When the Rupee weakens, car prices in Pakistan immediately go up. But when the Rupee strengthens, car manufacturers delay price hikes and wait for it to weaken again before increasing prices.
The Pakistani Rupee has strengthened by nearly 9 percent against the US Dollar since late August, and car assemblers are competing with each other to lower prices. To the point that one major auto assembler has reduced prices twice in a month. Does this mean that when the Rupee appreciates, prices go down? Not necessarily. In this blog, we will attempt to uncover the actual reasons why auto assemblers have begun to cut their prices.
Sab Say Bada Rupaiya?
While auto assemblers may want you to believe that the recent price reduction is due to a strengthening Rupee, the reality is that the Rupee has been appreciating for some time, even though prices have only recently begun to decrease.
Instead of lowering prices when the Rupee started to strengthen, auto assemblers attempted to boost car sales by offering various discounts and deals. Only when these efforts didn’t lead to increased sales did they start reducing prices. After all, auto sales dropped by 40% in the first quarter compared to the previous year.
Hypothesis
If we are suggesting that auto assemblers in Pakistan are reducing prices not because of a weakening US Dollar and strengthening Pakistani Rupee but due to their declining sales numbers, let’s try to support this suggestion by looking at the financial situation of the Big Three.
Honda Atlas
Honda has been mostly profitable, but in the last two quarters, it faced a loss of Rs.824 million, followed by a small profit of Rs.145 million in the next quarter. Despite raising prices significantly in the past year, the company struggled to cover production costs, which were higher than their revenue for every unit sold.
Toyota Indus
Toyota, despite a drop in sales, has managed to sell a larger proportion of SUVs and IMVs than ever before. For instance, in FY23, 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.
While the company tried to compensate for rising costs with improved revenues in the last two quarters of FY23, costs were piling up in earlier quarters with stagnant or decreasing revenues. Although the company made substantial profits (Rs.9.6 billion in FY23) and paid dividends to shareholders, its profit margins shrank to 4%, the lowest in its history.
Pak Suzuki
(Note: Suzuki is the only major auto assembler in Pakistan which has not reduced its prices, to date.)
Despite being a major player in the market, Pakistan Suzuki has faced significant challenges since the start of FY18. From June 2018, the company reported losses in 12 out of 21 quarters. The company’s prices didn’t match its production costs for a long time, and only recently did they raise prices to cover these costs. However, their income hasn’t seen substantial improvement.
Conclusion
It is evident that the local automotive industry is facing real challenges due to falling sales volumes and rising production costs. To reverse this trend, the industry has started to lower prices, offer discounts, and deals on various models to clear their inventories and boost sales. This has coincided with a stronger Rupee.
While it’s a positive development that auto assemblers are finally reducing prices when the Rupee strengthens, there is more to this situation than meets the eye. We suggest this because, in the past, prices have instantly gone up when the Rupee weakens, but when the Rupee strengthens, car manufacturers have typically waited until it weakens again before raising prices.
Suggested further reading for you: Toyota Decreases Car Prices: Who Is Indus Motors Trying to Fool?
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