KARACHI: Following a substantial 40% decline in year-on-year vehicle sales during the first quarter, automobile manufacturers have opted to take decisive action by reducing prices, offering attractive discounts, and introducing various deals.
The rationale behind these price cuts is often attributed to the appreciation of the Pakistani rupee, but closer examination of their financial performance reveals a more complex story. Regardless of the rupee’s fluctuations, these companies must boost their sales volumes to sustain their operations.
Pak Suzuki
Pakistan Suzuki (PSX: PSMC), despite its position as a market leader in terms of volume, has faced significant challenges since the beginning of fiscal year 2018. Over the course of the last 21 quarters, starting from June 2018, the company incurred losses in 12 of them. A closer look at the graph illustrates that the company’s pricing strategies failed to keep pace with its production costs.
Only in recent quarters did the company manage to increase prices sufficiently to outpace its costs, but its revenue streams remain stagnant.
Honda Pak
While Honda has generally maintained profitability, it faced losses of Rs824 million in the past two recorded quarters. A small profit of Rs145 million was made in the following quarter, supported by customer advances classified under “other income.” Despite significant price increases over the past year, the company still struggled to cover its production costs, which exceeded its revenue for every unit sold.
Indus Motors
In contrast, Indus Motors stands out due to its ability to maintain a strong market share in SUVs and IMVs, despite declining overall sales volumes. This can be attributed to the company’s improving performance and market strength. Notably, in fiscal year 2023, Fortuner and Hilux models accounted for 39% of the company’s total CKD sales, compared to 24% the previous year and 18% the year before that.
Although the company made solid profits (Rs 9.6 billion in FY23) and offered dividends to shareholders, its profit margins shrank to 4%, marking the lowest margins in its recorded history. This is a significant concern, with “other income” accounting for 84% of before-tax earnings, providing a safety net after a notable drop in EBITDA during the year (down 57%).
The automotive industry is clearly facing challenges, and the prevailing response is price reductions, coinciding with a brief respite due to rupee appreciation. With the exception of Suzuki, nearly all manufacturers have lowered prices and/or introduced discounts on various models to clear their inventories and stimulate sales.
Kia & Honda
Honda and Kia have also introduced their car schemes to make higher prices more attractive to potential buyers through installment plans. Honda targets HR-V, BR-V, and Aspire buyers, while Kia’s offer is limited to its less popular vehicle, Sorento.
It may appear encouraging that automakers are finally adjusting prices when the rupee appreciates. However, these price reductions are indicative of a more profound issue. Historically, the relationship between the PKR-dollar exchange rate and automobile prices has been unidirectional, with prices rising when the rupee depreciates, and assemblers waiting for a subsequent depreciation before considering price increases.
The truth of the matter is that warning signals have been sounded, and manufacturers are in dire need of increased sales volumes to navigate the challenges they currently face.
