Exports Provide Bright Spot for SA Car Industry as Local Sales Stagnate

The South African car market remained depressed in the fourth quarter of 2019 – and all indications are that it will remain that way for the foreseeable future, with a challenging macro-economic outlook continuing to drive down vehicle sales, despite fuel price decreases and an interest rate cut, according to the latest TransUnion SA Vehicle Pricing Index (VPI).

The good news for the automotive industry is that the export market continues to grow strongly. Export sales of South African built cars grew 17.7% in 2019 over the previous year, providing some measure of relief for local manufacturers, said Kriben Reddy, head of Auto Information Solutions for TransUnion Africa.

Reddy said the stagnant market reflected ongoing low consumer and business confidence, with continuing load shedding and pending decisions on South Africa’s investment rating having a clear impact on both growth prospects and market sentiment. In the face of these levels of uncertainty, constrained consumers are delaying vehicle purchasing decisions.

“The major issue facing the local automotive industry is the need for structural reform at a macro-economic level. We need to see sustained positive economic growth to get the new car market moving, and the challenge is that in 2019 we weren’t there. The problem is, it is unlikely that this situation will change in the short term, indicating that we may continue to battle for some years yet,” said Reddy. “Exports provide a bright spot by retaining jobs and keeping production lines going, but they are still a relatively small part of greater sales.”

The TransUnion SA VPI for Q4 shows that new vehicle price increases have remained below inflation for more than two years now. Despite this, the number of new vehicles financed in Q4 – a key indicator of sales - fell 1.6% compared to the same period a year ago, although the number of used vehicles financed showed a 1.4% increase.

The VPI for new vehicle pricing slowed to 2.9% in Q4 from 3.3% in Q3, with the used vehicle index moving to 1.2% from 1.1%. The index measures the relationship between the increase in vehicle pricing for new and used vehicles from a basket of passenger vehicles which includes 15 top volume manufacturers. The index is created using vehicle sales data from across the industry.

The reports shows the used-to-new vehicle ratio has increased from 2.03 in Q4 2018 to 2.09 in Q4 2019, which means that for every new vehicle financed, 2.09 used vehicles are financed. In the used vehicle market, more than 36% of used vehicles are under two years old, with 6% of those being ex-demo models. This indicates that consumers are opting for older vehicles as pressure on disposable income increases, said Reddy.

The percentage of cars (new and used) being financed below R200 000, R200 000 to R300 000 and over R300 000 has remained broadly consistent over the past seven quarters. This means that in real terms (i.e. allowing for inflation) consumers are spending less on cars, and opting for less expensive entry level vehicles. The average loan size in this quarter is also similar to that of 2013 Q2, suggesting that consumer buying power has effectively remained flat, or fallen in real terms, for the past six years.

Reddy says the good news for consumers entering the buying market is low price increases, low inflation rates predicted for 2020 and a range of marketing incentives from dealers, which include trade assistance to vehicle discounts.

“The challenge is that to get a customer into a new vehicle, you have to get him out of the old vehicle first. And in many cases, the very deal structures that are meant to stimulate the market – like offering terms of to 84 months on car finance – are having the opposite effect by taking customers out of the market for longer. If you take a deal over 54 months, conventional wisdom is that you’re going to be back in the market after 36 months. Over 84 months, you’re taking that customer out of the market for another 1-2 years,” said Reddy.