Delivery period of new vehicles shortens, to affect profitability

Analyst says companies’ bargaining power in increasing prices weakens in such a scenario

As the auto sector battled capacity issues, a reduction in bookings has now shortened the delivery period for filers of income tax returns. PHOTO:REUTERS

KARACHI: The delivery period for customers booking new vehicles has shortened by as much as two-thirds, suggests market talk, a development that would possibly dent the auto companies’ profitability in the long run.

In order to penalise those who do not file income tax returns, the previous PML-N government in its last budget imposed curbs on non-filers, barring them from purchasing or importing new vehicles.

The move, announced at the end of April, had the potential to massively impact sales as a majority of buyers are non-filers. With the measure coming into force on July 1, the auto industry stopped taking orders from non-filers, reducing the number of people on the ‘waitlist’.

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As the auto sector battled capacity issues, a reduction in bookings has now shortened the delivery period for filers of income tax returns.

“We are hoping that this restriction (on non-filers) is withdrawn by the new government,” an official of an auto company told The Express Tribune on condition of anonymity. “It’s bizarre that a non-filer can buy property worth Rs5 million but can’t buy a car of Rs1 million.”

The official said the industry’s sales would drop significantly if the restriction is not withdrawn, and it would reflect in the numbers for August. One Suzuki dealer confirmed that its flagship WagonR delivery period has come down from five to four months but other vehicles, including Cultus, Bolan and Ravi, are still handed over in 90 days.

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Earlier this year, Suzuki had to halt the booking of WagonR following barriers imposed on the import of vehicles by the government. The restrictions, meant to halt the fall in foreign exchange reserves and control the widening current account deficit, gave a huge boost to the demand for WagonR.

Imported used cars, mainly in the 660cc engine category, carry a huge demand, and mainly hit Suzuki’s market share. A dealer of Indus Motor Company, which assembles Toyota vehicles in Pakistan, also confirmed that the delivery period has gone down significantly.

“The delivery period was touching January (six to seven months) but the non-filer issue has forced it to come down to October. The process of issuing refunds to customers who don’t want to take delivery has also started,” Toyota Eastern Motors dealer Iqbal Shah said.

The delivery period of Fortuner and Revo has dropped to one month, which previously used to be around three to four months. “It’s like pay today and take delivery within a month,” Shah said. Vehicles like Fortuner and Revo are favoured by customers who travel predominantly in rural areas, and are generally non-filers.

Elixir Securities’ research analyst Farheen Irfan said reducing the delivery period would affect the companies’ ‘other income’. The more time they can keep the cash, the more money they can earn on it. Even after discounting the interest companies tend to pay customers in case of late delivery, it is likely that they are able to earn more on the amount paid.

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According to Insight Securities’ research analyst Zeeshan Afzal, a reduced delivery period will not directly affect profitability, but would impact the companies’ bargaining power in times of increasing prices. “If the delivery period comes down, it will reduce companies’ pricing power. They will not be able to increase the price when their cost goes up. It will certainly impact their profitability,” he explained.

Published in The Express Tribune, July 31st, 2018.

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