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Impact of global recession on local auto industry

Impact of global recession on local auto industry

Through 2018-19, the global auto industry was having vociferous recession in the sales and projections are painting similar decline in the current year. This protracted shrinkage would result into massive economic threats. Economists are optimistic that this would not last as long as it has. The auto sector represented 20 percent of 2018’s slowdown in GDP and roughly 30 percent of the slowdown in the global trade. Global sales of passenger cars are forecast to hit 77 million vehicles in 2019, down from a peak of 79 million in 2017.

Reasons for declining

Carmakers around the world are scuffling with an array of challenges which include:

1- Droppingin Demand

Global car sales were gone down in 2018, after years of sturdy upward growth. Experts says it was largely because of a collapse in demand in China. The ongoing trade tensions between USA and China have hit confidence in China. The Chinese slump comes as demand in two other giant car markets, Western Europe and the US, has also slowed amid waning consumer confidence.

2- The electric challenge

Though the market isn’t quite ready for electric cars, still the global sales of battery electric cars surged 73 percent in 2018 to 1.3 million units, but that was still just a fraction of the 86 million cars sold.

To get their emissions levels down, carmakers are also going to need to sell a lot more electric vehicles. The main issue is the lack of charging infrastructure on roads in Europe and the US, although China is making great strides in this area.

3- Air Quality Concerns

The introduction of new tougher carbon dioxide emission standards are creating problems in Europe. The air quality concerns and taxation changes have led to a big drop-off in diesel sales, contributing to a 7 percent fall in new car registrations in 2018 in UK only. Moreover, from 2021, manufacturers will face big fines in the EU if they cross the agreed emissions limits. And it’s going to be tougher and tougher. Consumers are not motivated to buy; resulting loosing consumer’s confidence.

4- Driver-less Cars

In next 15 to 20 years, the driverless cars would dominate the roads. Many consumer might opt to share or rent rather than own our own vehicles.That could also slit the cost of travel per kilometer hence making ownership seem much less appealing. However, the research and development (R&D) costs a lot and so many are teaming up to spread the risk.

5- European Union

The investment in the UK car industry has fallen in the last two years, slumping 46.5 percent in 2017 alone.

The British car plants rely heavily on components imported from the EU, while most of the finished cars they produce are exported to the European mainland.

Uncertainty in the form of tariffs will cause bottlenecks and delays which will make UK plants less economical.

Pakistan auto sector in hot waters

Pakistan’s auto sector is in hot waters; the current phase an all-time low. The rupee has lost 49 percent of its value since December 2017, following which the auto companies have massively hiked car prices. A slowdown in the economy, rising inflation and declining purchasing power of consumers have dented profit margins, which has been reflected in their latest financial results.

Pakistan’s auto industry is the typical oligopoly, with only three major players assembling a handful of automobiles: Honda, Indus Motors (Toyota) and Pak Suzuki Motors. For decades the ‘Big Three’ have dominated the market in their own right, each having at least one USP over the other.

Some of these new entrants have already entered the country while others are expected to enter soon. Things may be going from bad to worse for the big three Japanese automakers, but there are some who have emerged as gainers in this situation.

Current scenario

A number of developments in the past two years have adversely impacted the existing players, hence pulling the sector down. Several rounds of currency devaluation coupled with fresh levies have hit the carmakers hard.

The latest statistics of the Pakistan Automotive Manufacturers Association (PAMA) revealed that car sales in Pakistan fell 39 percent in September 2019 compared to the same period of previous year. Recently, two of the three automakers had to halt production due to growing stockpile and meagre demand. Around 11,724 units were sold in the previous month compared to 19,345 units in September 2018.

Second hand car market

The second-hand car segment has witnessed a spike in business activity. The demand for used cars had surged in the past one and a half year. The sales of second-hand cars had gone up. A drastic drop in sales of locally assembled new cars and freshly imported cars due to multiple rounds of devaluation. The demand and supply forces had pushed used car prices upwards as well because sellers always priced their used cars in line with changes in rates for new vehicles.

Due to this fall in the purchasing power, sales of both new and used cars, had decreased because of consumer skepticism and a lower disposable income. Consumers are looking for five to eight-year-old vehicles, which were earlier preferring two to three-year-old cars.



The new tax regime in the budget for 2019-20 resulted in higher prices hence lower demand. This is also detrimental for the government’s vision of attracting new entrants into the auto industry.

Interestingly, the major problem in the auto industry is supply and not the demand. This is due to the fact that the local industry did not have the capacity to meet demand. Earlier, this gap was filled by imports of automobiles which created a fair bit of competition.

Imported cars

The import of used cars has shrunken to 5 percent to 10 percent, after the implementation of SRO-52. Before this around 50,000-70,000 cars were being imported every year which has dropped to 6,000 only.

The cars up to five-year-old were allowed to import under the personal baggage, transfer of residence and gift schemes meant for the overseas Pakistanis. Around 95 percent of the imported used cars were Japanese. The imposition of federal excise duty on cars of all engine capacities in the recent budget had dented sales of new cars and shifted potential consumers to second-hand vehicles. The procedure has become extremely difficult and potential buyers are now going for local cars. Perhaps, this is another reason why the second-hand car market has experienced a spike in activity.

Demand for used cars had indeed increased in the past one and a half year due to rupee devaluation followed by price hikes. The imposition of federal excise duty on cars of all engine capacities in the recent budget had dented sales of new cars and shifted potential consumers to second-hand vehicles.

It is pertinent to mention that FED was earlier only applicable to cars of 1,700cc and above. Sales of second-hand cars would never fall because these were priced way below new cars, which gave buyers an advantage.

Impact of new tax regime

The taxes imposed by the government on the automobile sector coupled with reduction in purchasing power of the consumers, arising due to economic slowdown, had caused a decline in sales of new automobiles.

Auto industry was the highest tax-paying industry during the last government’s tenure followed by cigarette, tobacco, telecom sectors. Sources said that Suzuki Company has showed deficit and Honda and Toyota may also show deficit if the situation did not improve. Sale of vehicles has dropped by 50 to 60 percent till June 2019 as compared to sales till June 2018. As a result, Honda and Toyota has laid off hundreds of employees.

Honda Atlas Cars Pakistan (HACP) has shut down its plant for 10 days as its inventories piled up to 2,000 units on plummeting car sales amid the crisis situation.

Similarly, Indus Motor Company (IMC), which produces Toyota models in Pakistan, has also decided to stop car production for eight days, two days every week, during the month. Honda had kept its plant closed for two days earlier last week. However, a Pakistan Suzuki Motor Company spokesman said the company will take decision whether or not to cut down production in the next few days after analyzing sales trend and flow of booking orders during the present month.

HACP and IMC executives say their decision to scale down production during July was informed by extremely lackluster sales in the first 10 days of the current month. They said their inventories from the last month and the first 10 days of July have grown rapidly because of steep increase in car prices after currency devaluation as well as imposition of Advance Customs Duty (ACD) on all imports and Federal Excise Duty (FED) on assembled cars, leaving us no option but to shut down the plant to cut production. If the present trend holds, they expect sales to drop to less than 30,000 units this business year (April 2019-March 2020) from over 48,000 units last year.

IMC has the same reasons for observing production days during July.

The sales have been on the decrease for the last three months as total car and light commercial vehicles (LCV) volume contracted by 5 percent to 17,561 units in June from a year ago. Overall, the car and LCV sales plunged by 7 percent during the last fiscal year to 240,335 units from the previous year. The impact of implementation of 5 percent ACD on all raw materials and parts used by the local assemblers and imposition of 2.5-7.5 percent FED from July 1 has started resulting in further decline in sales. Industry expects a significantly large dip in sales at the end of the year. It may be recalled that the industry was expecting to increase its sales to half a million units by 2022.

Car sales have plummeted by a whopping 39.4 percent to 31,107 units during the first quarter of this fiscal year compared to 51,221 units in the same period last year. Truck sales, considered a measure of trade and business (new or growing businesses purchase them for transportation etc.), also took a major hit with sales dropping from 1,738 to 874 on a year-on-year basis. Honda and Toyota sales dropped 6 percent and 57 percent year-on-year respectively during September, while Suzuki Motor Company sales contracted by a relatively lower 18 percent year-on-year. This is despite the government putting severe restrictions on used car imports that have also come down drastically as a result.

Most of the damage has been done by the depreciation of the rupee; roughly 27 percent against the greenback since August of 2018 to date. Two of the most important and expensive components of automobiles here are imported engine and transmission. That right as there is a significant jump in cost. Add to it the increase in Federal Excise Duty on cars and their registration cost, and all vehicles become unaffordable. The net effect has meant that a 1.8L new civic costing Rs 3.0 million on-road a year ago is now costing upwards of Rs 4.5 million. A similar proportionate increase can be seen across the range being offered by Indus Motors and Suzuki.

Factory lots where previously cars right off the belt would not stay for longer than a day, due to the high demand, are now full. Indus Motors even tried to absorb some of the price hike by offering to pay for the registration of its lower-end, lower displacement vehicles. With car inventories piling up, Honda and Indus have reduced their manufacturing by observing no-production days. New entrants such as Hyundai and KIA have also been compelled to revise their introductory prices upwards as they are importing CBUs (completely built units). Hyundai’s IONIQ for example has been launched at an eye-watering Rs6.4 million- a hybrid 1600cc hatchback.

Consumer finance

Leasing cars is also no longer a financially viable option with the discount rate at 13.25 percent- add to that bank premium and you’re paying at least 15 percent mark-up, not to mention the higher down payment at a minimum rate of 33 percent of full price.

It is severe economic downturns like the current one that the true vulnerabilities of an industry become apparent. None of the so-called ‘Big Three’ have invested their abundant retained earnings on reducing their dependence on imported parts in order to protect against currency shocks such as the current one. Price revisions owing to ever-changing economic conditions are not exclusive to Pakistan. However, when the quality of the product does not meet international standards, because it doesn’t have to, then that product becomes even more unattractive to the consumer. There is simply no way to justify the asking price of cars right now.

[box type=”note” align=”” class=”” width=””]The author, Mr. Nazir Ahmed Shaikh, is a freelance columnist. He is an academician by profession and writes articles on diversified topics. Currently he is associated with SZABIST as Registrar and could be reached at[/box]

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