Motor sector sees virus halving profit
• More than a third of firms say they will be lucky to break even in 2021
Most SA motor industry companies expect Covid-19’s economic effects to more than halve their 2020 budgeted earnings. More than a third say they will be lucky to break even by end-2021, though the rest hope to be there by midyear.
Most SA motor industry companies expect Covid-19’s economic effects to more than halve their 2020 budgeted earnings.
More than a third say they will be lucky to break even by end-2021, though the rest hope to be there by midyear. The findings are contained in a report published on Thursday by the Deloitte business consultancy.
The report, “The economic impact of Covid-19 on the automotive value chain”, is based on a survey of 127 companies in vehicle and components manufacture, vehicle importation and sales. The industry was already taking strain before Covid-19 struck. Two-thirds of companies had reported reduced earnings, and 57% were considering operational changes, including costsaving initiatives.
The survey in May, before most of the motor industry had reopened properly from lockdown, found that 83% of respondents had less than three months’ cash flow remaining.
Martyn Davies, head of Deloitte’s African automotive division, said it was too soon to assess Covid19’s effect on the industry.
In April, analysts suggested that up to 30% of small and medium companies could go out of business, with a similar proportion of jobs at risk.
“There will be significant fallout but trying to predict what it will be, even now, would be a stab in the dark,” Davies said on Thursday. “We still don’t understand the virus.”
Carmaker executives forecast recently that full-year newvehicle sales in 2020 would drop 20%-30% from 2019. Mike Mabasa, CEO of the National Association of Automobile Manufacturers of SA (Naamsa), said the decrease could be anywhere from 30% to 50%.
Some Deloitte respondents are more pessimistic: 24% think the fall will be up to 30%, 59% that it will be 30%-50%, 14% that it will be 51%-75% and 3% that it will be more than 75%.
The strain on resources is likely to delay plans for transforming the motor industry.
According to the report, companies put immediate business survival ahead of long-term sustainability. While broad-based BEE transformation was a priority across all sectors before Covid-19, the emphasis now is to “survive and generate cash flow in the immediate term”. This will probably be the primary focus for another 18 months.
“Given the financial pressure many companies are under, they are concentrating their resources on liquidity and the wellbeing of employees,” said Davies. “Under these circumstances, it’s not surprising that transformation is temporarily on the back burner.”
Vehicle manufacturers have already asked the government to delay introduction of the 20212035 SA automotive master plan while they wrestle with the economic chaos caused by Covid19. The plan (its launch may be postponed from January to July 2021) includes creation of a R6bn fund capitalised by local manufacturers of cars and bakkies to develop blackowned automotive companies, mainly components suppliers. The fund, which allows multinational vehicle makers to avoid selling shares in SA subsidiaries to black partners, may be swollen if foreign-owned truck and components companies win the right to remain intact.
Naamsa president and MD of BMW SA Tim Abbott said existing backers paid in a proportion of the capital, mainly for staffing and administration. “We need to get the fund up and running so it is ready to go live any time from January next year,” he said.
Motor dealers hope the Competition Commission will not rush to implement its plan to allow independent workshops and spare-parts providers to muscle in on the traditional territory of franchised new-vehicle dealers. The commission wants independents, mainly black, to have access to the aftersales service and repair of vehicles under manufacturer warranty.
Dealers say anything that undermines their already limited income will put many of them out of business.