Market overshot, major correction looming
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.”
Overstocked position will continue. Manny de Canha