Post Pandemic Supply Challenges Drive Shift in Vehicle Purchasing Behaviour
Vehicle sales in South Africa dropped sharply in the first quarter of 2023 in the face of ongoing vehicle price inflation, declining consumer disposable income and negative consumer and business sentiment. TransUnion Africa figures show the number of financial agreements in the passenger vehicle market in Q1 decreased 12% year-on-year (YoY), with new car sales down 2.6% and used car sales down 17.7%.
What’s more, according to the information and insights provider, macroeconomic indicators suggest that there’s little respite for the embattled auto industry in the short term. Inflation climbed from 6.9% to 7.1% during the quarter, with used vehicle prices increasing from 7.9% to 8.1% in the same period.
This trend is unlikely to reverse soon, with the current macroeconomic climate in South Africa of low growth rates, frequent power cuts, and decreasing disposable incomes making consumers and businesses more cautious, said Lee Naik, CEO at TransUnion Africa.
"The vehicle market in South Africa is facing significant challenges. The rising cost of vehicle ownership makes it difficult for consumers to buy new vehicles. However, the low supply of new car sales from previous years due to COVID-19, semi-conductor shortages together with the current high demand for used vehicles, means there is a shortage of quality used vehicles. That means that consumers have limited options," said Naik.
TransUnion’s latest Vehicle Pricing Index (VPI) showed ongoing YoY increases in both new and used vehicle pricing. The new vehicle price index increased from 4% in Q1 2022 to 6.3% in Q1 2023, with used vehicle prices increasing from 7.9% to 8.1% in the same period. In the used car market, the prices of three-year-old vehicles increased 10.2% YoY, and new mid-sized SUVs increased by 11.4% in the same period. Hybrid and electric vehicles only increased by 3%, albeit off an already high price point.
The VPI measures the relationship between the increase in vehicle pricing for new and used vehicles from a basket of passenger vehicles which incorporates 15 top volume manufacturers. The index is created using vehicle sales data from across the industry.
This pressure on the supply of quality used vehicles saw a further shift in the ratio of used to new vehicles being financed. A year ago, 2.18 used vehicles were financed for every new vehicle, but this declined to 1.86 in Q1 2023. The last time that the ratio of used to new vehicles was this low was in Q4 2015. The number of demo models financed in the latest quarter remained stable at 4%, which may indicate that consumers are either being driven towards the new vehicle market, or that they are opting for significantly older vehicles as the supply of more recent models diminishes and price increases exceed earnings growth.
Despite these challenges, the number of new hybrid and electric vehicles purchased has increased, with the number of purchasers growing 10-fold for hybrids and six-fold for electric vehicles YoY, which now together make up 2.5% of all new vehicle purchases. However, this positive trend is not significant enough to offset the decline overall in the vehicle market.
Consumer buying patterns in the South African vehicle market are also increasingly being shaped by increasing interest rates and fuel price hikes. In their search for value, consumers have been gravitating towards hatchbacks or downgrading from two-car households and opting for one slightly more expensive vehicle. SUVs made up more than 47% of total new and used financed vehicles, with consumers aged between 26 and 40 financing almost half of all vehicles. Rising prices are further reflected in the average price points, with the percentage of cars (both new and used) financed below R200,000 declining to 20% in Q1 2023 from 25% in Q1 2022.
This trend poses potential opportunities for the servicing industry, as older vehicles that are out of motor plan will require more maintenance and repairs to keep them roadworthy. However, it also raises concerns about vehicle safety and emissions, which could lead to increased scrutiny from regulatory bodies in the future, says Naik.
“Ongoing negative sentiment is making it increasingly difficult for the industry to generate demand for its products and services, as consumers and businesses alike have become more discerning and price-sensitive in their purchasing decisions. To succeed in this market, auto businesses will need to find ways to differentiate themselves and offer compelling value propositions that resonate with consumers and businesses,” he said.