For nearly four years South African motorists have been spoilt for choice, with a seemingly endless stream of keenly priced new makes and models arriving virtually monthly. The honeymoon is now over.
So should we emulate the property writers who constantly urge readers that the time is right to buy? In this case, yes. Domestic inflationary pressures have steadily inflated labour and energy costs, which increases production costs significantly. The motor industry has so far absorbed the added expenses, but the recent decline in the value of the rand adds enough to the burden to make a rise in car prices inevitable.
Car sales in South Africa have reached an all-time high this year. In August alone, sales reached 39 215 units, the highest single monthly sales total on record, and 3 473, or 9,7% more than the same month last year.
In the first eight months of this year sales have improved by 17,7% over the same period in 2005, which was in itself a record year.
From the dozen or so brands offering a couple of hundred derivatives a decade or so ago, the industry in South Africa has grown to the extent that there are now 42 brands and 1 200 derivatives for buyers to mull over before spending their hard-earned money. Competition is fierce, and that’s good for the consumer, but the importers and distributors are, after all, in business to make a profit.
There are more imported vehicles than locally assembled ones available in South Africa today, and the recent decrease in the value of the rand is going to affect the price of these vehicles adversely. The imported component in locally manufactured cars is on average about 40% by value, so the impact on pricing there is also significant.
Senior economist Tony Twine of Econometrix says that whatever happens to the rand next year, its performance over the next few months is vitally important. ”The reason I say this is that importers and manufacturers very often agree with their parent companies in Europe and Japan on internal company exchange rates for the year. Once that’s agreed, it doesn’t really matter what the market does — what’s important is the rate agreed between the yen and the euro in advance for the year in the books of the companies. The agreements usually come into force at the beginning of the financial year, so over the next few months the importers will be negotiating for next year’s rates.”
Where there are no internal agreements, importers normally buy forward-cover to insure against currency fluctuations. ”Common practice is to carry 60% of your exposure forward for six months, and we’re now approaching six months since the rand started to dip,” says Twine.
Where does Twine believe the rand is going against the dollar? ”I believe it’s going to spend most of the next 12 months in a fairly wide channel between R6,50 and R7,50. For the next couple of years we’ll experience long wallowing cycles within a weakening trend, so clever treasury management guys will be able to make pots of money along the way. The rand value won’t go down in a straight line as it did in the Eighties and Nineties.”
What does Twine believe the future holds for us in terms of car prices? The fact that there’s now so much competition is good for the consumer, and most of the newcomers are here to stay. ”I think that prices in December next year will be 7% to 10% higher than in December this year,” he says.
A question we need to ask ourselves, however, is: what is going to happen to prices between now and December?