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BR Research

Autos dialing zero

Auto sales in April have registered nil, save for tractors (though shrinking considerably from last year) and a hand
14 May, 2020

Auto sales in April have registered nil, save for tractors (though shrinking considerably from last year) and a handful of commercial vehicles (marginal numbers recorded for Hino, Isuzu) that managed to sell in the past month. The lockdown along with income uncertainty is keeping even the likeliest of consumers, especially urban passenger vehicle buyers at home. This includes buyers of motorcycles, cars, as well as jeeps. And if trucks and pickups sales are a barometer for economic activity, the economy is down in the trenches.

It makes little sense then that passenger car makers have raised prices despite production being shut down and zero sales recording in the month (which will likely continue in May). Both Indus Motors and Honda Atlas Cars have raised prices between Rs60,000 to Rs500,000 across variants citing rupee depreciation once again. This reasoning is getting stale.

As car makers targeting an elite and a small consumer base, both Toyota and Honda enjoy a certain advantage of price inelasticity— only those consumers buy their cars who need it and are willing to pay premium to get them. Incremental increases don’t dissuade these consumers against buying cars. Moreover, car makers enjoy heavy duty protection from imports which are getting even more expensive as rupee depreciates. The companies have a low volume, high margin model that has worked for them.

But over the past year, it has been evident that there is a certain extent to which car buyers will absorb the additional price for the car that they are getting. Evidently, volumes had started to shrink long before coronavirus made its entry. The cooling economy, lower incomes, higher cost of financing and rising car prices all contributed to the decline. Perhaps, those who can afford expensive cars will wait for new entrants, or import other better models from abroad (Read more: “Car prices: Is there method to the madness?” April 17, 2020).

However, one thing is abundantly clear. Auto makers, consumers and the entire economy is looking at a very foggy future. Nobody knows when Covid-19 will end, or even when the curve would start to flatten in Pakistan. The lockdown is slowly being relaxed which means production units may start manufacturing again, but demand may not meet supply even half-way, if at all. Monetary policy has been loosened which will bring down cost of auto-financing but lease buyers may be found wanting.

With Careem and Uber shut down for an unforeseeable future, Suzuki cars also have little to no chance of selling, specially being the only car maker of the three that has offerings for middle-income car buyers. Folks are expected to keep a close check on cash, reduce spending, and in times of uncertainty and looming health concerns, are least likely to make expenses that will put a dent on their wallets or incomes. Automakers can raise prices all they want at this point; it’s a futile exercise.


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