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Sri Lanka automobile sector in trouble with import controls, regime uncertainty

PRE-COVID ORDERS: Vehicles at the Hambantota Port waiting to be cleared soon after Coronavirus lockdowns ended.

ECONOMYNEXT – Sri Lanka’s auto sector is grinding to a halt while some type of tyres is also not available in the market, with import controls triggered by money printing through an unstable soft-pegged monetary regime.

While some dealers of re-conditioned vehicles still have stocks as sales have also weakened amid an economic lockdown, many brand agents of cars, as well as commercial vehicle agents, are already out of stock.

Many agents are struggling and are planning to close dealerships and showrooms or lay off staff.

The industry is calling for stable policies to survive.

Out of Stock

An analysis of Sri Lanka’s vehicle registry data by JB Securities, a Colombo-based brokerage showed that 1,712 cars were registered in July 2020 down from 2,536 in January and 2,584 last July with pre-ban vehicles.

Brand new cars were down to 272 in July from 349 in January.

Total vehicle registration in Sri Lanka including motorcycles and three-wheelers fell to 13,219 in March, zero in April and recovered to 17,313 and 32,123 in June before starting to fall to 28,573 in July.

Motorcycles, especially scooters which are bought by the least affluent, and was a phenomenon in driving the economies of East Asia was still holding up at 22,419 in July.

Small Maruti-Suzuki cars, one of the most popular cars for first time owners and families moving up from motorcycles fell to 67 units from 120 last year.

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DIMO, agents for Mercedes Benz Jeep and TATA is struggling.

General Manager, Rajeev Pandithage said Dimo has already sold out TATA and Mercedes Benz units.

“We have no stocks to sell, we have finished selling TATA, Mercedes,” Pandithage said. “As a strategy, we are focusing on our pre-owned business – buying and selling second-hand vehicles.

“But it does not account for the revenues or even the overheads or the assets we have invested on.”

“What we expect is, we don’t need to bring vehicles at the same rates (as previous years) but banning vehicles is detrimental for the country in the long run.”

After housing, vehicles are a key purchase made by a family.

New vehicles bring large volumes of taxes, petrol sales, in particular, is a key source of tax income. As a communications path, transport is also the main tool to keep economic activity going.

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Vehicles are also a key driver of insurance, finance as well as an islandwide motor vehicle repair business which is claiming to employ around 500,000 persons.

“We are an authorised channel partner for a global brand, not a pop-up car sale,” Pandithage said. “We have employed people and we have trained people, paid our taxes and we are responsible for our customers so I do not think it’s sustainable”.

Chairman of United Motors, agents for Mitsubishi, Sunil Wijesinghe told shareholders the firm will be “severely hampered” without new stocks which are expected to run out in the third quarter of 2020.

“Until the import restrictions are removed there are no prospects of new stocks arriving,” he said.

Drive One (Pvt) Ltd, agents for the upmarket, Audi brand in Sri Lanka, is also struggling.

“With the import restrictions are in place we cannot come up with a strategy because we do not know when they will lift these restrictions,” Chief Operations Officer Anushka Polonwita said.

Authorized agents have also ordered cars to be produced for Sri Lanka in 2020, with modifications done to meet Sri Lanka environment requirements.

“Our principles who are producing cars are asking us when these import restrictions will be lifted,” Polonwita explained.

“We are unable to answer them as well. It is important because those cars are being specially made to meet the environmental needs of Sri Lanka. Therefore those cars cannot be exported to other countries.”

In 2020 with weak demand, vehicle sales have declined, though there had been a spurt immediately after lockdowns ended with zero car registration in April.

“And so far we have only been able to sell about 60 cars,” Polonwita said. “Comparing it with 200 plus cars in the previous year and 300 plus cars in 2018 it will be a significant drop in our sales.”

“Now we are planning to make our showrooms available for the people who want to sell their car. We will inspect the cars and if they are in good quality only we will let them showcase in our showrooms.”

Soft-pegged Monetary Trouble

Sri Lanka slapped severe import controls in April 2020, after unprecedented money printing by the central bank, which is operating a highly unstable soft-pegged monetary regime set up by the US Federal Reserve in the style of a series of interventionist pegs in Latin America.
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Sri Lanka has had a chronic balance of payments trouble since the money printing central bank was set up in 1951. After the Bretton Woods system of soft-pegs collapsed in 1971, Sri Lanka closed the entire economy.

The 2020 import embargoes are the worst since then.

Cars are a favourite target of bureaucrats each time money printing triggers a currency crisis.

The latest complete import ban comes on top of restrictions imposed in 2018, after the central bank printed large volumes of money to target the call money rate from April 2020 in pro-cyclical liquidity injections just as the economy recovered from a 2015/2016 currency crisis.

There have been calls to reform the monetary regime, without which critics say the country will not be able to progress and policy frameworks will founder on an unstable foundation of unsound money as they had in the past.

The re-opening of the economy in 1977 was also carried out without central bank reform leading to steep currency falls and high inflation and high nominal rates in the 1980s.

Commercial Vehicles

Ideal Motor services which is the authorized dealer for India based Mahindra Motors is using domestic assembly as a way to deal with the crisis though key business lines have ground to a halt.

Nalin Welgama, The founder and the Chairman of the Ideal Motors said the company has a lifeline due to assembling KUV 100 SUV vehicles in Sri Lanka which brings a 30 -35 per cent of local value addition.

However, sales in Mahindra light trucks which have a 50 percent market share in the segment is down to none.

“We import a range of vehicles,” Welgama said. “However, the biggest loss is not being able to sell Mahindra and Mahindra lightweight truck which have a 50 per cent of the light truck segment in the market.”

Welgama said the lightweight truck had the potential to support the SME sector of the country, which is the main focus of the government.

“SME is struggling, and how can they empower themselves if they have no vehicle to utilize their business more efficiently.”

He said currently no lightweight trucks are available in the market which has struck the SME sector in the country.

“There is not a single lightweight truck in the country,” Welgama said.

Ideal Motors is now planning to assemble light trucks in the country.

Distribution Networks

Associated Motorway, the authorized agents for the Nissan, Suzuki, Renault and Yamaha brands in Sri Lanka said currently the company may also be forced to close down showrooms and retrench staff unless the situation changes in the next three to six months.

“AMW group is suffering highly because we do not have a single brand new car to sell,” an official said.

“In Suzuki, we have 17 showrooms across the Island and we are planning to close some of them as well as we are planning to cut down our staff as well. As a group, we are downsizing.”

Survival strategies include using showrooms to sell pre-owned cars.

“At the moment we are heavily depending on the AMW auto mall, where we sell pre-owned motor vehicles,” the official explained.

“But we will be not able to solely survive on that in the future.”

The firm initially had pre-ordered cars, especially excess stocks from 2019, but has since run out of stocks.

Drive One opened their latest showroom in Nawala in January 2020 with support from Audi, expecting to sell 50 per cent more vehicles this year than in 2020 when it was hit by sudden restrictions on car sales.

“We also do not wish to stop any ongoing projects such as the workshop we are building along with our new showroom,” Polonwita said.

“We have invested a lot in that showroom with becoming the authorized dealers of Audi in Sri Lanka.”

He said dealers are getting some revenues from after-sales services but the business cannot sustain solely on the service sector.

United Motors is planning to open its service centres to third party brands.

AMW said it will also close dealerships.

“Our branch network had been a strategy that worked very well for us in the past and we strategically located ourselves in key cities, however in the current circumstances we find that some of our branches are now underperforming since the demand in those areas has reduced,” AMW said.

“We have decided to withdraw from any area that we are losing money and where we find that we are unable to turnaround the branch performance in the next 12 months.”

Regime Uncertainty

“The most import thing we are requesting from the government is to come up with a strong stable policy for the industry,” Polonwita said.

“Because in the previous years as well we have struggled due to changes in taxes and reforms time to time,” Polonwita said.

“So, we are asking for a strong stable policy for the industry.”

“Uncertainty arises from Government tax policies which are unfavourable to the motor trade industry and the more recent import restrictions on passenger and commercial vehicles which have impacted the core of the business model of your Company,” Wijesinghe told shareholders.

“We hope that with the assumption of the new Government in August 2020, the economic policies will be enunciated with more certainty so that we could plan and budget rather than fight fires.”

Economists call the lack of policy stability ‘regime uncertainty’.

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Regime uncertainty in the form of a trade embargo is coming due to monetary instability. Monetary instability from the soft-peg tends to re-enforce each other in a vicious cycle.

Sri Lanka is suffering worse monetary instability after the war than before, with more activist policy coming in analysts said.

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Welgama from Ideal said in addition to cars, the sector is also hit by the lack of peripherals especially tyres, which are needed for the existing fleet in the country.

“There are several types of tyres which need to be produced and every type of tyres cannot be manufactured in the country,” Welgama said.

Monetary stability has in turn triggered economic nationalism in the form of import-substitution which is hitting peripherals.

Similar ideologies had also sprung up in Latin America where monetary instability was rife. Economists called the ideology of monetary instability and import substitution, Latin America Structuralism.

Critics say proponents are unable to grasp the role played by the service sector in an economy as well as having poor knowledge of classic economics in general and the role of sound money in particular.

Most such countries eventually ran into severe currency trouble and sovereign default. (Colombo/Sept07/2020-sb)