New car sales taking a battering

Globally the new vehicle industry remains in positive territory…for now. But the local industry, battered and bruised by an ailing economy and a surge in used car buying, is facing some stiff challenges with new vehicles sales posting a decline of 4.5% compared to the same period last year.

Even while the month of September accurately reflected the worsening financial health of the economy, two positive factors did emerge from those figures; the month-on-month increase in passenger vehicles of 6.9%, and the year-on-year 14.3% improvement in exports. Not so in October.

October is traditionally a strong sales month for the motor industry. Coming a few months before the Xmas holidays, this is the time when consumers, keen to bag a good deal, take up the incentive packages on offer.

Despite incentives October passenger vehicles declined by 3.0% compared with September. Indicative of a tough trading environment and consumer affordability pressures, the month saw a drop of 10.92% in passenger vehicles compared with October 2014.

Should we be troubled by shrinking exports, also down year-on-year by 13.9%? Not according to Naamsa or Standard Bank.

Despite declining exports Nicholas Nkosi, Head of Standard Bank Vehicle and Asset Finance, Retail Banking believes this to be a temporary drop and is upbeat about exports in the coming months. “I think we will see a different picture next month. It’s too early for figures to reflect the hypothesis of a slowing in the markets that we export to. The decline is more likely due to new models being produced in SA that would have a slowing on output,” says Nkosi. Vehicle exports for 2015 remain on target to reach a record export number of around 335 000, says industry body Naamsa.

Nkosi is less upbeat about the turnaround in new passenger vehicle sales on home turf. Unsurprising given shrinking disposable incomes and the rise in the popularity of used vehicles. “We expect used car sales to overtake those of new vehicles. By nature of affordability consumers will continue to look for good value priced assets and the reality is that there are so many cars in the market that consumers can afford to shop around,” says Nkosi.

The 1.5% revised growth for the country delivered by Finance Minister Nhlanhla Nene in his recent medium term budget speech is also unlikely to accelerate vehicle sales, even those coming from the commercial sector.

“Year-on-year we have seen a stretch in replacement cycles of commercial assets from the traditional 36 months to 48 months or longer, in particular the trucking industry and we foresee the trend continuing next year as the economy comes under more stress,” says Toni Fritz, Executive Head, Vehicle and Asset Finance, Business, Standard Bank.

“The anticipated drop in unit sales year on year in the three key sectors of our market are off the back of the prolonged replacement cycles we are seeing, prudent corporate spend in a low growth economy and also impact of some sectors such as mining and sub sector mining activities which have shown strain this year (see graph).

We anticipate that 2016 will be a year of similar stress for the economy and companies, however we do see opportunity in ensuring that we are part of the new private and public sector changes that are needed to get the economy back on track to better growth numbers. Commercial assets are cash producing assets and as such are part of the growth in our economy,” adds Fritz.

Perhaps the bus sector emerges as the star on a dark horizon. Historically a sector that has struggled with subsidies and contracts, the recently announced budget allocation may begin to iron these problems out. Fritz tells Finweek that some of the larger corporates and providers of public transport systems have indicated that they are now starting to secure actual contracts instead of month-to-month contracts providing more certainty in terms of fleet management.

But, the medium term budget did not close the door on the thorny issue of a possible VAT hike. “The possibility of VAT being increased will affect the consumer far more than corporates who will find ways to absorb this, generally by passing this on in their pricing,” says Fritz.

Unsurprisingly, sales of domestic new cars and commercial vehicles are expected to remain under pressure into 2016. But in contrast, says Naamsa, automotive industry vehicle production remains on a strong footing with higher new vehicle export sales continuing to support the industry’s output, contributing positively to South Africa’s balance of payments.

The contribution to GDP by the automotive industry is substantial, around 5%-6%. So while manufacturers may still be churning out cars at similar levels of production to those in the past, if consumer uptake of new vehicles is not maintained at similar levels, that could change. And negatively impact GDP contribution.

Industry Snapshot:

- October 2015 reflects a decline in sales of 1.9% compared to September 2015.

- Year-on-year monthly comparison shows a decline in overall sales of 8.6% in October 2015 compared to October 2014. 

- Standard Bank Vehicle Asset Finance reports:

  * a continued shift to more used vehicles financed.

  * the average contract term increased from 67.1 months in October 2014 to 69.9 months in October 2015 (4.2% year-on year-growth).

  * the average deal size decreased from R307 583 in October 2014 to R288 056 in October 2015, a 6.3% year-on-year decline.

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