Even as Suzuki’s Cultus and Wagon-R show a strong resilience to changes in prices (up), disposal incomes (down) and cost of financing (up), the combined decline in demand in the automotive industry is enough to rattle a few. Sales have fallen in double digits during 11MFY19 (including passenger cars, jeeps and commercial vehicles) brought forth by a decisive decline in demand for commercial vehicles, tractors and jeeps. Passenger cars alone cumulatively saw sales slow down by 4 percent (motorcycles: 7%) as the fiscal year quietly comes to a close.
Due to pressures from the depreciating currency and higher input costs, automakers have raised car prices by 20-25 percent across different variants over the past 12-18 months. For the better part of this fiscal year though, despite subsequent price hikes, consumers kept going to the showrooms to book new vehicles. Research shows that in Pakistan, consumers are less sensitive to price changes, but more sensitive to changes in incomes (“Autos: For Whom the Bell Tolls”, May 27, 2019). That is one reason why changes in prices have had less impact on demand than one would imagine.
On the other hand, auto loans have seen a decline, according to the latest SBP quarterly report, indicating that the higher cost of financing due to monetary policy tightening and the resultant burden on consumers have elicited the response that was anticipated. Are more buyers shifting to cash transactions?
It is clear that overall inflation and the higher incidence of taxes that will soon be taking affect will cause disposable incomes to shrink. For middle income car buyers, that will be discouraging. So far in 11MFY19, Toyota’s Corolla as well as Suzuki’s mid-range vehicles has managed to keep their respective demands intact. Though if the economic climate continues to chip away at the purchasing power, it is likely that these variants will eventually come under pressure as well.
Those consumers buying on financing will have to absorb the burden of price hike (there are more to come!) as well as higher cost of financing (the monetary policy committee sits again soon in July which will allow clarity on interest rate movement). If they are risk averse, they will start to delay purchasing decisions and put their money into savings.
Or so goes the argument. If the excitement for the new Suzuki Alto is anything to go by, demand for passenger cars may not taper off so soon. Mind you, some consumers had been waiting for the Alto launch for the past six months or so, and may already have put aside cash savings to buy it. The same argument could be made for the new entrants’ Kia and Hyundai launches. This may be what new and old automakers may be banking on too. Though as earlier opined, slowdown or not, the new automakers are entering an “uncertain market place with a shrinking financing space”, and surely, uncertainty is never good for business.
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