In a loop!

What seems now to be a fortnightly affair—and following Honda’s price hike of up to Rs425,000—Suzuki and Indus Motors have also raised prices for a range of their models. The small car manufacturer that just launched the new Alto just increased prices of variants up to Rs329,000 while Toyota’s prices went up by up to Rs830,000 in July. Citing the depreciating rupee, the price increase ranges from 36 percent to nearly 60 percent in the passenger car segment for locally assembled vehicles (not counting the discontinued Mehran) between Dec-17 and June-19. If that doesn’t seem normal, it isn’t. Most of all, this model is not sustainable.

The reliance of car makers on imported kits and other inputs including steel, rubber, plastic, leather etc. makes them sensitive to exchange rate fluctuations, though automakers boast of high localization, specially the likes of Toyota and Suzuki where localization is said to go up to 60-70 percent. The rupee has devalued by about 47 percent price hike between Dec-17 till date. That against the price increase of 36 percent to 49 percent (minus Honda Civic) may be a tad excessive.

As per the Pakistan Bureau of Statistics (PBS), motor vehicles index during the aforementioned period went up by 19 percent against 12 percent increase in CPI in the past 1.5 years. Vehicle prices have gone up by much higher than headline inflation.

Moreover, the budget 2019-20 has also raised federal excise duty (FED) as well as withholding taxes on a range of vehicles. Perhaps, the recent increase in June incorporates that, though Honda Civic’s whopping 53 percent price hike makes less sense since the FED has been reduced on that vehicle.

Even so, the more important takeaway from this is that automakers seem unprepared to revise their business model with the changing economic times. With the new market-based exchange regime, there will be more volatility in the market. Automakers cannot keep raising prices each time the rupee depreciates, given that there is no history of them ever decreasing prices when the rupee had appreciated; the exchange rate is expected to go both ways. How will they mitigate the exchange risk while also keeping some semblance of price stability in the market for consumers to make informed long-term decisions about car purchases? So far at least, they have failed. Let’s plan better, let’s not turn cars into chicken.