Consider these facts. Fact 1: in FY19, over 200,000 people bought locally assembled cars. This of course is down roughly 4 percent from last year, but up 12 percent since FY17. Fact 2: the average monthly car sold this year is a little more 17,000 against 18,000 last year. The difference between the two years is paltry. Fact 3: commercial vehicles, pickups, motorcycles, tractors and jeeps have all seen demand shrink dramatically this past year. Fact 4: cost of borrowing has increased, and will increase further. Taxes have been raised, and will kick in soon. Inflation has been high, and is projected to go up to 11-12 percent, with food and energy prices up significantly. Fact 5: car makers have raised prices in the range of 20-50 percent since Dec-17. With these facts in mind, here's the question: who will buy a car in today's economy?

Undeniably, FY18 was one of the best years for car assemblers volumetrically. As opined in this space at the time: “Economic fundamentals may put a dampener on the recent high the sector has experienced, which would be a shame as the ball had just started to roll". Even as that year was ending, it was expected that the anticipated austerity drive would adversely affect demand, which sure enough did materialize across the automobile segment, just not in cars.

The SBP's third quarterly report asserts that the car segment benefited largely from earlier bookings and when the impact of earlier bookings receded, production of cars contracted. However, two other factors—removal of non-filer restriction and conditions on used cars import—may have shored up sales as well. But in order to understand who will be buying cars in 2020, we have to look at who were buying cars in 2019.

Evidently, nearly half of the sales were in high-end cars like Toyota Corolla, Honda Civic and City. About 30 percent bought the mid-range Suzuki Cultus and Wagon-R models while about 25 percent were buyers of the now phased-out Mehran and Bolan, and the recently added 1600 units sold in Jun-18 for the new Alto. This segment had 31 percent share in total car sales last year. But it makes sense that the first segment to be hit is the low-end segment, and the last to get hit is the high-end segment.

Studies have shown that Pakistanis are more sensitive to changes in income than prices. Price increases may not be a huge deterrent to car buyers—at least to a certain extent—but incomes have a “magnified" effect on demand for vehicles. As inflationary and tax pressure bring down disposable incomes and reduce purchasing power, small car buyers will delay their decisions to purchase vehicles. Moreover, it is unlikely that consumers will be purchasing vehicles on financing—that also pushes a significant share of consumers out since not many mid-income potential car buyers have that kind of cash savings lying around; even if they did, this is not a spending market—unless of course, purchasing a car is absolutely unavoidable.

Though sales for Wagon-R and Cultus have also slowed down in the last few months of FY19, this one segment will remain the dark horse performer of the entire industry. Not only used car imports are restricted which give them competition, these cars are increasingly putting consumers on the road and into the gig economy where they can supplement their incomes. That is a big selling point, as these cars are paying back dividends.

The 2020 car buyer will buy a car either due to necessity or due to the introduction of a new model in the market (think Alto, Kia's Sportage or Hyundai's offerings). He will belong to the middle to high income group and he could be thinking about putting his vehicle on careem/uber to earn on the side. He will likely buy the new car on cash, and he will certainly not make that purchasing decision lightly.

Copyright Business Recorder, 2019