Over the past few weeks, the automotive industry has complained that the sector is losing jobs by the thousands due to economic downturn leading to lack of orders, and government’s policy to restrict non-filers from buying vehicles. This catastrophe however, is truly reflecting in the tractor manufacturing sector, and on the commercial vehicle side, possibly impacting parts manufacturers and vendors most.
The rest of the industry is settling in a lull. Latest numbers from Pakistan Automotive Manufacturers Association (PAMA) reveal passenger cars have grown by 1 percent in the first half of the fiscal year on year—Honda cars (11%), Corolla (10%); bus sales grew by 76 percent, followed by a decline in sales for tractors (24%), trucks (24%) and pickups (9%).
A number of factors have contributed to the decline in commercial vehicles including trucks, LCVs and pickups, which had been seeing a boon last year. As mentioned earlier: “the ban on non-filers to procure vehicles, higher diesel prices, depreciating rupee, higher cost of vehicles exacerbated only further by higher cost of borrowing are all curbing the enthusiasm. There is also a selling spree in the market of old or used trucks by oil transporters”.
Overall, the demand for pickups and trucks is lower due to decreased economic activity, though persistent trade numbers are belying these realities. It may seem that logistic companies, freighters and transporters are not keen on spending on new vehicles during this high cost phase (read more: “Thrill of the chase”, Dec 31, 2018). The CPEC led demand for the segment it seems is not translating into volumes.
Tractor sales have historically been very sensitive to changes in prices, agricultural growth or lack thereof, and government policies. In times of lower sales tax, subsidy schemes or policies to promote farmers; sales boomed. In times of high sales tax, sales plummeted. Since the sector is highly localized (some estimates put it at 90%), it is inescapable that when orders are cancelled by tractor manufacturers who are now facing higher inventories, smaller vendors would face tougher times. This inevitably would lead to layoffs of employees and lower hires of daily wage workers.
The demand slowdown comes due to the cash crunch being faced by farmers. There has been a delay in cash disbursement to sugarcane farmers by millers due to late crushing start. Cotton production has also been down. Overall rupee depreciation is making input costs more expensive. Moreover, higher cost of mechanization due to the rising cost of financing may also be a factor.
The most talked about passenger cars are the least impacted, even though, all three car makers have raised prices of their cars by up to 20 percent over the past year in several phases. Further looming price hikes may be unavoidable if cost of inputs globally rises, or rupee depreciates more. Though December did not bode for the car manufacturers; overall, Honda and Toyota are doing well on the passenger segments. The SUV and cross-over SUV of both companies have seen a significant drop though. Consumers may be waiting for upcoming new models from new players, or simply waiting out the period of market uncertainty.
The decline for Suzuki’s Mehran and Bolan in 1HFY19 also makes sense. The former is being phased out of production and many consumers may be shifting preferences toward better Suzuki variants or used cars which even non-filers can purchase. The latter has recently seen a rise in imported substitutes (used) which are equally affordable. It is also often used for commercial purposes and may be witnessing the same trends as the rest of commercial segment. Suzuki’s Swift, Wagon-R and Cultus are fighting the headwinds and coming out the victor, so far but maybe not for too long.
While the passenger cars may live to fight another day, as they have in the past, tractors industry may see a significant drop in the market and may contribute to unemployment. Companies manufacturing trucks can save face with the encouraging increase in bus sales. The sector is back to hustling.
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