From past examples, it has been seen that rupee’s value is highly uncertain and the current state of foreign exchange and trade deficit have made it even more concerning. Rupee is uncertain enough to lose 3.2% overnight – which has frightened the biggest commercial players in the country.
Auto part manufacturers have stressed their concerns on this uncertainty as they too are affected by it. It’s not only the fear of “rupee might lose value” bothering them. What they are really concerned about is the “uncertainty” as the strength charts can spike in any direction in a really short time.
Their businesses run on heavy imports and stored inventory. Imports cost more if the strength of the rupee falls and that stored inventory loses its value.
What the Auto Industrialists Are Saying
“Rupee devaluation will affect all auto part manufacturers and their business cycles – this is a cause for concern,” said Pakistan Association of Automotive Parts & Accessories Manufacturers (PAAPAM) Chairman Mashood Ali Khan.
The payable-receivable period of auto vendors is usually very long. Most transactions are high-priced and on credit. Due to the nature of the content being sold, different costs are incurred such as delivery and holding.
Holding Up Payments
What the auto-makers fear is that an expected profit on a certain sale might change in the future if the rupee’s value falls.
“I fear auto companies would hold my payment for a few months in case the rupee depreciates suddenly. This can stretch up to six to eight months,” an auto vendor says.
An estimate shows that around 50% of the raw material used by auto vendors is imported.
Former PAAPAM chairman, Munir K. Bana, said:
Rupee devaluation will hurt auto vendors just like it would hurt any other industry. All we want is that the rupee is allowed to depreciate gradually and not by a huge margin overnight.
10% Decline Expected
Auto industrialists expect a decrease in the rupee’s value by the government. The expected decrease is around 10%.
Rupee devaluation will certainly make everything expensive, including cars.
Some industry officials believe that the demand is inelastic to some extent – a change in price does not affect the demand of the product significantly – therefore a 10% change might not affect consumer purchase of cars.
A Cause for Concern
For now we can only wait and see what the auto makers do once the Rupee falls. If you recall, the rupee is being artificially inflated with foreign exchange being pumped by the government. As soon as the next government comes, they will have to face a sharp decline in Rupee’s value which will cause a lot of problems in the future.