SA Car Industry Remains Under Pressure In Face Of Low Confidence

The South African car market remained under significant pressure in the third quarter of 2019, with vehicle sales continuing their steady decline, despite new vehicle price increases staying under inflation for the past two years. This is according to the latest TransUnion Vehicle Pricing Index (VPI) for Q3 2019.

New vehicle price increases have remained below inflation for the past two years – the longest consecutive period since the creation of the index in 2000. Used vehicle price increases have slowed, which is indicative that the used market is also taking the strain. Despite lower price increases, the number of new vehicles financed in Q3 fell 7% compared to the same period a year ago, while the number of used vehicles financed showed a 1% increase.

The new vehicle VPI moved to 3.3% in Q3 2019 from 3.1% in Q2, while the used vehicle index moved to 1.1% from 1%. 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. Vehicle sales data is collated from across the industry to create the index.

Kriben Reddy, head of Auto Information Solutions for TransUnion Africa, said the sluggish market reflected ongoing low consumer and business confidence, reiterating the weak domestic demand conditions. Although interest rates fell by 25 basis points in July, which offered consumers additional spending power, many consumers have opted to delay vehicle purchasing decisions due to the ongoing economic uncertainty.

Reddy said this would inevitably have a negative effect on the local automotive industry, which is a major contributor to South Africa’s GDP. According to NAAMSA figures, the industry contributes 6.8% to GDP (4.3% manufacturing and 2.5% retail), with total automotive revenues in 2018 of R503 billion.

“The bad news for the industry is that local market conditions are not likely to change in the foreseeable future. The industry is trending in a downward direction, and unless certain structural changes take place in the economy, the picture is not going to change for the local auto industry,” said Reddy.

However, this will be partially offset by a strong export market. In 2018, the export of vehicles and automotive components reached a record R178,8 billion, equating to 14,3% of South Africa’s total exports. Vehicles and components are currently exported to a record 155 international markets, with export values doubling year-on-year to more than 25 of those markets in 2018.

The VPI report shows the used-to-new vehicle ratio increased from 2.08 in 2018 Q3 to 2.26 in 2019 Q3, which means that 2.26 used vehicles were financed for every new vehicle financed. The make-up of used vehicle sales is also shifting, with 36% of used vehicles financed under two years old, with 6% of those being ex-demo models – which indicates consumers are opting for older vehicles as pressure on disposable income increases.

“The percentage of cars (new and used) being financed at key price points – below R200 000, R200 000-R300 000 and over R300 000 – has been fairly consistent over the last six quarters. This shows that consumers’ purchasing power and their ability to purchase more expensive vehicles is not changing,” said Reddy.

“People are continuing to spend less on cars, with consumers still opting for less expensive entry level vehicles. The average loan size in this quarter is comparable to that of Q2 2013, which suggests that consumer buying power has effectively remained flat for the past six years,” he said.