The auto industry in Pakistan has been struggling for the past few years. Forex troubles, sourcing issues, and inconsistent tax policies have forced automotive manufacturers to constantly increase the prices of their products. This inevitably led to a steady fall in demand and we have seen some of the most troubling numbers of sales declines in the history of these companies.
As the industry stands at a critical juncture, steps to overcome the troubles are desperately needed. Companies like Suzuki Pakistan taking drastic steps such as taking themselves off the stock market to protect against volatility in share prices shows how bad the situation is.
Why is the industry struggling?
The auto industry has been under scrutiny since 2018 when the Pakistani Rupees faced serious devaluation against the US Dollar. Stability in the exchange rate is crucial to recovery as automotive companies have to import parts for vehicles from other countries.
This is a testament to the problems originating from the manufacturers’ side as most components of the vehicles are imported and thereafter assembled locally. A varying exchange rate means that the manufacturers are forced to keep additional margins to allow for differences in the exchange rate.
This is worsened by sourcing and supply chain issues, wherein companies have had to cease production for weeks at the end because of the inability to import the requisite parts for production. Not having buffer stocks and being import-dependent led to severe barriers to production, forcing companies to make up for the losses by increasing the prices of the cars.
Resultantly, consumer demand for new vehicles kept on tumbling till a point where all companies were posting reductions in sales volumes on a year-on-year basis. This was made worse by companies that increased prices while deliveries of pending bookings were delayed, forcing customers to either cancel their bookings or get the cars at inflated prices.
When will it improve?
Time is of the essence: the recovery is a long process as consumer trust is gained back and prices stabilize. Political instability causing fluctuations in government policies leads to the core of the issue; so, it is hard to point out when the problem will subside.
The move towards stability must be backed by governmental policies to ensure the industry does not get jolted by further changes. The upcoming budget is expected to have relief for the automotive companies in a bid to pass respite to the end user. This gives rise to the question: will the companies pass adequate benefit to the consumers or retain margin for themselves?
How will it recover
Flexibility amidst challenges
First and foremost, resilience from the automotive companies is essential to recovery. Despite losses and slumping sales, most companies have coped well with the troubles facing the industry. There have been new entrants in the market despite the seemingly sluggish market conditions and existing companies have managed to navigate through the storm.
Being able to survive the crisis is tantamount to embarking on the journey to success. Companies have launched new models, introduced facelifts of existing models, and pledged to bring further variety to the market, which shows their commitment and belief in the Pakistani market.
Rising demand
The constant rise in the working population translates to an ever-increasing demand for vehicles. The preference for new vehicles has been present since the inception of the country and is expected to improve the conditions of the market as the youth of the country gets purchasing power.
Freelance income earners
A major shift in the automotive industry is being caused by the rise in freelancers in the country who earn in USD. Several freelancers and YouTube content creators etc. buy new cars as their incomes accumulate. This change is expected to steadily increase demand and since such customers are mostly immune to price variations (because of their incomes being dollar-pegged), companies have a stable source of revenue.
Government negotiations with the IMF
The government’s negotiations with IMF, if all goes well, are expected to boost the foreign currency reserves of the country. This can help remove all kinds of restrictions on the imports of vehicles and parts to the country, helping automotive manufacturers resume production at maximum capacity.
Quality and standards enhancements
Pakistani consumers often complain of inadequate quality from local manufacturers along with a lack of features otherwise offered in models abroad. Fixing this could lead to local companies grabbing the share of customers who prefer used imported vehicles.
Reduction in interest rate
A major share of automotive sales in Pakistan are of leased/financed vehicles. These figures have been tumbling since 2021 because of rising interest rates. The effective interest rate right now is approximately 28%, which means that roughly a third of the vehicle’s cost goes toward interest payments annually.
A reduction in interest rate could work into higher demand for vehicles from middle-class consumers who don’t have the resources to pay upfront.
Conclusion
An improvement in the auto industry is essential for the country. The end goal should be to manufacture cars that can be exported to other countries and to start local manufacturing of parts. To continue to sustain the 4 million families that are directly and indirectly dependent on the auto industry flourishing, drastic steps must be taken.
