Auto Industry Remains Suppressed, but Dealerships Innovate to Boost Affordability

The macroeconomic factors currently affecting consumer confidence and spending across the board are also suppressing the sale of both new and used vehicles in Q3 2023. Rising inflation, increased fuel prices, and currency volatility have contributed to a decrease of more than 8.4% in the sale of financed vehicles compared to Q3 2022, and NAAMSA reports a decline of 9.1% in new passenger vehicle sales in the same period.

Announcing TransUnion’s latest Q3 SA Vehicle Pricing Index (VPI) this week, TransUnion Africa CEO Lee Naik said that while consumer confidence remains low, it is slowly improving. “We are seeing that financially distressed consumers are gravitating towards more affordable mobility options, including older, lower-cost used vehicles. Alternative financing solutions are coming into play, and dealerships are offering trade support in the form of discounts and incentives on new vehicles on a scale that we have never seen before, in some cases also extending the finance period up to 84 months.”

The VPI measures relative increases in vehicle pricing over any given quarter. It is based on sales data for all financed vehicles across the industry, including the 15 top volume manufacturers in the country. As things stand in Q3, new vehicle price increases are, on average, below inflation as dealers cut into their profit margins to boost sales.

The focus is on premium vehicles, where we see a price increase of just 5.6% compared to Q3 2022. Small SUVs, crossover models and mid SUVS follow, at 6.6%, 6.9% and 7.3% respectively for the same period. Hatchback and hybrid models show the highest increase, both at 8.0%.

In contrast, used vehicle prices show dramatic increases. Looking at the three-year price increase for mid SUVs we see a rise of 19.4%. In the same period, the price increase for crossover vehicles is not far behind, at 18.6%, and small-SUVs and premium vehicle increases are at 17.6% and 17.0% respectively.

Showing the depth of the pricing strategy that dealers have adopted to spur new vehicle sales, the largest discount cited in Q3 2023 for an entry level urban vehicle was 12.69%, meaning that the after-discount price is actually lower than the listed price in Q3 2022.

The impact of new vehicle discount is evident in the used-to-new vehicle financing ratio, which provides insight into consumer preferences for used versus new vehicles. The move down from 2.05 in Q3 2022 to 1.41 in Q3 2023 means that fewer used vehicles are being financed than previously.

A significant market trend is the notable increase in the average loan amount for financed vehicles. In Q3 2023, the average loan value increased to R359,000, up from R317,000 in Q3 2022. This increase reflects not only rising prices but also a combination of changing consumer preferences and a shift toward premium vehicle segments for some buyers.

Access to credit

“The VPI focuses on financed vehicle trends, synchronising vehicle sales data with borrowing patterns. With the repo rate remaining at its 14-year high – unchanged from last quarter – the rise in fuel prices, and inflation increasing to 5.4%, consumers have lower disposable incomes and borrowing costs have risen. Lower-income individuals are applying less for vehicle finance,” says Naik.

Delinquency rates on existing credit lines have risen concurrently with these macroeconomic factors and, as a consequence, lenders have tightened their criteria for new credit.

This is where alternative financing solutions are coming into play. “Our data shows that more consumers are accessing unsecured and personal loans, and, while TransUnion is still negotiating with banks to include overdraft facilities in our reporting data, we know that more consumers are making use of overdraft facilities. We still have a way to go before we can understand exactly what these solutions are being used for; however, VPI data shows that short- to medium-term leasing, or hiring, of vehicles is on the rise, and this type of finance can be used for that purpose. The downstream effects that this ‘subscription’ model will have on the auto and credit industries remain to be seen.”

Overall, this quarter’s VPI figures underscore a contraction in the vehicle market and highlight the need for strategic agility and adaptability among industry stakeholders. “Manufacturers and dealerships have stepped up to the challenge. Their efforts to aid consumers to enter or re-enter the auto market by way of discounts, incentives and focusing on monthly payments rather than gross price, are paving a path toward potential market stabilisation and growth that flies in the face of the current economic headwinds,” says Naik.