Vehicle manufacturers, dealers face challenging market conditions

Vehicle price inflation continues to lag consumer price inflation

According to the VPI, new and used vehicle prices showed an annual increase of 2.5% and 1.6% respectively in Q4 2018. There was a small increase in the rate of growth for new vehicles, which had an annual rate of price inflation of 2.4% a year earlier (Q4 2017) but was a marked decrease in the rate of price inflation for used vehicles which stood 3.5% in Q4 2017. This was, however, lower than consumer price inflation over the same period which ended on 4.5% in December after a high of 5.2% in November 2018.

Vehicle finance deals show a marked decline

It was also revealed that new and used passenger vehicle finance deals decreased year-on-year by 7% and 15% respectively, while the used-to-new ratio decreased from 2.22 in Q4 2017 to 2.03 in Q4 2018. Total financial agreement volumes in the passenger vehicle market also decreased by 12% between Q4 2018 and Q4 2017.

Commenting on the results, Kriben Reddy, head of TransUnion Auto in Africa, said, “Challenging economic conditions have seen manufacturers reduce the price of new vehicles in real terms as a way of stimulating sales. It is important to consider the overall cost of owning a vehicle, not just the purchase price. Factors such as household disposable income and consumer confidence are also part of the changing dynamics of the vehicle market."

Consumer confidence is key

The latest consumer confidence data released in January held steady after a substantial deterioration in confidence levels across all income groups were recorded in November 2018. Reddy confirms that low consumer confidence levels have a direct impact on whether a consumer will consider entering into the buying cycle or wait for conditions to improve.

“Even when the consumer decides to proceed with a purchase, it is often at a lower price point, which places pressure on manufacturers and dealers and erodes their profit margins." says Reddy.

According to the report, the percentage of new and used vehicles being financed below R200,000 now stands at 37% – marginally up from last quarter’s 36% – and mostly consist of used cars.

"Thirty-nine percent of used vehicle sales during the period were for cars that were less than two years old, while 10% were for demo models. In the South African market, there is a significant price differential between new and used vehicles, so demo models and used vehicles less than two years old offer attractive alternatives to purchasing a new vehicle – especially as the baseline price of new vehicles now sits at the R200,000 to R300,000 band," adds Reddy.

After fuel prices surged to record highs in October 2018, consumers saw some relief in January 2019 when prices fell by more than R1 per litre.

Reddy explains, “Although further fuel price drops are expected, this is unlikely to have a significant impact on vehicle sales. Aside from the increase in VAT, a depreciating Rand and slow economic growth, consumers also face the looming prospect of electricity tariff increases as an embattled Eskom tries to recover.”

The latest figures from NAAMSA showed total new vehicle sales had declined by 1% year-on-year, although export sales have consistently recorded growth. The automotive industry is a substantial driver of the country's economy and contributes 7.7% to South Africa's annual GDP.

“Unless broader economic growth is stimulated, the automotive sector won't see a significant improvement in the near term,” continues Reddy.

“There are only so many levers manufacturers can use to stimulate market demand, including pricing, marketing incentives, trade-in assistance and tools such as residual value that can ease the pressure on consumers’ cash flow. However, measures such as residual value can add up over time and push consumers out of the buying cycle. At a dealer level, there are indications that the market is swinging toward used vehicles, which tend to have a larger margin than new vehicle sales. After-sales service is also a potential growth area for dealers and can ease the pressure from lower sales while the market recovers.”

Reasons for optimism

Despite the challenges currently facing the market, Reddy believes there is reason to be optimistic.

“The latest GDP figures show encouraging signs of an economic turnaround, which should translate into improved consumer confidence and better trading conditions. While new vehicle sales are likely to show flat or marginal growth in 2019, there is potential for improved growth in the used car market provided quality stock is available. Dealers will need to be cognisant of consumers that are struggling with constrained cash flow and indebtedness – offers will need to be tailored accordingly.”

Download the TransUnion Vehicle Pricing Index Report (PDF File. Size: 597KB)