Rising Vehicle Demand vs. Increasing Production Costs — A Predicament for Automakers

The outbreak of COVID-19 has caused severe supply chain issues, resulting in a huge spike in costs for both commodities and services. It may be argued that the global automotive industry has been affected the most by the pandemic which has led to a shortage of semiconductors that are vital to several modern vehicles, and a scarcity of containers, resulting in causing shipping delays and a steep increase in freight costs.

Freight costs are now 700 percent of the pre-pandemic tariff. Similarly, steel prices continue to surpass historical highs every few months now. Steel constitutes a major portion of the prices of vehicles and this has caused a huge cost increase for automobiles that automakers in Pakistan are also experiencing every month.

Thanks to the government’s recent intervention in the matter, car manufacturers are refraining from implementing massive price hikes. The government had stepped in on the basis of the reliefs provided to the automakers in Pakistan as a part of the Automotive Industry Development and Export Plan (AIDEP) 2021-26.

However, it is important to note that Pakistan has seen price hikes for vehicles yet again as a result of the more than 700 percent higher freight costs, as well as the recent depreciation of the rupee, skyrocketing prices of steel and resin.

Steel Rebar Rates as of September 14, 2021

Shortage in Motorcycle Industry

The motorcycle industry has already registered over four price revisions in just one year. Motorcycle retailers state that since the economy reopened after the lockdown during the first wave of COVID-19 last year, there has been a considerable increase in the demand for motorcycles.

According to sources, the motorcycle segment is having delivery issues for the first time in 20 years as the supply cannot fulfill the increasing demand. The sector also has a supply shortage due to the dearth of containers, with parts being delivered late, which was already a cause for concern since the onset of the pandemic.

Atlas Honda has raised its motorcycle pricing by three percent (up to Rs. 5,000) while Yamaha has increased its prices by nine percent (up to Rs. 13,000). Given the failing public transportation infrastructure and the ever-increasing prices of petrol, several assemblers predict that the demand for motorcycles will stay strong regardless of the price hikes.

Motorcycle Price Increases in July 2021
Make Increase
Yamaha 9%
Honda 4%
Suzuki 3%
Chinese Motorcycles 4%

 

US Dollar and Steel Price Hike

Analysts project that the sector may conduct a pricing review in relation to the rupee-dollar parity. A six percent devaluation of the rupee has already occurred since the announcement of the budget.

The price of steel is likely to grow by at least 13 percent in the near future, according to the Chairman of the Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM). This is on top of the fact that local steel prices already rose by 50 to 60 percent last year.

The start of such a price increase has already been observed in the case of cars. Honda Atlas has increased the price of the new Honda City by Rs. 300,000 as compared to the previous generation. It was previously priced at about Rs. 100,000 below the comparable Yaris models. However, now its price is Rs. 275,000 more expensive than a Yaris.

A careful analysis reveals that the price increase of the Honda City includes all the incremental manufacturing costs, in addition to some profit adjustments. It may be assumed that Toyota will follow suit and will revise the prices of the Yaris by the same amount to account for the cost increases.

Considering the record-shattering prices of steel, freight costs, the shortage of the semiconductor chip, and the turbulent value of the local currency, the car industry can be expected to imitate motorcycle manufacturers by increasing the prices by nine percent due to the similar nature of manufacturing materials and supply chain issues.

Vehicles Jul-21 (Price Revision) 9% Price Revision Difference
Honda Civic 1.8 Oriel 3,864,000 4,211,000 347,000
Honda Civic 1.5 Turbo RS 4,564,000 4,974,000 410,000
Honda BRV S 3,374,000 3,677,000 303,000
Hyundai Tucson GLS 4,979,000 5,427,000 448,000
Hyundai Tucson Ultimate 5,469,000 5,961,000 492,000
Hyundai Elantra GLS 3,899,000 4,249,000 350,000
Toyota Corolla 1.6 MT 3,109,000 3,388,000 279,000
Toyota Corolla 1.6 AT 3,249,000 3,541,000 292,000
Toyota Corolla 1.8 CVT 3,579,000 3,901,000 322,000
Toyota Corolla Grande 1.8 CVT 3,889,000 4,239,000 350,000
Fortuner Sigma 4 4×4 9,269,000 10,103,000 834,000
Fortuner V 4×4 8,899,000 9,699,000 800,000
Fortuner G 4×2 7,649,000 8,337,000 688,000
Yaris 1.3 GLI MT 2,409,000 2,625,000 216,000
Yaris 1.3 GLI CVT 2,589,000 2,822,000 233,000
Yaris 1.3 Ativ MT 2,519,000 2,745,000 226,000
Yaris 1.3 Ativ CVT 2,669,000 2,909,000 240,000
Yaris 1.5 Ativ X MT 2,719,000 2,963,000 244,000
Yaris 1.5 Ativ X CVT 2,899,000 3,159,000 260,000
Changan M9 1,234,000 1,345,000 111,000
Changan Karvaan 1,399,000 1,524,000 125,000
Changan Karvaan Plus 1,539,000 1,677,000 138,000
Changan Alsvin Comfort MT 2,149,000 2,342,000 193,000
Changan Alsvin Comfort DCT 2,399,000 2,614,000 215,000
Changan Alsvin Lumiere 2,589,000 2,822,000 233,000
Suzuki Alto VX 1,113,000 1,213,000 100,000
Suzuki Alto VXR 1,335,000 1,455,000 120,000
Suzuki Alto VXL AGS 1,521,000 1,657,000 136,000
Suzuki Bolan 1,049,000 1,143,000 94,000
Suzuki Cultus VXR 1,655,000 1,803,000 148,000
Suzuki Cultus VXL AGS 1,975,000 2,152,000 177,000
Suzuki Ravi 1,034,000 1,127,000 93,000
Suzuki Wagon R VXR 1,530,000 1,667,000 137,000
Suzuki Wagon R VXL 1,610,000 1,754,000 144,000
Suzuki Wagon R VXL AGS 1,760,000 1,918,000 158,000
KIA Picanto MT 1,781,000 1,941,000 160,000
KIA Picanto AT 1,922,000 2,094,000 172,000
KIA Sportage Alpha 4,294,000 4,680,000 386,000
KIA Sportage FWD 4,782,000 5,212,000 430,000
KIA Sportage AWD 5,270,000 5,744,000 474,000
KIA Sorento 2.4L FWD 6,836,000 7,451,000 615,000
KIA Sorento 2.4L AWD 7,812,000 8,515,000 703,000
KIA Sorento 3.4L FWD 8,203,000 8,941,000 738,000

While it is sincerely hoped that the effects of the pandemic end soon and the cost of manufacturing becomes more feasible, this price increase might be inevitable unless the government intervenes. However, your dream car is still slightly within your reach.

With the government focusing on car financing programs, and manufacturers working on reducing lead time, it is expected that the actual affordability will not be majorly affected. The market will have a reduction in car premiums or ‘on money’ and easier availability of auto financing. This will help maintain the affordability of cars at existing levels.

Author: Usman Sohail



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