Auto sales expected to improve in few months

[Naveed Yaseen]

* IMF support, healthy farm income and removal of 5% FED on cars above 850cc positive developments

By Moonis Ahmed

KARACHI: Although the operating environment during the first quarter from July-Sept 2009-10 was an extremely challenging time for the local auto industry, the auto sales are expected to improve during the next couple of months, industry people told Daily Times on Saturday.

They said that though the sales of locally assembled passenger cars and light commercial vehicles were up 13 percent to 30,787 units as compared to 27,159 units sold for the same period last year, the overall trend of the market remained sluggish.

The sales of 850 to 1000cc cars declined for the quarter (Jul-Sept 2009), while that of 1300cc Toyota Corolla 2009 increased. Demand for Toyota Corolla 2008 model had increased, but due to shortage of cars sales remained depressed.

Some improvement in the economic situation on the back of International Monetary Fund’s support, healthy farm income and the removal of 5 percent federal excise duty on cars above 850cc allowed a reduction in car prices and contributed significantly in preventing further decline.

However, some challenges that are faced by the auto industry as economic recovery, political stability and security situation will play an important role in sales’ performance during this period and the rest of the year. Continuous depreciation of the rupee against major currencies and higher interest rates will exert pressure on margins of local Original Equipment Manufacturers. The second quarter Oct-Dec is also considered traditionally challenging for the auto industry due to the year-end phenomenon. There were a number of reasons, both relating to the macroeconomic situation and government polices (levies and taxes), behind the declining sales and production volumes of the auto industry.

These include that the federal budget 2009-10 brought some hope for the auto sector that struggled for survival during the last year. Removal of 5 percent FED on cars with engine capacity in excess of 850cc is a welcome step by the government towards the revival of the industry. There are some signs of turnaround with stronger demand recorded during the first quarter to September 2009.

However, it is expected that the auto sales for 2009-10 will improve as compared to the previous year, but still challenges in the form of macroeconomic and global situation, increasing raw material and commodity prices like rising input cost, currency rates (strengthening of dollar/yen against rupee), rising inflation, trade deficit, rising interest rates and rising fuel prices are present for the industry. Strict policies on auto financing are leading to a decline in car financing numbers.

Auto financing is an integral part and one of the main drivers for auto sales, making vehicle ownership affordable for many people and enhancing motorisation and mobility. Restrictions by leasing and financing companies in loan disbursement and higher interest rates have had a negative impact on sales of vehicles. The number of auto loans per bank has gone down.

This has had a direct impact on the consumers whose purchasing powers have decreased, as well as shaking their confidence in the local economy and putting purchase decisions on hold.

In 2008-09, the global automotive industry witnessed its worst slowdown amid dramatic financial crises worldwide. The ongoing global economic crisis, negative security developments and continued power shortages slowed Pakistan’s real gross domestic product growth to 2 percent for 2008-09 as compared with 5.8 percent achieved in the previous year. Overall economic activity weakened despite growth in agriculture, while declining imports and slowing domestic demand resulted in lower tax revenue. The large-scale manufacturing sector recorded a dismal performance in FY09 with a decline of 8.2 percent as against 5.4 percent growth during the previous year.

http://www.dailytimes.com.pk/default.asp...2009_pg5_6