KARACHI, Jan 2: Auto assemblers have preferred to increase their margins and car prices instead of transferring the benefit of lower import costs to the consumers despite appreciation of rupee in 2002, the first quarterly report for the year 2002-2003 of the State Bank of Pakistan (SBP) said.

In Pakistan, the considerable dependence of the automobile industry on a large number of imported components leaves the car prices vulnerable to depreciating rupee/dollar parity, said the report while specially highlighting the issue of “rising prices of automobiles and consumers loss.”

The rupee has gained against the dollar by 7.05 per cent in 2002 in the inter-bank market, thus making imports cheaper.

The SBP also noted that the steep decline in domestic interest rates would have also helped reduce manufacturers’ cost of production. It was also pointed out that the gains of the auto industry already come on the back of protective policies that ultimately result in high consumer prices.

The report said that in fact, assemblers apparently failed to increase supply in response to rising demand. As a result, the time lag between the sale of a vehicle and its delivery by the manufacturers of popular models increased from three to six months to over eight months since the beginning of 2002.

Concurrently, the amount of downpayments made at the time of booking was also raised to 100 per cent from 25 per cent. Thus, car manufacturers, instead of borrowing from banks, were utilising the advance payment to support financing for their operations, the SBP report said.

For instance, if a 1000cc car at the rate of Rs0.6 million is booked on 100 per cent downpayment with a six-month delivery period, a manufacturer would be saving approximately Rs36,000 by financing production out of it, the report added. Clearly, an increase in sale-to-delivery time lag would result in additional gains (savings) for manufacturers.

The central bank report said that anecdotal evidence suggests that some dealers also exploited this situation by purchasing stocks of popular car brands to sell as premium to customers unwilling to wait for the extended delivery period. This premium represents an additional loss of consumer surplus.

Following government’s intervention, car makers later increased their production and some of them were also forced to pay mark-up on the advance payments by customers, the downward sticky prices for automobiles are still a matter of concern.

The demand driven growth has been on the rise since the introduction of new attractive models of cars and increasing popularity of purchase through lease finance and consumer financing by commercial banks. The strength of the demand for cars is such that manufacturers have actually been able to increase prices in financial year 2002 despite substantial reduction in major cost of production.

Rupee appreciation has lowered the cost of CKD kits and machinery and this gain was complemented by a steep decline in interest rates, reducing funding costs. Moreover, even the funding requirements fell as an increased proportion of cars were sold well in advance, thus improving manufacturers’ cash flows, the SBP report said.

According to figures released by Pakistan Automotive Manufacturers Association (PAMA), car sales of Japanese and Korean models rose by 28.5 per cent to 21,479 units in July- November 2002 from 16,716 units in the same period of 2001. Production of cars also increased by 38 per cent to 21,867 units in July-November 2002 as compared to 15,801 units in the corresponding period of 2001.