May 19 - 25, 2008

Automotive assemblers are in a quandary. Lately they have invested heavily to expand production capacity. Initially, permission to import secondhand cars and then rising price of steel, depreciating dollar, skyrocketing crude oil prices and rising interest rates have created hostile environment. Two of the sectors facing the brunt of declining sales are banking and insurance.

Lately, availability of auto financing at lower cost had contributed significantly towards growth of banking and insurance sectors. However, shrinking sales volume of cars and growing delinquency of auto loans have been adversely affecting the two sectors. The only sector benefiting for the time is oil marketing because of growing sale of motor gasoline and diesel. However, if depreciation of dollar continues and crude oil prices continue to break record in quick succession people would not be able to enjoy the luxury of driving leased cars.

Lately, auto sales have shown significant slow down amid rising financing cost, tougher financing terms by banks and higher prices. The pressure has been further heightened by mounting vehicle operating costs owing to rising fuel prices. Auto sales continue their downhill journey, with volumes declining by 6.2% to 17,259 units in April 2008.

Passenger cars have been the victim of the situation as vehicles with larger engine capacity have shown greater decline sales for cars with engine capacity of 1,000cc and over 1,300cc engine capacity have declined by 8.8% and 9.7% respectively during the month. Meanwhile, smaller cars have shown some resistance to the trend that can be attributed to greater number of customers switching to cheaper options. On the other hand, LCV sales continue to enjoy robust sales, partly attributed to 1) commercial vehicles of Pak Suzuki still enjoying delivery periods of over 6 weeks and 2) launch of the new model of Hilux after a gap of more than one year.

Corolla has been the flagship product of Indus Motor as it accounts for two-third of the company sales in terms of number of units and over 75% in terms of Rupees. Indus is getting ready to launch Corolla's tenth generation model that has already been released in various parts of the world. This should benefit the Company in the long-run, as customers switching to newer version should boost sales. However, prospective buyers delaying their purchases for the newer version will negatively affect sales in the short-term.

Although LCVs have continued to support overall numbers, sales of Liana declining by 46% and Alto by 15% depressed Pak Suzuki PSMC sales by 5.7% during April 2008. Analysts believe the Company's sales enjoy better prospects and likely to improve as 1) the Company's advances increased to Rs 7.8 billion and 2) finished goods inventory increased by 332 vehicles during April 2008. Considering these elements, Pak Suzuki sales are likely to improve.

There are also prospects for improvement in sales due to cyclical demand following the harvesting season during May and June because buyers may defer purchase decision because of launch of new Corolla. This should result in overall sales numbers reaching to 190,000 units for 2008, a decline of 6.7%.

Oil consumption in the country posted a growth of over 10% as unveiled in a recent report of the OCAC for July-April this year. Total volume of the POL products (excluding non-energy products) were 15.5 million tons during this period compared to 14.07 million tons last year. Local refineries provided less than half of the total consumption.

Two major White Oil products, HSD & Motor gasoline, were the drivers fueling growth posting 14% and 30% growth, respectively. The combined volume of the two products was over 7 million. This was due to refueling demand amid reduced smuggling of the Iranian products (Mogas) and increased utilization (HSD) in transportation and power generators due to acute electricity shortage observed.

The POL products consumption in April 2008 grew 8.77% with White Oil growing by 13.5% - mainly driven by Motor gasoline (25.4%), HSD (10.6%). The gap between regulated products and alternatives like CNG and LPG also impacted HSD and motor gasoline volumes in April 2008. Greater hassle and increased waiting time at CNG filling due to greater price differential also compelled people to go for HSD and motor gasoline.

Recently, a few news stories linked suicides with growing financial cost. While the attitude of recovery staff of some of the financial institutions needs to be deplored, one could not resist from saying that this is due to attitude of people. Traditionally, people have been defaulting intentionally because they knew the inherent weakness of the prevailing legal system. These weaknesses have forced the lenders to use coercive measures. The financial institutions say, "We are ready to listen and accommodate the borrowers suffering from serious but genuine issues and are also willing to reschedule payments. However, they cannot avail any benefit unless they approach the financial institutions.

Declining auto sales is also affecting business of insurance companies. In an attempt to safeguard their interest the insurance companies have also made certain changes in their policies. They have enhanced permission for acquiring riots cover after December 27th incidence. In an attempt to contain claims pertaining to theft/snatching of expensive cars insurance companies demand installation of car tracking facility and prompt reporting to police. However, in absolute terms claims are on the rise due to partly lack of comprehension of insurance rules and because of the way car snatchers operate in the country.

According to some insurance sector analysts, one of the reasons for the declining profit margins of insurance companies has been the cut throat competition. Lately, in an attempt to acquire more business insurance companies have brought down the tariff to a dangerously low rate. With the declining business volume, rising claims, and inability to recover the snatched vehicles insurance companies will continue to post pathetic results.