Is the auto sector going to get worse? You bet

Can it get any worse for the automobiles sector of Pakistan? Yes, yes it can. And you better believe it will.   

If there was any more proof that Pakistan is reliving a slump the likes of which was last seen in 2009 , it is that the total car sales in fiscal year 2020 are the lowest they have been since 2009, according to Hammad Akram, analyst at Topline Securities, in a note issued to clients on July 13. 

The total car sales in 2020 were recorded at 110,583 units, which is the worst recorded since fiscal year 2009. The greatest contributors to this decline were Honda Atlas, which saw sales decline by 63% from 44,234 units in 2019, to 16,390 units in 2020. Indus Motors sales declined by 53% from 60,993 units in units to 28,378 units in 2020. Finally, Pak Suzuki Motors saw sales decline by 49% from 130,002 units in 2019, to 65,815 units in 2020.

Specifically, the month of June 2020 witnessed a 52% decline year-on-year from 17,468 units in June 2019 to 8,446 units last month. This marks the remarkable 20th consecutive month of a year-on-year decline in car sales. Around 1,000 units are also expected to have been sold by non-registered car assemblers, such as KIA during the month of June.

However, it is an indication of how appalling the month of May was for car sales that sales actually increased 77% on a monthly basis. Car dealerships became operational after the lifting of Covid-19 related lockdowns and restrictions. That is why one sees unusual jumps in the monthly sales growth figures: Honda Atlas recorded sales growth of 514%, while Indus Motors recorded 199% sales growth.

Meanwhile, in the world of motorbikes, Atlas Honda recorded sales of 90,039 units in June 2020, up by 5% year-on-year and 644% month-on-month. However, when it came to sales in 2020, the company recorded a decline of 22% year-on-year to 873,902 units, or the lowest level since 2016. 

Tractor sales for 2020 are down by 35% year-on-year to 32,727 units. However, tractor sales in June 2020 were up by 46% year-on-year and 187% month-on-month to 5,312 units. Within that world, Al Ghazi Tractors sales increased 121% year-on-year, while and Millat Tractors’ sales increased 23% year-on-year respectively. 

“We believe the uncertainty regarding tractor subsidy of Rs2.5bn has ended, when it was not made the part of budget FY21.” says Akram. That explains the June 2020: farmers had been holding their decision to buy tractors to take advantage of the subsidy, and made the purchases in the outgoing month

So, what happened in 2020? According to Akram, the year remained turbulent for car assemblers, as slow economic activity and high interest rates affected demand at the start of the year. The depreciation of the rupee, which lost value by  3.9% from July 2019 to March 2020, also led to unusually high car prices. For instance, just a few months ago, Honda Atlas had to increase its prices on average by Rs90,000, while Indus Motors had to increase its prices on average by an astonishing Rs200,000. 

The final nail in the coffin for anxious consumers was the Covid-19 pandemic which severely affected sales in the second half of the year. Turns out, the middle of a pandemic, and fear of job security, is when people are least likely to buy a new car, instead focusing on essentials that matter and making sure a home is still running. 

It was not always meant to be this way: as Ali Asghar Poonawala analyst at AKD Securities pointed out in a note sent to clients on July 13, the year 2020 was slated to be ‘the year’ for new entrants to launch complete knocked down cars (or cars that are imported in parts and assembled in the importing country). But only one, Kia Lucky, launched two variants: the compact SUV Sportage in August 2019, and the hatchback Picanto in October 2019. 

Meanwhile, the much awaited Toyota Yaris’s launch was delayed well into 2020. Indus Motors – the Toyota subsidiary in Pakistan – launched its new sedan in March 2020. There were high hopes for the Yaris: its average price is Rs2.7 million, which is significantly cheaper than the Corolla (at Rs3.7 million), and only Rs0.1 million more expensive than its competitor, the Honda City. Perhaps in another climate it would have boosted sales; as is, this is an environment of overall weakness, and the launch was hampered by the Covid-19 crisis. 

There is one bright spot moving forward: as Poonawala noted in another report sent to clients on July 13, 

interest rates have been pulled down from 13.25% in March to 7% in June. And even better, banks like Habib Bank and Bank Alfalah have started to offer discounted limited time promotions on auto loans. Now granted, the loan space is still in its nascent stages: HBL’s scheme has attracted less than 1000 applicants. The interest rate cycle tends to have a three month lag on consumer loan growth profile, so it will be interesting to see how the car space evolves, if at all, in the next few months.