Entry-level cars are proving to be the motor industry’s success story as new vehicle sales face a difficult year, reports
Max Gebhardt
After four successive years of buoyant sales, the motor industry is steeling itself for this year’s slowdown in the economy. While car-makers remain bullish for future prospects in the industry, 1997 should see the first decline in new car sales since 1991.
Most leading car manufacturers say they will have to cut costs this year as the high levels of private sector credit extension and household debt and the prevailing high real interest rates deflate the last four years’ upswing in sales.
The National Association of Automobile Manufacturers of South Africa (Naamsa) is expecting car manufacturers to face a difficult first half this year, as pressure on private disposable income and the slowdown in economic growth hits consumers’ pockets.
Although the growth in new vehicle sales wasn’t as significant as the 1994/95 year- on-year growth, which saw car sales rise by meteoritic 24%, Naamsa executive director Nico Vermeulen said last year’s figures were still noteworthy given the fact that 1995 represented a relatively high base.
Figures released by the industry this week showed that sales of new vehicles had risen by 4,5% to 393 026 units in 1996.
The new vehicle manufacturing industry’s sales revenue rose above inflation, by about 9,5%, on the back of the continued improvement in sales to an estimated R31- billion in 1996 from R28,3-billion in 1995.
Volkswagen emerged top of the stakes, selling one out of every four cars purchased last year.
Vermeulen was also happy with the results of the motor industry development programme (MIDP), implemented in 1995, to reshape the future of the South African industry.
“The MIDP has been successful in achieving various key objectives; namely, a substantial improvement in vehicle affordability in the domestic market, further growth in the vehicle market – particularly in exports – and an improvement in overall efficiencies and international competitiveness of the South African industry,” he said.
Naamsa did take a swipe at “certain stakeholders”, who it said are sectionally lobbying the government to modify the development programmes in the MIDP. It said the approaches of these stakeholders are regarded as “premature, unscientifically based and protectionist in nature.
“Vehicle manufacturers and a number of component suppliers had embarked on major investment programmes on the basis of the MIDP and, while additional benefits of the development programmes would take some time to materialise, the industry requires certainty and stability in government policy, particularly for long-term planning purposes,” it said.
It is anticipated that the MIPD would contribute to neutral balance of payments by allowing producers to import vehicles and components free of duty equivalent to the value of their exports.
Naamsa expects the aggregate value of exports of components and vehicles to exceed R5-billion during 1997 compared with R4-billion in 1996.
This development programme, though, has been at the expense of local dealers and component manufacturers, according to some, with imports still exceeding exports by an estimated R12-billion.
But this will not be enough to halt the expected slide in the new car sales for 1997, which Naamsa forecasts to fall to 388 000 units.
Industry analysts say car manufacturers have been riding the back of an overly optimistic market and last year’s growth can be attributed to a number of factors that won’t be evident this year.
According to Econometrix economist Tony Twine, manufacturers had benefited from the pre-emptive buying splurge by consumers in the latter half of 1996 as fears of a downturn in the economy took hold.
Delta Motor Corporation’s director of sales and marketing, John Cuming, says the relatively high number of new vehicle launches that took place during the year would have contributed substantially to the increase of new car sales.
This view is echoed by Johan van Zyl, managing director of vehicle marketing for Toyota.
“The passenger market performed well to achieve growth of 5,6%. This was largely driven by intense new model activity, linked to aggressive marketing campaigns and the growth of the entry-level segment,” he said.
Van Zyl said he didn’t expect new model activity to reach the fever pitch of 1996 in the coming year.
“It is our view that some imported models that joined in the new model frenzy recently may not survive,” he added.
As a result, car manufacturers are taking a cautious view of the road ahead and are predicting intense competition in the entry-level market.
“Manufacturers at the moment perceive that the momentum is going out of the upswing and they will start looking at tightening their belts in the coming year,” Twine said.
Although last year was full of impending doom as the rand took a nosedive and the slowdown became evident, consumers emerged with the best deal in the car market.
Analysts are describing 1996 as the year of the entry-level car. Since 1990 this market has grown remarkably from below 2% to nearly 30% of the total new car market sales last year, while the luxury car market, according to Naamsa, continued to experience difficult trading conditions.
Despite the 25% depreciation in the rand since February, the prices of some smaller models are 18% lower in real terms than a year ago, while the average car price is down 5% in real terms.
According to Van Zyl, while overall prices did come down in real terms during the year, cost pressures currently being faced by the industry are extreme.
“This will impact on vehicle prices in 1997. The first moderate increases for the year have already been applied,” he said.
Vehicle prices are expected to increase by between 9% and 11% in 1997, but fierce competition in the entry-level market should keep prices fairly static.
“With the lifting of trade barriers against South Africa, our local motor industry has entered an era of competitiveness that has not been experienced for many years, if ever,” says Delta’s Cuming.
Twine said that intense competition in the industry has prevented the old reflex action by manufacturers of rewriting the price ticket on new cars. But the influx of new models below the R40 000 price level, the latest being the Opel Corsa, has not significantly altered the buying patterns of new cars.
The private individual still accounts for only 20% of new car purchases, while the rest is taken by fleets. In the entry level, this pattern is slightly higher at roughly 35% to 65% respectively.
But while the fierce competition might be good for the man in the street, this phenomenal growth in cheaper cars has been at the expense of the second-hand car market. According to industry analysts, the used car market has seen a drop in value by an estimated 25% to 30%.