Pricey tag for scrap

Despite talks about a programme to support the auto industry, good news for taxpayers is that a scrapping allowance for trade-ins is definitely not on the cards.

Nimrod Zalk, the spokesperson for the Department of Trade and Industry, said although it previously offered a scrapping allowance for taxis as an incentive to stimulate car sales, this is not a feasible option. “We do not have the resources and it would be impossible to monitor.”

Zalk said that any proposals requiring changes to tax legislation would take a long time to implement and it may be too late to assist the embattled industry.
Any assistance to the industry would focus on manufacturing components, especially suppliers that form part of the supply chain. This is most likely to be in the form of a bridging loan, not a bail-out package.

“Ideas have been raised but they will not necessarily happen. We do not have the deep pockets of developed countries and we already have a budget deficit of 4%,” said Zalk.

But the department is concerned about the loss of manufacturing capacity should automotive component suppliers go under.

“The automotive industry forms the core of manufacturing and it is in a crisis. It has been hit by losses in the export market as well as local demand. We don’t want a situation where we lose capacity that cannot be resuscitated. When a manufacturing plant closes, it is unlikely that it will open again,” said Zalk.

Although arguments can be made for assisting manufacturing industries to access loans during a credit crisis, it seems that the retail side of the car industry will be left to its own devices.

Many argue that this overtraded market could do with major restructuring and consolidation. It is an industry that grew fat during the credit feast, seeing a surge in imported models in the past five years. A scrapping allowance would be a waste of taxpayer’s money because it would prevent a restructuring process.

South Africa has 1 300 models to choose from. Even if the industry sold 500 000 cars this year, if divided equally that would be only 384 cars a model. The past 10 years the average number of cars sold in one year was just short of 400 000 cars. From 2005 to 2007 that figure shot past 600 000 and topped 714 000 in 2006 before falling back to about 520 000 last year. If the estimated 385 000 cars are sold this year it would be nearly 30% more than the number of cars that were sold in the economic downturn of the late 1990s.

Although this is not a robust figure, the question is whether the spike of 700 000 cars is the figure we should be targeting as sustainable.

Rather than incentives the industry should perhaps start with affordability. In the US and UK it has been reported that car dealers are slashing up to 45% off the list price of new models in a bid to tempt cash-conscious buyers. According to research conducted by UK car website What Car?, buyers are receiving the best deals, gaining average discounts of about R26 000.

Where are South Africa’s hottest deals on new cars? Car prices have increased and there are warnings that prices of imported vehicles are expected to increase by around 40%.

Although manufacturers and dealers are talking up the prices of cars, the reality is that dealerships are sitting with stock levels of around five months compared with an average of two months. The cost of holding this stock bites into profits and Marcel de Klerk, managing executive of Absa Vehicle and Asset Finance, said we could see extremely good offers.

“Some dealerships have already started weekend auctions to reduce stock levels.”

Rather than direct incentives, interest rates are a far quicker way to stimulate the car industry. Lower interest rates will reduce the cost of holding stock while making car purchases more affordable.

On a R200 000 vehicle that will cut the monthly repayment amount by R500 a month compared with last month. The advantage of using rate cuts to stimulate demand is that, unlike the auto industry package, it is not discriminatory and is beneficial to all sectors of the economy.

How would it work?
Germany and the UK have introduced incentives for people to trade in their old cars for new models. If South Africa decided to follow the same approach and offered R20 000 a car, as an example, given that the average age of cars on the road is 11 years, at least half of the owners could qualify.

If the aim was to boost car sales to 500 000 a year, then let’s assume 250 000 of those sales would receive a R20 000 incentive. That would cost South Africa’s taxpayers R5-billion. If only one-tenth of that number was allowed, R2 000, that would still be R50-million too much.

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