Monday,23 October, 2017
Current issue | Issue 1297, (26 May - 1 June 2016)
Monday,23 October, 2017
Issue 1297, (26 May - 1 June 2016)

Ahram Weekly

More costly cars

Hikes in car prices are hurting consumers as well as traders, reports Niveen Wahish

Economy
Economy
Al-Ahram Weekly

Cairo resident Laila Abdel-Salam wanted to buy a new car to replace the one she has been driving for the past 10 years. She was looking for a medium-sized European car costing about LE130,000. Her plan was to sell her old car and take out a loan to cover the rest of the cost of the car.

However, she was not quick about making her decision. The result was that the car she wanted to buy suddenly became 15 per cent more expensive because of the fall in the value of the pound against the dollar.

For Abdel-Salam, buying a new car has become increasingly difficult. She will now have a harder time taking out a loan, not only because it will mean bigger monthly instalments, but also because the banks are not allowed to give loans that exceed 35 per cent of a borrower’s income.

As a result, Abdel-Salam has put off her plans to buy a new car, and is now considering buying a used vehicle. But she will still have to dig deeper into her pockets to finance the purchase of even a used car because this too has increased in price.

Abdel-Salam is not alone. Many Egyptians are now abandoning the idea of buying a new car. This has impacted car sales, resulting in a drop in the sales of passenger cars, said Shady Rayan, head of Egyptian Car Trading, a major car distributor.

Sales of all types of vehicles dropped by 30 per cent in March 2016, compared to the same month last year, according to figures from the Automotive Marketing Information Council (AMIC). The decrease in car sales is not only due to falling demand, but also to less supply, Rayan said. The waiting time for imported cars is now between three and six months.

The current scarcity of hard currency is making it more difficult to import cars, Rayan added. Car dealers have to procure dollars on their own and cannot depend on the banks as cars and car parts are not among the strategic commodities that the banks are allowed to provide hard currency for.

This means that instead of acquiring dollars at the official rate of around LE9, the dealers try to find them on the black market, often ending up paying around LE10.50. Prices are a factor in pushing buyers away, said Shady, adding that car prices in Egyptian pounds have still not risen at the same rate as the pound’s loss of value.

One manager for a domestic car assembler and distributor who preferred to remain anonymous agreed. Car prices have increased at a lesser rate than the increase in the pound-value of the dollar, he said.

While the dollar was trading on the black market at around LE8.50 in December, today the average rate is LE10.50, an increase of around 30 per cent. Meanwhile, car prices have increased by between 15 and 20 per cent, he said.

Campaigns to boycott the purchase of new cars have been launched by consumers, and one such campaign, called Khaleeha tesady, or “Let it rust”, calls on consumers to not purchase cars until prices drop. Abdullah Hossam, a university student who supports the campaigns, said traders are pricing cars much higher than their cost, even accounting for the higher dollar value.

However, the campaigns have not been effective, according to Rayan, because in the end prices are a matter of supply and demand. Some car showrooms sell at higher than real prices when they find there is much demand, taking advantage of the situation, the anonymous manager said. However, this is also because there is no stability in the market, he added.

Fewer sales means that business is now more costly for traders, Rayan added, explaining that expenditures are the same and, with fewer cars sold, costs are higher.

For local assemblers, the situation is difficult as well. Until December, dollars to buy car parts were acquired through the banks at the official rate, but this is no longer the case, pushing prices much higher.

Despite the increases in their costs, local manufacturers cannot increase car prices dramatically because consumers cannot afford them. As a result some are willing to sell at breakeven prices to keep factories going because it would mean greater losses if they had to shut them down.

The hike in the dollar rate has also prevented consumers from feeling the recent drop in customs on European cars. Although such cars saw customs rates cut to 16 per cent, the increase in the value of the dollar has prevented people from feeling a drop in prices, the anonymous manager said.

However, the cut has narrowed the price differential between European and Asian cars, which traditionally have been cheaper. To prevent consumers from choosing European over Asian brands, and risk having Asian cars pile up in their stock, traders are hiking prices on the European brands to maintain a price differential in favour of the Asian brands, Abdullah said.

The Egyptian car industry has been described as over-protected and is considered to be an industry that has benefitted from the domestic market but has failed to export. To encourage local producers to export there must be incentives that encourage them to increase local components, such as customs exemptions on car parts or lower sales taxes, said the anonymous manager.

There also need to be more local feeder industries, so that car parts can be produced locally. In Morocco, for example, the anonymous manager said, investors are given land for free and the government helps in the construction of factories.

“We need similar incentives here in Egypt, and we need to produce in huge quantities if we are to export,” he said.

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