AUTO & ALLIED INDUSTRY UNDER PRESSURE
SHABBIR H. KAZMI
Sep 24 - 30, 2012
Automobile sale by the local assemblers during August were not different from July but in fact continued to be a dull month for the industry. Sales declined by 10% MoM and 22%YoY to stand at 9,329 units. The influx of used cars has become a serious challenge for the local automakers. Price and quality continue to attract customers' attention as sale on imports secondhand cars is on the rise hurting both the assemblers as well as the vendor industry.
The market leader, Pak Suzuki Motor Company, saw its sales going down marginally despite increase in the sale of Mehran (up 40% YoY) and Cultus (up 21% YoY). Though, discontinuation of Alto was partly compensated by an increase in sale of Mehran, a 35%YoY decline in sale of Ravi cumulatively inched down sales by 4% YoY.
Sale of Indus Motor Company remained also most flat at 3,092 units. Corolla, the revenue driver for the Company declined to 2,800 units in August'12 as compared to 3,681 units during August'11, whereas Hilux contrastingly had its sales up by 31% YoY. The phasing out of Cuore has dented Company's volumetric growth to some extent as it now relies heavily on its high-end segment products. Going forward, phasing out of the Yellow Cab scheme coupled with discontinuation of Also and Cuore would reduce the volumetric sales post CY12 for the overall industry.
Increasing import of cars continue to hurt local assemblers. The government is planning to reduce import duty on luxury cars (engine capacity of 1800cc and above), by 50% coupled with increasing the age limit of old cars from 5year to 7years.
According to InvestCap the move is likely to be hurt the local assemblers and foresee Toyota and Honda to bear the brunt. Sales of two major locally produced 'luxury' cars Honda Civic and Indus Corolla Altis are anticipated to be affected. Since Suzuki's variants do not fall in this category, the brokerage house does not see any impact on PSMC due to reduction in regulatory duty.
During the FY12, commercial importers had imported around 4,000 cars falling in this category. In the aftermath of reduction in regulatory duty by 50% analyst expects cars like Toyota Premio (2009-10) models to be available for Rs2.5 million in the local market and this can very well dent the locally manufactured Honda Civic and Toyota Corolla Atlis sales volume. Furthermore, this move will also put pressure on the local assemblers to reduce their margins on luxury cars.
Another likely decision by the government to increase the age limit of imported used cars to 7years from 5years can prove an additional dampener for the local car assemblers as it is likely to reduce the prices of imported cars by Rs50,000 to Rs75,000 per car. With the increase in age limit, Pak Suzuki Motors will be the major looser, as import of the smaller cars is anticipated to jump sharply.
One of the ways to combat the odds is coming up with a consensus auto policy capable of protecting the interest of all the stakeholders. While there is need to contain import of used cars, assemblers will also have to play a key role in bringing down cost of the automobiles. It is true that depreciating Rupee, global prices of steel and high rate of inflation in the country are escalating cost of production, but it is also a fact that if locally assembled cars are sold at handsome premium one could suspect presence of 'groups having vested interest'.
Financial institutions, particularly commercial banks will have to come out of 'T-Bills syndrome' and focus on auto financing. The condition of public transport is going from bad to worse, especially in Karachi in the absence of any financing for the public transport. Since financial institutions have burnt their fingers in the past they don't seem ready to take another chance. However, the blame must go to financial institutions which failed in mitigating the risk through acquiring comprehensive insurance of vehicles through credible insurance companies.
It is on record that with the rising prices of car acquiring some financing facility has become a must. Referring rising sale of luxury cars, some critics say Pakistanis don't suffer from any liquidity crunch. They are partly right but decline in sale of cars up to 1000cc clearly negates this point. It is also on record that auto boom in the past was driven by financing schemes offered by the financial institutions.
Yet another reason for declining car sales is the government's decision not to allow sale of factory fitted CNG kits. Since petrol and CNG prices are sky rocketing some solution has to find yet another alternate fuel. For a country like Pakistan popularizing E-10 (motor gasoline blended with ethanol) offers an ideal solution. To use this fuel no additional gadgets have to be installed. Pakistan can emulate Brazilian example. The added advantage will be production of huge quantity of sugar for export, besides saving billions of dollars spent on the import of motor gasoline.
Though the suggestion may not be very pertinent for increasing sale of cars, it is necessary to emphasize removing all sorts of encroachments on roads. It has been observed that at an average travelling 25 kilometers during peak hours takes up to ninety minutes. This is not only waste on millions of man-hours on daily basis but also leads to higher fuel consumption and more pollution. Only roads have to be kept free of encroachments.
Experts say that in big cities people have started using two wheelers to save time and fuel. This may be termed 'selecting a lesser evil' because this is certainly not a prudent option. The government must think about improving quality of public transport. Instead of investing in circular railway the amount should be used to create an endowment fund from which soft-term loans should be offered to operators of public transport. To avoid turning of these borrowers delinquent, transporters should be asked to form limited companies.