Liquidity crunch, cash margin provision hit automobile industry

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Liquidity crunch, cash margin provision hit automobile industry

Yuvan Timilsina, a resident of Banepa Municipality-2 of Kavre, bought a Bajaj two-wheeler six months ago after getting a good resale value for his old bike. Ghimire, who also enquired about other brands, finally settled on Bajaj due its exchange offer. Bajaj Nepal is not the only company providing attractive exchange offers though. Renowned two-wheelers brands, including Yamaha, were also providing exciting exchange offers until a week back. Discounts and exchange offers are among few marketing strategies that dealers are adopting to attract customers. And these strategies have paid well to boost sales, sales statistics show.

The record of the Department of Customs (DoC) shows that the country imported a total of 353,534 two-wheelers in Fiscal Year 2020/21, whereas only 207,392 two-wheelers were imported in 2019/20.

“The demand for two-wheelers were exponentially high in the last fiscal year and the overall business of the automobile sector reported good growth excluding public and passenger vehicles,” Subash Acharya, a vice president of NADA Automobiles Association of Nepal, said.

Raju Chettri, CEO of M.A.W Enterprises Pvt Ltd -- the authorised dealer of Yamaha, agreed with Acharya. “The last fiscal year was a historical one for two-wheelers sales,” he shared.

The Covid-19 pandemic, which started affecting the country from March 2020, wreaked havoc on all kinds of businesses. But the automobile sector has relatively withstood its effects and rose back stronger.

Foreign trade data published by the Trade and Export Promotion Centre (TEPC) shows that the country imported motor vehicles and parts worth Rs 97.37 billion in FY 2020/21, an increase of 49.7 percent from the previous fiscal year. In 2019/20, the country imported motor vehicles and parts worth Rs 65.02 billion.

Not only in FY 2020/21, the automobile industry has done pretty well in the first four months of the current fiscal year as against the same period of the previous year. The data shows that the country imported motor vehicles and parts worth Rs 44.59 million in the review period, up from Rs 28.66 million in the corresponding period of the last fiscal year.

Bishal Ghimire, business head at Pooja International Nepal Pvt Ltd -- the distributor of Volkswagen in Nepal, said that the business, which was nil during the first lockdown, picked up slowly to reach a good level. “The fear of contracting Covid-19 in public vehicles and the restriction measures like lockdown pushed people to have their own means of transport which drove the sales up,” he added.

Because of the pandemic, the economy witnessed a negative growth in FY 2019/20. The four-month lockdown measures enforced in the first wave of the pandemic and another two months of lockdown in the second wave ruined all kinds of businesses. In spite of this, the automobile industry emerged stronger in the wake of the strict lockdown and registered good business.

According to Acharya, the spike in the sales is led by the lack of other promising investment avenues. “People had accumulated savings which they prioritised on vehicle purchase. Also, public transportations resumed very late and people tried to avoid it as much as possible due to the fear of contracting COVID,” he added. Ghimire, however, believes that the passenger vehicles segment has remained unaffected by economic slowdown which helped the industry to bounce back.

Maruti Suzuki, one of the leading four-wheeler brands in Nepal, has reported good sales. Anup Kumar Baral, managing director at Narayani Auto Business Pvt Ltd -- the authorised dealer of Maruti Suzuki cars in Nepal, shared that the automobile industry witnessed catastrophic effects in the first wave of the pandemic as it was directly linked with mobility. Through the months that followed lockdown, Maruti Suzuki fared well overcoming challenges of supply chain disruption and decline in global production.

Growth in sales aside, the year 2021 has been a bumpy ride for the automobile sector. The year 2021, which took off from the effects of the second lockdown, saw an increase in excise duty on two-wheelers in the revised budget, and experienced chip shortage which hit automotive production worldwide. As if it were not enough, a hike in prices of key metals used for production of vehicles increased the price of products which ultimately was passed on to consumers. Even so, it didn’t ruin the market demand. On the contrary, the companies were not able to supply their products as per the demand due to the decline in global production owing to shortage of semiconductor chips. On top of that, it became the victim of the financial crisis the country is facing.

Cash Margin Provision for LC
The country’s banking system has been grappling with liquidity since the beginning of the current fiscal year. In the wake of the COVID-19 pandemic, banks and financial institutions (BFIs) engaged in aggressive lending which has now created a shortage of loanable funds. This is bound to have some pressure on lending to the automobile sector. On the other hand, the country’s balance of payments (BoP) situation was affected amid rising trade deficit and declining remittances flow.

To control the depleting foreign exchange reserves, Nepal Rastra Bank (NRB), the central monetary authority, introduced mandatory cash margin provision to open LC for imports. As per the provision, importers of two-wheeler and diesel-powered private four-wheelers are required to keep a fifty percent margin to open LC for imports.

“This kind of policy blunder invites uncertainty in the whole sector. It would lead to a sharp decline in vehicle imports which will affect the revenue earnings of the government,” said Baral. “People will lose jobs.”

Acharya agrees with Baral. “Not only the industry, the government will also be at the receiving end,” he says, adding that the automobile sector employs more than 1.5 million people.

Ghimire said the new import provision is already affecting timely delivery of motor vehicles. The banks are delaying the payment of the remaining fifty percent as well, he adds.

“The industry which was riding high on the sales of last year registered huge business in the first months of the current year. We were expecting sales to beat the record of last year. But after the festive season, sales have slowed down to around fifty percent due to the liquidity crunch coupled with margin provision,” Chhetri shared.

Encouraging EV Sales
On a brighter side, the electric vehicles (EV) market has provided a glimmer of hope. The country imported 9,052 EVs in FY 2020/21. The electric vehicle market is slowly taking crucial steps required for a massive adoption of EVs in the country.

Sundar Traders Pvt Ltd, which has electric buses running on different routes, had brought 60 electric scooters for sale some two months earlier. It has cleared the stock and is importing a further 500 units. These scooters are priced between Rs 224,000 and Rs 235,000 and come with a four-year warranty on battery.

“Customers are positive about shifting to EVs. However, until and unless the nation is infrastructure ready in terms of charging stations and maintenance centres, it won't be a sustainable business,” said Ghimire.

Omicron Variant
The market is already feeling the heat of the surge of Omicron variant. Automobile dealers say that sales are already down compared to what the market had observed in the beginning of 2021. Ghimire said that they were in a wait and watch situation. The government might enforce restrictive measures anytime, so we plan to emphasise on digital marketing, keep a low inventory, and import vehicles only after the bookings are confirmed, he added.

Chhetri said they will have no alternative to shutting their business down if the upcoming wave proves to be disastrous like the previous ones.

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