Soaring Car Sales- Real Buyers or Investors?

No doubt we are witnessing the toughest of economic times with rising inflation, currency hitting a record low, commodities becoming too expensive and of course, price of cars going out of the reach of many. Within the last 3 years, prices of locally available cars on average have been increased by nearly 80%, almost double to what it used to be few years ago.

Despite tall claims of achieving higher localization of up to 70%, the impact of shipping costs & currency devaluation is always fully transferred to the consumers. Local assembled cars are always 100% vulnerable to forex rates, perhaps because the local isn’t actually that local. And again, we are witnessing a new wave of price hikes as from November 2021 automakers have announced the price revisions which this time, will be applicable in two steps, first in November and the second effective from 1st January 2022, with prices of cars going up from Rs 200,000 to up to 500,000 depending on model & variant.

As usual, the reasons mentioned behind the latest price hike is rising shipping & raw material costs and massive increase in forex rates, however interestingly if we look at the financial performance of local automakers, the picture might look completely opposite. For example, Indus Motor Company (IMC) the assemblers of Toyota cars in Pakistan earned a profit of Rs. 12.82 billion in FY 20-21, compared to Rs. 5.1 billion in FY 20-19, registering a staggering 152% growth in profits. Then in the first quarter of Honda’s model year 2022 (1Q-MY22), the company enjoyed a healthy gross profit of Rs. 1.6 billion, that too in just in three months (April-June 2021). Lastly, Pak Suzuki posted net sales revenue of Rs. 66.11 billion during the first half of 2021, compared to Rs. 27.47 billion during the first half of 2020, witnessing a massive 141% growth. The company also earned a profit of Rs. 1.2 billion during the first half of 2021.

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And despite the massive increase in prices, the start of fiscal year 2021-22 has been phenomenal for local automakers. Pak Suzuki set the highest-ever monthly sales record with 15,207 units sold in the month of July 2021, since its inception the company never sold this much vehicles in a single month. In the same month, IMC also witnessed its highest-ever sales in a month since its inception in 1993 with 6,775 units sold in July 2021. And then again in October it sold 7,001 units breaking its own sales record that was set in July. Furthermore, Kia which is not a member of PAMA, celebrated achieving 50,000 units milestone earlier this month. Interestingly the 25 thousand units milestone was celebrated in March 2021 (took 18 months) but the 50 thousand units feat was achieved in hardly 7 months.

So how come all of a sudden despite alarming price increase & recent restrictions on car financing, car sales are soaring so high. This is most likely due to the presence of huge number of investors in the market compared to genuine buyers. As according to a recent research by Pakistan Institute of Development Economics (PIDE), it has been revealed that up to 90% passenger vehicles in Pakistan are sold against premium/ on money. The research also disclosed that automobile sector has made undocumented transactions worth up to Rs 170 billion during last 5 years under the head of additional charges, better known as own/ premium, paid to the dealerships to get an immediate delivery of a vehicle.

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You might also have noticed that any new car when launched gets fully booked in no time. As evident in case of recent car launches, even those reaching in the early hours of the very first day of booking are surprised to get the “booking closed” message at the dealerships due to an ‘overwhelming’ response. This is a simple fact that due to absence of check & balance and poor regulations in the auto sector, the market in recent times is being manipulated by investors who tend to get hold of all the units and later sell them to the actual customers against a hefty premium. Unfortunately, government while playing inept will always impose penalties on the end-user while not trying to harm the investors at all.

Today the automakers are happy since the units are getting sold in record numbers, the investors are happy since they are getting healthy profits without doing much, however the number of new car registrations will show us a clear picture whether these cars are getting into the hands of genuine customers or not. The current soaring sales trend despite massive increase in prices might be nothing more than a bubble, which will eventually burst sooner or later.

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As long as people are willing to pay extra amount to get hold of the vehicles they have actually paid for, the ascending sales trend will continue but with constantly increasing prices and restrictions in financing there is a obviously a limit to what most people can spend. And when the investor realizes that people are no longer willing to pay high premiums, they will stop buying cars in bulk and the sales will suffer from a sudden dip, and will come down to a realistic level which will be much lower than the record-breaking numbers of today.

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