Many in the automobile industry these days liken its predicament to that of a near apocalypse scene set. Buoyant demand for cars stands virtually destroyed, with increased explant prices, unbridled inflation, a plummeting rupee, high discount rates, rising fuel prices, reduced purchasing power, a confrontational political climate and a seriously ailing economy. Plant shutdowns from the Big Three have been happening intermittently over the last few weeks, with little relief in sight.
Trouble in Paradise
A far cry from what used to be as recently as June 2022, when more than 103,000 units were sold that month. Largely due to the progressive Automobile Policy 2016-21 and 2021-26, plus budget relief, whereby federal excise duty on all vehicles was reduced by 2.5%; sales tax on under 1000cc cars was slashed to 12% from 17%, and the seven percent additional customs duty was removed on cars below 1000cc and reduced on cars above 1000cc to only two percent. Additionally, the industry had just emerged from the Covid-19 crisis, registering a 62% increase in sales in 2021 over the previous year. The compounded result meant that Pakistan’s automobile industry had emerged among the fastest-growing in Asia.
This demand was not expected to cease. Production shortfalls over the previous two years had delayed deliveries and pent-up further demand and a forecasted increase in production capacity and comparable ease of supply in 2022 and beyond was anticipated to ensure accelerated sales. For an industry that contributes Rs 30 billion in taxes and duties and registers at nearly three percent of the country’s GDP, this backto-the-wall outlook was far from foreseen when the year began.
The first sign of trouble manifested itself in July 2022 when sales spiralled downwards by 52% over the previous month and by a further 46% in August. Despite this downturn, perhaps as a testament to having greater product slate and lower-priced models, Pak Suzuki (Pakistan’s largest car manufacturer, based on sales volume) punched a growth of 58% in August over the last month. The company sold 6,009 units, largely spurred by sales of the Swift, Wagon R and Bolan variants, which recorded an increase of 137%, 110%, and 168% respectively, with the popular Alto and Cultus trailing not far behind. Overall industry sales, however, were still in shambles. How did this happen? What was the future going to be like?
The Rise of the Dollar
The rupee, already under pressure, began the year trading at about Rs 172 a dollar. Untethered manoeuvres in the open market meant that this went up to Rs 240 on two occasions, before settling at a low of Rs 217. It has since rebounded, trading at Rs 220 currently. The repercussions are hardly surprising for an industry that is greatly reliant on imports.
The Government Swoops In
In May 2022, the State Bank of Pakistan (SBP) made some changes to the prudential requirements for the grant of consumer loans intended for car financing, in terms of limits to financing, higher upfront payments, lesser tenure for repayments, and of course, a much higher discount rate. With close to 40% of total car sales in the last few years locked in car financing, these changes had a chilling effect on overall sales turnover. To add to this, at the same time, the SBP barricaded off all imports to preserve foreign exchange, disallowing the opening of Letters of Credit (LC) for imports – which badly impacted the assembly lines. Strapped for cash, the government increased the withholding tax for filers and non-filers (between Rs 5,000 and Rs 25,000 for models under 1300cc and less – higher for higher-end models) and installed a one percent capital value tax on all cars over 1300cc.
Why do plants have to close shop in the interim? The answer is a simple assessment of demand and supply. Companies in Pakistan generally follow a ‘Just-in-Time’ model (JIT) to circumvent risks to the demand-supply equation. This indicates that an attempt will be made to balance out the two, with only the number of vehicles produced that are demanded via advance payment. Some companies also suspended bookings in July 2022, most likely to work around the extremely volatile dollar-rupee parity, higher sea freight tariffs, and as a way to manage the delayed supply of imported CKD units and parts, due to import restrictions set up by the government in the previous month to control the dollar flight. These measures put off the few still-interested customers who now had to wait extended periods for their deliveries.
Rocketing Fuel Prices
Exorbitant fuel prices across the world created no less a deluge of problems in Pakistan, further aggravated by IMF restrictions – anticipating a consistent rise in prices every fortnight, despite a later in the year reduction in global prices. From prices in January 2022 of Rs 144.82, gasoline prices shot up throughout the year, peaking at Rs 237.43 in September 2022.
Car Prices Go Way Up
Price increases were par for the course throughout the year, with all of the manufacturers raising car prices to account for higher CKD prices, freight rates and the weakening rupee. Since January 2022, Pak Suzuki has raised prices for its variants from between 27 to 36% on base prices that range from Rs 17.47 million and Rs 24.22 million. Similarly, Indus Motors increased prices for all its models in the range of 32 to 37% on models priced earlier at between Rs 26.12 million and Rs 80.32 million, although Honda Atlas showed greater flexibility with price hikes, the increase was still 19 to 25% compared to the year-start prices between Rs 27.29 million and Rs 75.49 million.
The year 2022 has been a bad year for Pakistan’s beleaguered automobile industry, and the worst may not be over. The coming months will be challenging. Fresh out of debilitating floods that have further wrecked the economy, Pakistan will have to operate under a tightening IMF belt which will, from a microeconomic perspective, further stifling the purchasing power of consumers, as they struggle to meet primary necessities. After all, when the going gets tough, high-end consumer products are the first to take a hit. In the past, bumper crops have increased the demand for cars emanating from rural areas. With significant flood-induced devastation in nearly two-thirds of the country, this avenue of sales appears to be deeply impacted. Lowering the dollar-rupee parity for the longer term and fast-tracking the economy in this scenario will be next to impossible due to the treasury coffers running precariously low. This virtually leaves the government little option but to try to lessen the impact on the common man, while keeping the IMF happy and maintaining its financial obligations – a tough ask in itself.
Nevertheless, Pakistan’s automobile industry is amazingly resilient and has seen dark days only to spring back. Many economists are puzzled by the anomalies of demand and supply that oddly enough do not seem to work in Pakistan, regardless of adversity. Perhaps this aspect, if little else, will come to the industry’s rescue.
Mazhar M. Chinoy has led the marketing services function for a leading multinational automobile company and is currently a director at LUMS. email@example.com