With economists predicting that South Africa will be in a full-swing recession by the first quarter of next year, the South African motor industry is undoubtedly in the doldrums. It is said the figures never lie, and these provide some tough reading.
Total new car sales for June dropped by 22% to 42 436 units compared with the 54 061 units of the same month last year, a figure down 13,7% on the June 2006 figure of 61 467 units. This figure was part of South Africa’s record 2006 year in which 714 340 new vehicles, including cars, bakkies and trucks, were sold — a blockbuster year that prompted industry observers, at the outset of last year, to predict one million units would be sold a year by 2010.
The reality is that new-vehicle sales last year settled at 676 097 for the year, a 5,4% drop. Not large, but significant considering the forecasted increase was to hit 6% to 10% on its way to 2010 and the one-million-units mark.
The downward trend then continued into 2008. Sales on a year-to-date basis (January to June) are at 155 409 units, down 20% from the 192 232 units of the same period in 2007, a figure also down 6,8% on the record new-car sales of 2006.
It’s easy to ignore the wood for the trees and lament how it all went so horribly wrong, but at a glance back through the now murky crystal ball, we look at the factors contributing to this dip:
- The interest rate now: 15,5%. The interest rate in the last month that South African new car sales showed an increase (January 2007): 10,5%.
- The price of Brent crude oil in January 2007: $55,25 per barrel. Brent crude today: $142 a barrel. The petrol price in January 2007: R5,35 a litre. The petrol price today: R10,40 a litre.
That’s why, according to Wesbank, the current “cost of mobility” as it relates to maintenance costs, fuel, insurance premiums, capital portion and interest portion on an average South African’s motor vehicle is a staggering 46% higher than it was four years ago.
As a result of these factors, director and chief economist at Wesbank Brian Riley says vehicle repossessions have shown a significant increase. “Factors like the NCA [National Credit Act] and our improved knowledge of customer credit information means repossessions in the past 12 months have increased by 75%. They’re stabilising, though, as consumers start to curb their spending.”
Riley says, as with repossessions, the market is not expected to fall significantly further. “The passenger market appears to have bottomed out. We are still seeing monthly declines, but at a less significant rate, so indicators predict a turnaround in nine to 12 months.”
Audi South Africa’s divisional manager, Greg Levine, likens the challenges in the motor trade to what he calls the perfect storm. “Right now the motor industry is facing challenges similar to a perfect storm: a global slowdown, political instability, interest-rate hikes, the Eskom crisis, fuel price hikes, the strong euro, which affects our imports, the NCA, which is still a major influencing factor, food inflation, the subprime crisis, skills shortages, infrastructure challenges and high levels of crime. In essence, the higher the level of severity of a storm, the more it can be described as perfect.”
That’s all the gory detail, but Brand Pretorius, chairperson of McCarthy Motor Holdings, notes that the short-term situation isn’t all bad for consumers as dealers try to offload surplus stock. “The situation improved after the Reserve Bank announced only a 0,5% rate hike [in June]. The market is characterised by a high incidence of special offers such as discounts, cash-backs, free fuel and subsidised interest rates.”
So what would a straight comparison of which new vehicles South Africans were willing to buy 18 months ago versus today highlight? Interestingly, there does appear to be a shift in behaviour.
One would assume that, with the largest increases to cost of mobility being the interest portion and fuel expenses, the first vehicle to fall off the wish list would be the SUV. And this appears to be true in the luxury or premium SUV market, at least. In June, only 10 Range Rovers were sold versus the 114 that South Africans bought in January last year — a 91,2% drop.
The same appears to be true in the luxury sedan market, with the Mercedes S-Class selling 90,1% less and the Porsche 911 selling just four in June, down from the 46 in January last year. Although sales figures for total-import manufacturers such as Porsche are subjective because of fluctuating stock, one must still recognise a 91,3% drop as relevant.
Significantly, the market does not seem averse to new-model launches, as was the case in 2007 with the new Mercedes-Benz C-Class improving its sales by 21%, making its fall in 2008 by 60% all the more prominent. Standard C-segment competitors from Volkswagen and Toyota are also suffering, to the tune of 35% to 40%.
Sales of the Chevy Spark, at one time South Africa’s cheapest car, dropped by only 4,8% in the past 18 months, but not all bargain offerings have fared well — the Tata Indica dropped by 42,3%, for instance.
Looking at the evidence of the past 18 months, it appears that although South African consumers are willing to alter their purchasing habits and leave the heftier price tag of premium brands and less economical SUVs for the next person, they don’t appear to be totally satisfied with entry-level cars at the bottom of the market.
Consumers appear less fixated on brand perception and manufacturers of the old guard, but still perceive their vehicles as lifestyle choices and want a guarantee of value in them. They are receptive to the value a market of 61 brands can provide, when it once could offer only 20.
It’s a point echoed by Riley: “Consumers are buying down into the new-car market. And, now more than ever, value-for-money products are in higher demand. The cake is still there; it’s just a little smaller.”
We’re not alone
“The demand for energy around the world is growing faster than supply,” says General Motors chief Rick Wagoner. The demand for fuel-efficient models in the United States exceeds what dealers can deliver. According to US reports, June was its worst sales month in 15 years.
Blame fell at the feet of a 31% lower demand for trucks (bakkies), and manufacturers of smaller, fuel-efficient models, such as Toyota’s Prius, weren’t able to keep up with sales demand.
Does a similar issue exist in South Africa’s strapped market? It sure does.
Toyota brought the Prius to South Africa in 2005 and says demand has grown to more than 30 a month. Last month Toyota could supply only 12, and it admits to a back order and waiting period of three months.
While Honda, widely regarded as the greenest manufacturer in the US, does not offer any of its hybrid technologies in South Africa, we can expect a hybrid Civic here before 2010.