Flat prospects

Mar­ket over­shot, ma­jor cor­rec­tion loom­ing

Finweek English Edition - - Cover - FRIK ELS

IT’S NOT DIF­FI­CULT to de­duce how things got so bad for the av­er­age car owner. Ac­cord­ing to a cal­cu­la­tion by Wes­Bank, look­ing at over­all mo­bil­ity costs, fac­tor­ing in in­sur­ance, in­ter­est, cap­i­tal, fuel and main­te­nance, the owner of a ve­hi­cle val­ued at R100 000 is pay­ing close to 44% more now than he was in 2004. Debt ver­sus dis­pos­able in­come has sim­ply be­come too oner­ous for most con­sumers (see graph). Con­sumers squeezed by in­ter­est rates and high fuel bills are des­per­ate to get rid of their ve­hi­cles. How­ever, thanks to low prices and high out­stand­ing debt, sim­ply trad­ing down is no longer an op­tion.

Bid­vest’s auto di­vi­sion McCarthy’s CEO Brand Pre­to­rius says it man­aged to in­crease used car sales vol­umes by just un­der 10% to 42 182 units in the year to end-June through ag­gres­sive trad­ing. How­ever, Pre­to­rius says af­ter the “mas­sive clean-up process” the com­pany un­der­took, the mar­ket might be re­turn­ing to one of dead­lock.

The record years for new car sales, static prices on new ve­hi­cles and South Africans’ pre­dis­po­si­tion to drive the latest and great- est, pushed the used ve­hi­cle mar­ket into a highly over­stocked po­si­tion. SA’s car park is roughly 7m ve­hi­cles. While new car prices have been steadily climb­ing along with in­fla­tion and are ex­pected to in­crease by 10% this year (see graph) it hasn’t yet helped the pre-owned mar­ket as much as ex­pected. New en­trants (par­tic­u­larly from China) sell­ing brand new ve­hi­cles at the same price as twoand three-year-old cars and bakkies from tra­di­tional play­ers have also played a role in keep­ing prices down.

McCarthy says the av­er­age new ve­hi­cle price in­creased by ap­prox­i­mately 22% – from R151 536 in 2003 to R184 560 in 2008. Used ve­hi­cle sell­ing prices only went up from R97 996 in 2003 to R102 452 this year – a 4,5% in­crease.

There are sim­ply too many cars avail­able: on top of the 6 000/month re­pos­ses­sions, fleets at SA’s rental car com­pa­nies num­ber 48 000 and those ve­hi­cles en­ter the used mar­ket ev­ery nine months. Deal­ers are also get­ting rid of demo mod­els ear­lier. “It’s quite likely that to­tal used ve­hi­cle sales (in­clud­ing private to private sales) will be dou­ble that of the new ve­hi­cle mar­ket this year,” says Pre­to­rius.

Wes­Bank’s latest ve­hi­cle sales con­fi­dence in­di­ca­tor shows the num­ber of deal­ers and other auto in­dus­try play­ers in­di­cat­ing the mar­ket as “highly ac­tive” as al­most non-ex­is­tent. The sur­vey is at its low­est level since

launch last year at 4,7 (out of 10). Gaug­ing con­di­tions 12 months out and con­fi­dence lev­els only rise to six.

How­ever, the num­ber doesn’t nec­es­sar­ily mean brighter con­di­tions next year. Says Wes­Bank’s De Kock: “That score al­ways fac­tors in a level of nat­u­ral op­ti­mism from the peo­ple in the in­dus­try. We aren’t ex­pect­ing the mar­ket to be in a sig­nif­i­cantly bet­ter sit­u­a­tion in a year’s time.” New pas­sen­ger car sales for the first six months of the year are down 19,2%. Of the roughly 1 700 new car deal­er­ships in SA, as many as 100 could close. Used car deal­er­ships num­ber roughly 1 000 but could be harder hit: vol­umes may be tick­ing up but mar­gins are tighter than ever.

Manny de Canha, CE of As­so­ci­ated Mo­tor Hold­ings, part of the Im­pe­rial Group, says the over­stocked po­si­tion of the mar­ket will con­tinue for some time. “The mar­ket can’t eas­ily digest 6 000 re­pos­ses­sions a month.”

The ra­tio of used ver­sus new cars sold will also fol­low in­ter­na­tional trends. From a 1:1 sit­u­a­tion in re­cent years it should move to above 2:1. In some coun­tries, such as Bri­tain, it’s 3:1. “The price in­creas­ing dif­fer­en­tial be­tween new and used car prices will help lift the used mar­ket – but that takes a while to fil­ter through. South Africans were spoilt in the past, when they could trade in a ve­hi­cle for the same price it was bought at two years be­fore. Once you drive out of the show­room you au­to­mat­i­cally lose 30% (in­clud­ing VAT at 14%).”

Says De Canha: “We over­shot the mar­ket. Ev­ery­one – man­u­fac­tur­ers, deal­ers, banks and car buy­ers – got car­ried away. Now we’re sim­ply re­turn­ing to nor­mal­ity.”

frike@fin­week.co.za

Over­stocked po­si­tion will con­tinue. Manny de Canha

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