Industry

Up to 25% decline likely in auto volumes in FY23

Karachi, July 28, 2022: A decline of up to 25% in the volumes of automakers is expected during Financial Year 2023 due to massive deterioration of purchasing power of auto consumers.

This situation will lead to adding pressure on gross margins in the auto sector – a similar situation the sector faced during FY 2018-20 when auto volumes declined by 35-40%.

“The state of affairs could deteriorate further this time around with woes of worsening purchasing power of auto consumers added by delay in auto productions over scarcity of FCY to import raw materials,” said Wasil Zaman at JS Research. 

It is worth adding here that most auto players have already stopped advance bookings for vehicles citing uncertainty and higher production costs as prime culprits.

Besides, the gross profit per car of all three manufacturers has declined over the years and at best has returned to 2017 levels. This shows that despite the price hikes, the auto makers are losing gross profit per car which means they will have to draw in more volumes to maintain gross profits at the same levels as before, holding all else constant.

What leads to repeat the sticky cycle?

Raw materials: Raw materials make up for the major chunk of costs involved in the production of Autos (90-95% of total costs for the listed players) which are primarily composed of steel, copper, plastic, aluminum and glass among others.

Industry localization in Pakistan stands around 50-55% in terms of parts. The number drops significantly when translated to localization in terms of value due to import of high value parts such as engine and transmission components.

Industry stakeholders have been pushing local auto assemblers for higher localization, however, local manufacturers of Auto parts have stressed the need for higher volumes in the industry for production of high value parts to become feasible.

Currency exposure: Production of Autos relies significantly on imported raw material from various countries with Japan and Thailand being among the top destinations. Due to this dependency on imports, movement in US$ and JPY remains a key factor in determining production costs for automakers.

Price hikes and their impact on demand

Demand in the sector bears a strong correlation to factors such as GDP growth rate, interest rates and prices of vehicles. Price hikes directly dent purchasing power of consumers negatively impacting demand although the intensity of impact tends to differ over higher and middle-income segments.

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