ECONOMYNEXT – Sri Lanka’s Mercedes Benz dealer Diesel & Motor Engineering Plc (DIMO) has reduced margins to absorb part of a steep currency collapse in a bid to win customers, though the rupee has appreciated in recent months, a top official said.
"Exchange rate risk is a massive one for us. We are dealing with Europe and Euro is a very volatile currency for our market so that is heavily impacting us," General Manager (Mercedes-Benz) Rajeev Pandithage told EconomyNext.
Sri Lanka’s rupee collapsed from 153 to 182 to the US dollar during 2018 as a soft-peg with the US dollar collapsed as the central bank printed money to keep rates artificially low as the economy recovered. Monetary instability was worsened by a political crisis.
In the same period however the Euro has weakened, taking part of the edge off the fall. In 2019 as private credit collapsed, Sri Lanka’s rupee has appreciated from 182 to 176 to the US dollar. The Euro appreciated from 209 to 197 rupees in 2019.
DIMO says the benefit of the stronger rupee will be passed on to customers to help revive the market.
"The currency has appreciating for the last six or seven months, so that means we are going to pass it on to the customers," Pandithage said.
He was speaking at the launch of a new DIMO brand identity and the 27th Mercedez Trophy golf tournament at the Royal Colombo Golf Club.
"We are already running thin on our margins and when you increase the price on a luxury item like this, it’s really going to impact on us," he said.
For each dollar spent, cars are among the highest sources of revenue for the government as rates of taxes are in excess of 200 percent for ordinary citizens, helping reduce the budget deficit.
Tax rates for the elected ruling class and state workers, are much lower in the style of a feudal privilege, critics have said.
Petrol car owners in particular pay high rates of tax on fuel after they buy a car.
The central bank has removed letters of credit restrictions place in 2018 as it printed money to generate monetary instability, but with higher prices and credit restrictions the car market remains weak.
Suicide blasts in April also has not helped the economy or sentiment.
Pandithage said DIMO has lost 50 percent of its vehicle sales since the import controls were brought in, while in its luxury segment which has the Mercedes Benz brand, sales fell 40 percent.
"Even before the attack, people did not have the disposable income to spend on goods and services," he said.
"Everyone was tightening their belts, there wasn’t much money circulating in the market, and we were really feeling the pinch," he said.
He said DIMO Batta, a mini-truck used by small and medium scale enterprises (SMEs), was one of the worst affected vehicle brands.
"The SMEs don’t have a lot of money so we are waiting for this to improve," he said.
SMEs which make a large share of businesses in Sri Lanka have been hit by worsening economic sentiment after the attacks, though agriculture is doing better this year.
With monetary stability returning in the first liquidity shortages, which prevailed during the capital flight of 2018 have ended and the interest rates have fallen.
But the market is yet to pick up. "There’s not much sales happening," Pandithage said.
In addition to reducing margins DIMO is also taking other measures to boost demand.
With the 200 percent cash margin being reduced to the normal 50 percent, DIMO is offering attractive financing, but sales remain low due to the current economic sentiment, Pandithage said.
"What we can do about it is give financial packages and solutions, to make it easier for them to pay the rest of the 50 percent, but even then, not much we can do," he said.
Pandithage said that DIMO is seeking further diversification from its core vehicle business.
The firm’s profits from the vehicle business has fallen over the past two years.
Vehicles are a favourite whipping boy of the government for taxes and the central bank when it makes monetary policy errors.
DIMO has businesses in the vehicle, heavy equipment, agriculture machinery and chemicals, electro-mechanical, bio-medical and marine engineering.
The firm has diversified its business segments over the past three years, entering into power generation with a solar plant in Sri Lanka, and diversifying its geographic footprint with expansions into Myanmar and Uganda as well. (Colombo/Jun20/2019)