Indus Motors raised prices after dollar surged 7%, others to follow
Toyota Yaris, one of the most anticipated cars launched last month, became 5% or Rs126,000 more expensive before it could hit the road.
Indus Motor Company, the makers of Toyota Corolla in Pakistan, launched the new variant on March 20 with a price tag of Rs2,349,000 for the basic model and Rs2,809,000 for top-tier 1.5 ATIV X (CVT) and started taking bookings. The dollar was trading at Rs158 at the time.
Twenty four days later, the company notified dealers that it was raising prices across the board because of rupee devaluation. On March 27, the dollar rose to an all-time high of Rs169 before the central bank intervened and brought it down. It is now trading at Rs167.
Whenever the dollar becomes more expensive, carmakers increase prices because they import about 40% to 60% of their parts, which are paid for in dollars. IMC has raised prices of all variants, including Corolla and top-tier 4WDs, but market analysts say other companies will follow in its footsteps.
All players do it, securities analyst Adnan Sami Sheikh said. “From steel to plastic and rubber, almost everything used in the making of cars is imported, not just engines. A hike in the dollar, therefore, translates to a hike in prices.”
The price increase comes at a time when car factories are closed because of a nationwide lock down to contain the spread of the Covid-19 pandemic in Pakistan. The sales of cars have plunged 70% in one year and the economic outlook is bleak. Experts are already warning of the threat of slipping into a recession.
“[I]t’s inevitable, we can’t sustain,” CEO of IMC told Samaa Money in a message on WhatsApp, attributing the prince hike to rupee depreciation (from 155 to 167) against the dollar. Does the increase apply to previous bookings? “All orders, which are fully paid will be entertained and we will take the loss,” he replied.
Why increase prices when factories are shut and the market has shrunk by half?
“In the auto sector, it’s a recurring practice to pass on devaluation impact to the consumers,” said Saad Ali, who is Head of Research at Intermarket Securities. “Traditionally, their [auto makers] strategy has been to protect profitability as opposed to increasing volumes [by lowering prices],” he said. By raising prices, they try to keep profit margins normal so they can stay in profit, the analyst said.
The auto sector has been under pressure for quite some time now. The sales data for March shows a 70% decline in sales compared to the same month of 2019, according to a report by Topline Securities. Sales of IMC halved during the period under review and the lock down has already added to the problem. The share of IMC has decreased by more than a half since the 2017 peak and stocks of Honda and Suzuki are six times cheaper than their peaks three years ago.
However, analysts believe auto sales will pick after the lock down is over. Sales were increasing monthly before the pandemic, inflation was slowing and interest rates are likely to drop further, possibly to single digits, in the next policy announcements, they say. Furthermore, the introduction of new models (Yaris launched already and City on the way), will help attract consumers. There is a risk of a further hike in prices if the dollar rises again and salaries may not increase for many people because of an economic slowdown, which could be one factor that may delay recovery in sales, they say.