Having confounded most pundits by growing at a rate of 5.3% in 2003, the South African vehicle market should post further gains in 2004. But although many of the factors that underpinned last year’s gains are still in place, they could prove volatile. Dave Cumming reports.
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In fact, the National Association of Automobile Manufacturers (NAAMSA), not given to exaggeration, says the new car and commercial vehicle markets could be in for “an exceptional year – one of the best since the mid 1980s”.
Little surprise, then, in the consensus forecasts of industry experts who are expecting growth of between 6% and 10% for calendar 2004. Passenger car sales are expected to lead the way and could even approach the 300,000 units last sold in 1980. But gains in all sectors are expected, with the widest divergence of opinion in the field of heavy vehicles where some predict a continuation of the 2003 performance which saw sales rise 27% and others expecting the market to pause for breath.
Lower interest rates and greater affordability
The factors influencing the positive outlook are the prospect of lower interest rates, a stable currency at realistic levels, greater affordability of cars for private owners, increased disposable income, higher consumer and business confidence on the domestic market, intense competition driving low margin deals, the real possibility of legislative change to allow private leasing and lower inflation.
But many of the economists who concede the presence of all these factors warn that they could change rapidly. They point out that at the beginning of 2003 the currency had only just emerged from the doldrums and a period which made exports super-competitive. Interest rates were high and consumer confidence low. All that did not prevent a swift turnaround.
That turnaround saw sales of 247,259 passenger cars (up 6.7%), 104 884 light commercials (up 0.1%), 6,100 medium commercials (up 7.6%) and 10,211 heavy commercials (up 27%).
However, the year saw the currency finish as the second strongest performer (after Australia) as traders seemed to put their faith in commodity-dominated economies. Monetary policy successfully brought inflation down to its three to six percent target levels and four interest rate cuts resulted.
Component exports present uncertainty
The one area in which there is some uncertainty is exports – particularly of components. Component manufacturers say the de facto monopoly supplier of certain types of steel to the SA industry, Iscor, is preventing them from being competitive on international markets because of its import parity pricing policy.
The policy recently received the approval of the competition authorities after complaints from a variety of Iscor customers, including Volkswagen SA. The complainants have expressed their intention to take the matter on appeal.
In the field of vehicle exports, however, there is less uncertainty. DaimlerChrysler (Mercedes-Benz C-class), BMW (3-series) and Volkswagen (Golf) are established export manufacturers. Toyota joined them (with Corollas for Australia) in 2003 and Ford announced its firm intention to do so during the year. Speculation has it that GM and Nissan will follow suit at some stage soon.
While all will have to compete for contracts from their parent companies with their peers around the world, the investments those parent companies have made and will make are of a strategic nature and are, therefore, not as sensitive to short term currency fluctuations and other factors as might otherwise be the case.
Other clouds on the horizon include the possibility of lower international demand due to slow global economic recovery, unexpected rand depreciation and deferred purchase decisions in anticipation of lower prices.
Villainous rand
The currency has undoubtedly been the villain of the motor industry peace in recent years, first driving purchase prices out of reach of private motorists as it plumbed new depths on an almost daily basis and then providing manufacturers and dealers with a fresh set of headaches as it soared to new highs – again on an almost daily basis.
Its recent performance has provided major strategic challenges for manufacturers and their franchised dealer networks. On the one hand they have potential buyers demanding that prices should be reduced and on the other they have to maintain prices at a certain level to sustain resale values of cars they sold in the lean times.
While nobody is expecting prices to drop, there is a strong likelihood any increases will be extremely modest. January has dawned, for instance, without a sign of increases which have previously been almost obligatory. And DaimlerChrysler has made downward adjustments to the prices of imported CLK and SL models, saying the prices had been set in anticipation of further rand weakness. Competitors were less charitable, saying the old prices were about 30% higher than they should have been, bearing the exchange rate in mind.
It is anticipated there will be a shift in emphasis in the pursuit of revenue during the year. Most of the action will take place at entry level, where retail margins are at their tightest and high volumes must be sought if acceptable revenue levels are to be maintained.
This trend made its first appearance during 2003 and luxury vehicle makers DaimlerChrysler and BMW both saw market share drop by 1.1%, albeit at acceptable levels of around 11% and 5% respectively. This suggests more affluent members of South African society are retaining their cars for longer before replacing them. Several observers are suggesting they are investing the money they would have spent on cars in anticipation of swift profits – notably in the booming property market. The major market share gain was made by Toyota (3% to 26.1%).
This anticipated shift suggests competition between suppliers of entry level vehicles will be at a pitch not seen on the local market for many years, which means buyers may not encounter lower prices but they will receive a great deal more for their money in the form of incentives such as subsidised interest rates and generous service, extended warranty and roadside assistance plans.
Franchised dealers are viewing the year with mixed feelings, aware that it holds substantial promise but, equally, aware that dealers’ share of the market once again declined last year, from to 75.2% from 76.4%. Purchases by rental companies, in-house sales by motor manufacturers and government buying made up the rest of the market. Nada, the national dealers association, regards an 80% share as the lowest at which dealers can comfortably make the major investment required for profitable operation.
Manufacturers are positive
The manufacturers, however, have no such reservations. “Generally positive consumer sentiment, strong replacement demand for medium and heavy commercial vehicles, enhanced overall vehicle affordability in real terms as a result of stable new vehicle prices and expected further reductions in interest rates provide an environment for above average growth in new vehicle sales,” says NAAMSA.
Industry observers will also be keeping a close eye on the used car market, where increasingly affluent blacks are making their presence strongly felt and it is expected several niche market sales strategies will emerge in the course of the year.
Table 1: South African vehicle sales by market sector | ||||
| Sector | 2001 | 2002 | 2003 | 2003/2002 % Change |
| Cars | 239,060 | 231,602 | 247,259 | +6.7% |
| Light Commercials | 115,146 | 104,747 | 104,884 | +0.1 |
| Medium Commercials | 5,383 | 5,666 | 6,100 | +7.6 |
| Heavy Commercials/Buses | 7,310 | 8,039 | 10,211 | +27.0 |
| Total Vehicles | 366,899 | 350,054 | 368,454 | +5.3 |
Source: NAAMSA | ||||
Table 2: South African vehicle exports by sector | ||||
| Sector | 2001 | 2002 | 2003 | |
| Cars | 97599 | 113025 | 115500 | |
| Light Commercials | 10,229 |
11,699 | 11500 | |
| Medium and Heavy Commercials | 465 | 582 | 500 | |
| Total Exports | 108,293 | 125,306 | 127,050 | |
Source: NAAMSA; 2003 figures estimates | ||||
