Vehicle sales: It’s abuyer’s market
So says Kriben Reddy, the head of TransUnion Auto in South Africa, which has just released its latest Vehicle Pricing Index (VPI).
It’s the credit bureau’s 17th index and the only such in the country, which collates all financed car deals - new and used - quarterly. TransUnion’s also produced an index specifically for the used market for over 60 years.
The report says the VPI has remained below inflation for the sixth consecutive quarter - eroded by last year’s VAT and petrol price increases and the constrained economy - but the bureau is more upbeat about the outlook for 2019, saying it’s more favourable than previous years.
This week, the National Association of Automobile Manufacturers of SA (Naamsa) released its new vehicle sales statistics for January 2019, noting domestic new vehicle sales had started off weakly - mainly due to “lower than expected” new car sales - and projecting subdued sales for the year. It said aggregate domestic sales at 42374 units were down by 3 398 units or 7.4% from the 45772 vehicles sold over the same period last year. Export sales remained relatively strong, at 18289 sold - an improvement of 4160, or 29.4%, on January last year.
Naamsa’s January numbers are based on the year-to-date figures and are purely related to new vehicle sales, including all domestic sales, government, rental and dealer networks, so the lag effects are expected.
The VPI shows that new and used vehicle prices had an annual increase of 2.5% and 1.6% respectively in the fourth quarter of last year: a slight increase of 2.4% for new vehicles for the same period 2017, but a marked decrease for used vehicles, which stood at 3.5% in 2017. This was lower than CPI over the same period, ending at 4.5% in December.
The impairment is not all negative. “It could have been worse,” Reddy says. “Vehicle pricing is at its lowest - for new or used - so if you come into the market you’re in a better position to bargain.
“The market is so volatile at the moment. We’re experiencing the lag effects from VAT increases and the interest rate hike. Once disposable income is limited, sales will decline.”
That said, sales are flat, rather than declining. “Flat is better than a decline. 2017 ended with 1.5% growth in the market,” he explains.
Gross domestic product (GDP) is directly correlated with the vehicle market: for the vehicle market to grow, the GDP needs 1% growth. And if the GDP is flat, sales are flat. “I could be in the buying cycle for a new car, but additional pressures make it not likely,” he says. “Insurance goes up, tyres, VAT increases, Eskom price increases, etc, all have an impact on buying patterns.”
Year on year, vehicle finance deals are declining: the VPI indicates both new and used passenger vehicle finance deals were down by 7% and 15% respectively, while the used-to-new ratio decreased from 2.22 in Q4 2017 to 2.03 in Q4 2018. And total financial agreement volumes in the passenger vehicle market also decreased by 12% between Q4 2018 and Q4 2017.
These results work in consumers’ favour, Reddy says, because they have more bargaining power.
“Challenging economic conditions have seen manufacturers reduce the price of new vehicles in real terms as a way of stimulating sales.”
He says dealers are now more eager to clinch the sales but the margin on new vehicles is but one revenue stream. “If they arrange finance, insurance, tracking, after-sales services, trade-in assistance - that’s repeat business. It’s about the total customer value. When volumes are down, dealerships have to do more.”
South Africa is predominantly a used car market. The used-to-new ratio, which once peaked at an average of three to one new financed, has now come down to about two to one financed. “Before that, the rand was very weak. GDP wasn’t growing as fast as it should have. Pricing was higher than the CPI, so used was a far better value proposition.”
The VPI shows the percentage of new and used vehicles being financed below R200000 is now 37% - up from last quarter’s 36% - and mostly consists of used and entry-level cars. Reddy says it’s because pricing slowed down. “Consumers, when times are tough, either hold off, or buy down and get a less expensive car or a second-hand/demo one with warranties and motor plans still in place.”
Reddy is encouraged by the latest GDP figures, which indicates an economic turnaround. And while new vehicle sales are likely to remain flat this year, the biggest growth area will be in the used market. This puts additional pressure on dealerships to sweeten deals with quality stock, service and better pricing.
“Dealers will have to be cognisant of the fact that consumers are struggling with constrained cash flow and high indebtedness, so they need to tailor offers accordingly.”