If car makers were not worried before, they should be now, as volumes have plummeted for Honda, Toyota and Suzuki alike. The recent price increases may be the straw that broke the camel's back but it has been a long time coming as car makers persistently raised prices, clearly at the cost of losing sales. This was predicted in this space toward the start of this year (read: “Autos: For whom the bell tolls", May 27, 2019; “How much is Rs10,000 worth?, Mar 28, 2019).

Honda sales for City, Civic and BR-V have slid dramatically following a shut-down of its plant for nearly 2-weeks while Toyota cars have not survived the onslaught, declining by 56 percent in Jul-19 year on year. Indus Motor Company (PSX: INDU) that assembles Corolla, Fortuner and Hilux also kept plant closed for 10 days owing to lethargic demand.

Higher prices, high cost of borrowing as Central Bank tightens monetary policy, reduced disposable incomes as government raises taxes, and overall purchasing power receding have all contributed to the lethargic demand. Though the Pakistani car appetite is not very sensitive to prices, it is sensitive to changes in incomes. Economic austerity is hurting all levels of income groups.

Even the better performer of the three, Suzuki with its popular vehicles Wagon-R and Cultus has not done well in July. Mehran has been phased out and the last of the vehicles are now being sold. There is no way to tell how well the new Alto will perform after the 4600 cars sold in July, likely booked when the car was first launched. A lot has changed since then. Higher taxes will typically burden middle class and low-middle class buyers more, which is expected to affect Suzuki sales, not unlike

Of course, the exceptions being the phenomenal and consistent growth of Pakistan Suzuki's Cultus and Wagon-R as the fiscal year come to a close. Both models are still all the rage, now known—like their imported peer Daihatsu Mira—as the unofficial “Careem-Uber" car. These cars have sustained sales month after month even as the company raised prices by 40 percent and 49 percent since Dec-17 respectively, because they have been bought increasingly by consumers to be used in the burgeoning ride sharing economy.

Higher prices, greater cost of financing, and reduced disposal incomes are not deterrent enough for Cultus and Wagon-R buyers. They are probably also still selling because of falling disposal incomes, rather than inspite of them. It is possible that more consumers are looking to supplement their incomes as inflationary pressures come to bite.

But the three aforementioned reasons are evidently enough to deter buyers of other models, including Honda vehicles which are now experiencing a steady drop in sales. So much so that Honda is shutting down its plant—reportedly—for 10 days as it tries to sell off 2000 vehicles lying in inventory. Oh, how the times have changed. Only a year ago, demand was so robust, car delivery was late by 6-8 months and these very vehicles were being sold on steep premiums ranging from a low point of Rs150,000 to upwards of Rs600,000.

On the one hand, the premium market, or “own money" buying showed the sheer appetite of car buyers and the persistent demand for these vehicles. On the other, it showed consumers' ability to absorb these premiums. Which is why, toward the start of FY19, even as the rest of the economy started to cool down—in the automobile sector alone, commercial vehicles sales started to decline, tractor volumes slid—car demand remained strong. And it did even as rupee experienced its free fall, and each depreciation cycle caused automakers to raise prices. Inflation meanwhile resulted in monetary policy tightening until auto loans became far too expensive for new borrowers to come in.

Today the monetary policy committee will mull over the inflation numbers and will likely raise interest rate by 100-150 bps. This essentially says goodbye to any potential new car buyers looking for finance, if they weren't already suitably discouraged. That leaves cash buyers and savers who might not want to part with the savings just yet. Indeed, higher income and indirect taxes plus inflation make a bitter concoction that only the rich may be able to swallow. And clearly, if Honda is shutting down its plant for a few days, with Indus Motors potentially following suit, it seems like even the affluent car buyers are going to wait out the storm.

Copyright Business Recorder, 2019