South African Car Market Hits New Lows; Focus Must Now Shift to Building Resilience
The South African car market experienced record lows in Q2 2020, as the combination of minimal trading due to the COVID-19 pandemic and the depressed economy saw a 71% decline in the number of new and used cars financed over the same period in 2019, according to the latest TransUnion SA Vehicle Pricing Index (VPI).
The South African motor industry did not operate during April, was at minimal capacity in May and only resumed full operation in June. The ongoing impact of the pandemic has not allowed the industry to recoup sales lost in April, and as vehicle pricing continues to increase while consumers come under increased financial strain, local car dealers are set for a challenging H2 in 2020, said Kriben Reddy, head of Auto Information Solutions for TransUnion.
“The focus for the industry now needs to shift to resilience, recovery, and creating a strategy to deal with new consumer behaviour. By using learnings from the previous global recession in 2007-2009, when it took 24 months for the car market to recover, the industry can create robustness and understanding of the ‘new’ market more quickly, accelerating its recovery,” said Reddy.
The VPI showed that new vehicle pricing rose above inflation for the first time since Q2 2017. The VPI for new vehicles rose sharply to 6.5% in Q2 2020 from 3.1% in Q2 2019, and to 3.1% from 1% for used vehicles. 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.
The financial impact of the pandemic, which has seen the unemployment rate rising above 30% in South Africa, has consumers either forgoing vehicle purchases or looking to buy down from new to used vehicles. The VPI report shows the used-to-new vehicle ratio has been trending upwards post-lockdown, from an average of 2.16 in 2019 to 2.31 in Q2 2020. This means that for every new vehicle financed, 2.31 used vehicles are financed.
The make-up of used vehicle sales shows that 33% of vehicles financed are under two years old, with demo models making up 6% of used financed deals. This indicates consumers are opting for older vehicles as pressure on disposable income increases.
The percentage of cars (new and used) being financed below R200 000, R200 000 to R300 000 and over R300 000 has seen a clear movement towards vehicles under R200 000 in Q2. The signs of consumers purchasing power growing marginally throughout 2019 has been pushed back post-lockdown, and TransUnion expects this trend to continue through 2020 as sentiment around the market continues to deteriorate.
“What is critical is how long it will take consumers to recover from the economic effects of the lockdown. The longer the constraints of COVID-19 continue, the greater the impact on the industry and the broader economy. TransUnion’s ongoing Financial Hardship research shows that consumers expect to be just over R7 000 short on their budgets every month, on average. That’s more than the cost of ownership of an entry level car. This might keep a lot of people out of the market for even longer,” said Reddy.
The macro economic outlook remains challenging. According to the latest figures from the IMF, the pandemic has caused negative annual growth in real GDP worldwide for 2020 April of -3%. South Africa, USA and the UK have all declined further at -5.8%, -5.9% and -6.5% respectively. Consumer confidence continues to deteriorate, and business confidence reached its record low since this metric has been tracked since 1975.
“Overall, the global automotive industry has had its most challenging quarter, with global lockdowns and temporary closures. In South Africa, it has been a quarter of record lows with regard to confidence, sales and economic activity. The automotive industry has to rapidly adjust to the current climate as consumer demand for vehicles declines - although with all major changes, opportunities arise to help consumers through tough times and build loyalty through areas like vehicle maintenance and digital retailing platforms,” said Reddy.