Car prices will not come down in the short to medium term, whatever the findings of the car price probe by the Competition Commission. No magic wand can be waved to enable everyone to rush out and buy new vehicles.
Vehicle affordability is part of the larger question of sustainable mobility — where people graduate from walking to work, to owning a bicycle or commuting by taxi or train, to ownership of used, and finally, new cars.
This graduation hinges on the job market, worker productivity and economic growth that allows regular pay increases that outpace inflation.
We are not there yet, but this is achievable in South Africa. In real terms the rand has stabilised, inflation and interest rates have fallen and car prices have remained static for the best part of a year.
If there are irregularities, the Competition Commission probe will hopefully weed them out. But more importantly, the findings should dispel some of the myths regarding car pricing.
One myth centres on South Africa coming off current technology levels and manufacturers’ export contracts to build stripped-down “cheap” cars such as the Trabant.
The National Union of Metalworkers insists the motor business is exploitative and out-of-step with national aspirations, and is considering lobbying the government to set up local labour-intensive manufacturing of more “affordable” vehicles.
Christopher McGowan, of Britain’s Society of Motor Manufacturers and Traders, questions if it is now practical anywhere in the world to make vehicles under state-sponsored schemes that turn back the clock in terms of technology and efficiency.
“All great economies have a large motor industry which produces about 5% of GDP,” says McGowan. “Protectionism is doomed to failure. It is impossible to run a factory economically if it employs stage-managed processes or is ‘ring-fenced’ from external economic forces.
“What is necessary is hard work at all levels — including government — to keep on ensuring attractive investment conditions. The South African motor industry has to understand just how fragile this is and that it requires daily effort to maintain.”
McGowan adds that it is difficult for factories to create jobs when cutting-edge technology is required to sustain exports to global standards. As in the United Kingdom, South Africa “hosts” its manufacturing industry — which can be quickly moved.
Roger Pitot, Motor Industry Development Programme chairperson, insists that reducing the total cost of owning motor vehicles must be a joint effort. “Everybody must come to the party,” he says.
“This starts at government level with elements such as the taxation structure and works down through the supply chain. In Brazil, a communal effort achieved a 20% reduction in car prices.”
Economist Tony Twine, of Econ-ometrix, deplores the apartheid legacy of an unskilled population. Much of vehicle affordability crisis, he believes, is linked to the inability to add value to manufactured goods.
A widely aired issue is the manufacturers’ role in preventing dealers from discounting beyond pre-set levels, to maintain resale values and used car prices. The biggest discounts are offered to major fleets buying significant volumes, with private buyers able to negotiate with dealers within parameters.
All vehicle manufacturers and importers have installed discount structures for each model and model derivative on the market, ranging from zero to about 12% on the retail price. Market forces should decide pricing. But based on the history of South Africa’s motor industry, and the fragility of our economy, wholesale price wars would mean the closure of many dealerships, job losses and chaos in the used car market.
Deft footwork will be needed to maintain the balance between sustainability of dealers and the used car market on the one hand, and eliminating artificial price regulation on the other.
A Competition Commission news-letter says price-fixing appears to be “standard practice” between manufacturers and importers of new vehicles.
Dealer discounts have dropped since the introduction of service and maintenance plans, as part of the purchase price on a wide range of model derivatives. Often, the revised discount, plus the cost of the maintenance plan, amounts to what the previous discount structure would have allowed.
But in the end, the price of an article is determined by what the public will pay, rather than the manufacturing cost. Consider the artisan who bought an entry-level car 20 years ago. The artisan is still buying an entry-level car — in other words, price bracket is fixed by income.
This has prompted attacks on car allowances and company cars. The argument is that, instead of people buying a car according to their disposable income, they buy according to a car allowance system that sets the amount they theoretically must spend to get the maximum benefit from their “cost to company”.
There is a case for saying such constant, artificially maintained demand keeps prices high. But without car allowances or company vehicles, thousands would be unable to drive their own cars.
It was South Africa’s distances and poor public transport infrastructures that drove allowances and company car schemes. Corporate vehicle purchasing accounts for more than 85% of all new vehicle sales each year.
Are manufacturers and importers charging too much? In a recent exercise, Wheels24 editor John Oxley did some comparisons on the Chrysler Crossfire, which is the same the world over. Oxley noted that in the UK, where it has already incurred the cost of transatlantic shipping — similar to the cost of shipping vehicles here — the price is R290 400 less 17% VAT. But in South Africa, the car costs R415 000, or R356 000 excluding VAT.
“There’s a difference of R65 600,” he says. “Some of this is clearly a difference in the shipping cost to the UK versus South Africa. But if you add 38% import duty to the ex-UK price, the ex-VAT price in South Africa would be R400 752.”
He concludes that DaimlerChrysler South Africa must be passing on some of its import credits — earned by exporting the cars it manufactures in East London — to reduce prices.
Oxley then looks at the Mercedes C180 Kompressor, also made in South Africa. He finds that the vehicle costs R238 000 here, or R204 680 ex-VAT. In the UK the same South African-manufactured car costs the equivalent of R214 000 ex-VAT.
Right now, the Competition Commission is scratching at a minor itch. One can only hope it does not turn it into a weeping sore.
Colin Windell is the editor of Autonews. Next week: Why car leasing is bad for your financial health