Auto industry forced to slash prices

Firms compelled to reduce margins, navigate taxes, inflation to bolster sales

KARACHI:

Auto experts state that a combination of factors, including weakened purchasing power, heavy taxation, rampant inflation, and currency devaluation, has compelled auto companies to slash prices. This move, while reducing profit margins, benefits customers and lends support to the struggling industry.

Expressing frustration with poor economic policies, market analysts told The Express Tribune that the recent government decision to hike sales tax on vehicles with engine sizes of 1,400CC and above, as well as those priced above Rs4 million, from 18% to 25%, has adversely affected the auto sector. They highlight that this increase in sales tax, enforced by the government and the Federal Board of Revenue (FBR), prompted auto companies to lower prices, sacrifice profit margins, and devise customer-friendly strategies.

For instance, if companies had passed on the entire 7% increase in sales tax to vehicles priced slightly above Rs4 million, customers would have faced a hike of at least Rs280,000 per unit. However, instead of passing on this burden to customers, companies opted to reduce prices to keep these vehicles within the 18% sales tax bracket. Ultimately, customers bear the brunt of these sales taxes.

Experts identify four major challenges—high interest rates, heavy taxation, rupee devaluation, and inflation—as significantly impacting the auto industry. They stress the need for the government to formulate consistent and pragmatic policies to stimulate sector growth, warning that without such measures, auto plants may become economically unviable, leading to increased unemployment.

Read: Auto vendors optimistic amid recovery signs

“In 2021-2022, over 300,000 vehicles were sold with the government collecting hefty taxes. However, given the current economic challenges, including high interest rates and inflation, the imposition of further taxes is expected to drastically reduce car sales, with projections ranging from 80,000 to 90,000 units during 2023-2024,” remarks Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM) Chairman Abdul Rehman Aizaz.

Honda Atlas Cars has reduced prices of two City variants to Rs4.649 million and Rs4.689 million, marking reductions of Rs50,000 and Rs140,000, respectively. Similarly, Indus Motor Company (IMC) recently reduced prices across its Yaris sedan lineup, with decreases ranging from Rs73,000 to Rs133,000. The price adjustments apply to four Yaris variants, now priced between Rs4,326,000 and Rs4,766,000 per unit.

CEO of IMC, Ali Asghar Jamali, attributed the price reductions to an internal strategy, providing no further details.

According to Waqas Ghani, Deputy Head of Research at JS Global, reduced inflationary pressure, coupled with low interest rates in car financing, is expected to boost sales in the near future.

Meanwhile, Muhammad Abrar Polani, a research analyst at brokerage house Arif Habib Limited (AHL), noted a contraction in local auto market demand. The decrease in auto prices aims to facilitate industry recovery.

Published in The Express Tribune, March 20^th, 2024.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.