales grew by merely 1 percent and a dramatic slowdown can be seen in the sales for jeeps and pickups. Pakistan Suzuki (PSX: PSMC) had already raised prices in four phases by August which may very well be the reason the demand has reduced. It appears that the middle income buyers that were going to Cultus, Mehran and Bolan have been more sensitive to price hikes.
One reason may be the fact that consumers are waiting for the new Alto as Mehran gets discontinued soon. But the likelier reason is that these cars are simply more expensive. Increase in interest rate, which is meant to see another bump soon, will make financing more expensive. Since nearly 40 percent of all cars are bought on bank financing, the dual effect of higher borrowing cost and greater retail price may dissuade potential car buyers.
While Honda Civic and City demand has not been affected, BR-V’s sudden decline has come off as a surprise. SUV buyers do not seem receptive to the changing economy. While OEMs have been able to maintain their margins by raising prices each time costs rose, the trade-off for any further price hike would be a loss in volumetric sales. The economy is in recovery mode and consumers will be more cognizant about expenditure. Meanwhile, government policies such as interest rate increase and reinstating the restriction on non-filers to purchase cars will undoubtedly hurt demand.
Since Toyota and Honda will both raise prices further in Jan-19—where cumulative price hike will cross 20 percent—consumers interested in these cars may make their bookings immediately. This could see a boost in demand over the next few months, but after that, it will be a tough call to make.
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