The revival of demand after the lockdown has brought back investors to the auto market along with the menace of “on money” or premium.
Impatient buyers with excess cash in hand happily pay extra money to car dealers for instant delivery instead of waiting for months on end.
Another factor that triggered the “on money” phenomenon was the curbs on used car imports. Dealers of imported cars had also jacked up prices citing the exchange rate changes. It forced buyers to go for the locally produced vehicles although their prices had gone up multiple times in the last few months.
Auto buying remained suspended during the lockdown in April and May owing to the shutdown of many plants and dealership networks. On its website, the Pakistan Automotive Manufacturers Association (Pama) marked the March-June period in red.
Investors are selling pre-booked cars to impatient consumers at premiums as high as Rs800,000 a unit
Along with investors, growers who have had better earnings because of cash crops have also flooded the auto market with extra money. Commodity traders also enjoyed bustling sales during the pandemic as the rates of vegetables, pulses, sugar, milk products and flour swelled substantially. Market sources say cash-rich growers and traders of these items are now switching to new car models.
The premium on Honda Civic 1.8 i-VTEC Oriel is Rs80,000-100,000 due to six to eight weeks of delivery time. All other Honda vehicles are being handed over to the buyers within two to three weeks with no premium. Honda Civic and City production increased to 4,058 units in July-August from 3,520 units in the same months of 2019.
The “on money” on Toyota Yaris ranges between Rs50,000 and Rs60,000. It was Rs200,000 in June. Its delivery time is between two and three months.
Toyota Fortuner Diesel, whose price is over Rs9.1 million, is available immediately at a premium of Rs800,000 as dealers are giving three months of delivery time. Total production of Fortuner in July-August rose to 274 units from 232 units in the same period a year ago.
The premium on Hilux Revo, whose price is more than Rs7m, is Rs700,000 owing to the delivery time of three months. Its production soared to 1,103 units from 793 units on an annual basis.
Corolla 1.6 and Grande are being delivered in three months. But one can have the vehicle on the spot by paying the “on money” of Rs200,000.
The two-month delivery time of Suzuki Cultus is not acceptable to many buyers who rather pay Rs50,000-60,000 extra for quick delivery.
A dealer said shrinking imports of used vehicles of 660-3,000cc have played a big role in pushing the buyers towards the locally assembled vehicles. For example, negligible imports of Toyota Prado and other SUVs have created fresh demand for locally assembled Fortuner, Hilux Revo, Kia Sportage and Hyundai Tucson. He said the price of a five-year-old Prado 2,700cc has risen to Rs13-15m from Rs8m.
In a bid to calm down the market, Indus Motor Company (IMC), which assembles Toyota vehicles, issued a public notice in the print media on Oct 1 regarding the resumption of double-shift operations with the induction of additional manpower to boost production. IMC has asked its customers to say “no to premium” and book vehicles through authorised dealers. The company has assured the customers that it will reduce the waiting period to a reasonable level.
Sources said the delivery time for Kia Picanto and Sportage ranges between one and two months depending on the model. However, the premium does not exist on all the models. They said the premium on one Sportage model is now Rs100,000, which was more than Rs200,000 only a month ago.
Kia Lucky Motors (KLM) CEO Asif Rizvi told Dawn that everything was moving swiftly prior to Covid-19 in March. “We had planned higher imports of kits and accessories keeping in view our sales prospects,” he said. However, the lockdown in March changed the market dynamics, forcing assemblers to stop orders for the import of kits in April-June, he added.
Imports of completely and semi–knocked down (CKD/SKD) kits in July-August fell 31.4 per cent to $84m on a year-on-year basis.
However, the auto market rebounded strongly after the easing of the lockdown. That led to the emergence of premium on cars as the gap between demand and supply widened, Mr Rizvi said.
He said there are three players in the market. Firstly, the assemblers who planned their production output based on anticipated demand. The lockdown resulted in great uncertainty among the assemblers who had already slowed down their orders for kits. They did not know how long the sudden rebound in demand would sustain. To the best of his knowledge, he said, all assemblers were increasing capacity rapidly.
In addition, the Kia CEO said the government needs to introduce regulations to discourage investors from demanding premiums. Consumers also need to display some resistance to premium. They should book their vehicles, take delivery on schedule and say no to premium, he added.
He said Kia is committed to discouraging premiums. The company had earlier planned to go for a double shift from January 2021 to address the premium issue. But now the company is actively thinking to go for it in December.
Mr Rizvi said the production capacity of locally assembled cars and light commercial vehicles (LCVs) would cross 400,000 units this year. After the inclusion of the new entrants, the capacity will be more than enough to meet car demand nationally. In 2018, sales were 330,000 units, including imported used cars.
Authorised as well as unauthorised dealers insist they are not involved in the instant money-making game. However, sources claim some authorised dealers are involved in this business. They offer vehicles either instantly or in one week’s time for extra money from visiting customers, the sources say.
An assembler, who asked not to be named, said investors sell vehicles to unauthorised dealers after lifting new models from authorised dealers. He said growing home remittances also improved cash flows and injected fresh demand into the market.
The assembler said a substantial fall in interest rates lured buyers into the auto market. The share of sales through banks’ car financing schemes has improved to 40pc from 20-25pc a few months back.
Published in Dawn, The Business and Finance Weekly, October 5th, 2020