A year of Unprecedented Challenges

A sharp decline in the overall sales is due to the rising car prices, a decline in car financing, amid a sharp rise in the interest rates and the ongoing import restrictions imposed by the central bank

Farhan Mehmood

Sherman Securities head of research

There is a need to strike an appropriate balance between supporting the economy, ensuring debt sustainability and advancing structural reforms. As the economy returns to full capacity and recovery becomes durable, the four-wheeler segment is expected to resume its growth momentum

Aamir H Shirazi

Honda Atlas Cars chairman

Restrictions on CKD kits import proved detrimental for the auto industry

Karachi: FY23 has been a year of unprecedented challenges for the automotive industry. Car demand remained sufficiently inelastic in the past. However, high inflation is now hurting the customers and restrictions on the import of completely-knocked down (CKD) kits have proved to be very detrimental for the auto industry.

Various original equipment manufacturers (OEMs) are now anticipating the suspension of production, owing to depleting inventory levels and cash flow concerns.

The sales of local automobile assemblers plunged over 40 per cent in January 2023 on a year-on-year basis. Last time, the auto industry posted similar sales was in June 2020, when the country was facing extended lockdowns during the Covid-19 pandemic.

The major reason behind a sharp contraction is around 70 per cent decline in the sales of the Pakistan Suzuki Motor Company (PSMC), which got affected by the shortage of inventory, amid the ongoing import restrictions, leading to plant closure during January 2023.

Meanwhile, Indus Motor Company (INDU) announced to completely shut down its plant from February 1 to 14, 2023. And, the production will commence on a single shift basis from February 15, 2023 onwards until further notice.

Farhan Mehmood, head of research at Sherman Securities, said that the overall sales during the seven months of FY23 remained 44 per cent lower.

“A sharp decline in the overall sales is due to the rising car prices, a decline in car financing, amid a sharp rise in the interest rates and the ongoing import restrictions imposed by the central bank.”

In the light of the recently introduced mechanism on December 27, 2022, the commercial banks have been advised to prioritise and facilitate the imports to specified sectors only, which does not include the auto sector.

The local auto assemblers and their vendors continue to face major hurdles in the import of raw materials and receiving clearance of their consignments from the commercial banks.

This has disrupted the entire supply chain and the vendors are unable to supply raw materials and components. Accordingly, the assemblers have insufficient inventory levels, making them unable to continue production activities, as usual.

The economy continues to face pressures on account of rising inflation, an elevated fiscal deficit and uncertainty over external financing. The GDP growth rate projection for the current year has been revised downwards to 2 per cent. The inflation is climbing and was recorded at 27.6 per cent during January 2023.

This was mainly driven by the rupee depreciation passed through to the domestic prices and the upward revision in the energy and food prices.

An industry official said the import restrictions on account of declining foreign exchange had crippled the industries.

“Resultantly, most demand indicators, including the sales of cement, petroleum products, automobiles and textiles reflect a downward trend. Accordingly, the shortage of the much-needed foreign currency inflows from bilateral and multilateral institutions is required to resolve the issue of the letters of credit (LCs) for ensuring sustained growth in this segment.”

Last week, the Pakistan Automotive Manufacturers Association (PAMA) and the Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM) sent a joint letter to the State Bank of Pakistan.

The letter said that the industry is on the brink of extinction due to the SBP’s restrictions and the commercial banks’ lack of cooperation in the auto sector imports. As a result, the factories are facing intermittent closures, while the assemblers and vendors are laying off workers.

According to the Pakistan Bureau of Statistics (PBS), the imports of the car assembly kits fell 38 per cent to $499 million in the first half of FY22/23 from $808 million in the same period of the last fiscal year. This has created an inventory shortage and massive sales and profit decline for the automakers.

The macroeconomic outlook seems challenging on account of the rising inflation, fiscal slippages and drying up of financial inflows and reserves. Moving forward, it is essential to sustain the reform momentum and focus on the policies for securing stability and promoting sustainable growth.

The macroeconomic adjustment measures, specifically fiscal consolidation to complement the ongoing monetary tightening and exports, will help relieve the pressure on the rupee.

Aamir H Shirazi, chairman of the Honda Atlas Cars, in the company’s last financial report issued on January 30, 2023 said that managing the underlying risk necessitates articulating and effectively implementing a clear strategy for the economic recovery.

“Accordingly, there is a need to strike an appropriate balance between supporting the economy, ensuring debt sustainability and advancing structural reforms. As the economy returns to full capacity and recovery becomes durable, the four-wheeler segment is expected to resume its growth momentum,” he added.