Pakistan’s automobile industry which is for long dominated by 3 Japanese players is going through some tough times. It recorded a slowdown in sales which dropped 8% to 237,950 units in fiscal year 2019– the first time after 6 years that automobile sales in Pakistan have witnessed a decline.
The slowdown is attributed to new taxes with increasing input cost, unpredictable surge in rupee-dollar parity and imposition of additional FED that has resulted in massive increase in car prices, which has ultimately casted a negative affect on car sales.
Two of the three key players have posted severe losses, with Pak Suzuki declaring a loss of Rs 1.53 billion in the quarter ended June 2019. Honda Atlas on the other hand suffered from a 77% decline in profits. Since each operates in a separate car segment with no overlap, the companies face no competition from each other. It is because of this difference that despite cost and demand dynamics being similar, one company has outperformed the other.
The devaluation impact on both the companies has been severe, and frequent price increases have not absorbed the exchange losses either. As a result, demand has suffered for both where Honda vehicles have witnessed a higher decline than Suzuki’s passenger cars and pickup. However, Honda cars also fetch much higher prices given that they operate in the 1300cc and above category while Suzuki cars are predominantly mid-range cars below 1000cc.
Moreover, the price hike in Honda’s case has also been much higher partially due to the higher FED on 1700cc and above cars. For instance, since last June, Honda has raised prices of its Civic six times—by 39%. Suzuki’s prices on average have gone up 29% (for a selection of cars). The result, Suzuki’s margins have plummeted to five percentage points while Honda’s have only fallen by one; and thus diverge their fortunes.
Demand is also a key factor. While Honda cars took a while to start showing lethargy, Suzuki was already on the way to phasing out its Mehran while Bolan that has often shown high growth in periods where there was a government taxi scheme underway was facing competition from used car imports in the same category. Though Suzuki Cultus and Wagon-R have both performed well but only providing a buffer for the demand depletion in other segments.
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It is understandable that that falling disposable income is not conducive for car demand, though evidently, the weakest links are the first to start folding. Civic/City car buyers have persevered the hardships of the economic slowdown while Bolan/Ravi buyers could not, though ultimately, the sharper price inclines in the former two caught up with them, leading to their eventual downfall.
The outlook is miserable no matter how one chooses to look at it. The FED on all cars, other than 1700cc plus, has been raised. Car demand on bank financing will shrink due to rising interest rates knocking on un-affordability. Meanwhile, further devaluation will be a toss-up for car makers—should they raise prices and suffer from further demand loss, or should they keep prices on the same levels and suffer from further margin loss.
For Suzuki, it will be doubly hard since it is already incurring a loss. Both companies are also carrying the burden of higher distribution, administrative and finance costs as a share of revenue. No matter how they play it out, it seems the only direction is down.
Source: Business Recorder