BEHIND THE PRICE-TAG
Are we paying too much for cars in SA?
New cars are too expensive” is a sentiment you are likely to hear whenever pricing for a latest model is announced in SA.
A March 1994 edition of Top Car magazine listed the cheapest Volkswagen, a Citi 1.3 Shuttle, at R35,032.
According to an online inflation calculator, this is equivalent to about R239,346 in 2022. The least expensive offering sold by the German carmaker today is the Polo Vivo, priced from R235,200 (1.4 Trendline).
This means a basic instalment of R5,091.96 over 60 months at a 10% interest rate. For reference, a recent index by Bankserv Africa revealed that the average nominal take-home pay received by South Africans is R15,542.
What goes into the pricing of a new car?
Representatives of Toyota, local sales leader by volume, explained that the considerations behind new vehicle prices are varied.
“Fundamental factors include exchange rates, inflation, shipping costs – which have increased dramatically of late – commodity prices and taxes,” the firm said.
“Import costs amount to 50%, and then we would have ad valorem [a luxury excise tax according to value], VAT and customs duty. The cost of shipping has particularly been a challenge for the sector in the aftermath on the pandemic.”
“We have been experiencing shipping delays for both imported and local parts, there has been congestion at both global and local ports – including the Durban Port.
“Due to these factors, shipping and air freight costs escalated, air freight space has to be used more frequently, so not only is volume affected but pricing is now also impacted.”
The impact of lockdowns and restricted supply in source markets were additional factors cited, during a discussion with Audi. “It is important to note that pricing decisions go far beyond only determining a retail price,” the premium carmaker said.
“The product offering, perceived customer benefits and value for money are considered as well as the total cost of ownership such as residual values, finance schemes, service and maintenance, consumption, insurance and affordability on a monthly basis, incurred by the owner.”
Dealer mark-ups
Anyone browsing for a new vehicle will have identified the difference between a recommended retail price and the price a vehicle is advertised on the dealership floor.
Take the Corolla Cross, for example, which has a from-price of R360,400 (1.8 Xi) according to the Toyota website. Seek out an online classifieds portal and you may see a different story. For example, we found a 1.8 Xi model from a Toyota dealer, with mere delivery mileage (10km); listed for R424,900.
“In line with [local] law and competitions commission requirements, Toyota may only publish recommended selling prices and may not dictate or enforce prices, however, we encourage our dealers to trade fairly at all times,” the manufacturer told us.
Audi put forward a similar perspective: “[The company] does not prescribe retail pricing to our dealers, who are separate legal entities, but recommends the maximum retail price.
“This is permitted by the Competition Act.” The manufacturer said it is entitled to challenge dealers which sell vehicles at a price higher than the maximum recommended retail price.
Burden on consumers
Mikel Mabasa, CEO of the National Association of Automobile Manufacturers of SA (Naamsa), agrees that the tax burden on consumers relating to vehicles is high, impacting pricing and affordability.
He indicated an average of R85,694 is generated from taxes and levies on each vehicle sold in SA.
“As much as 42% of the price of a premium vehicle consists of taxes which go straight to the fiscus and which are outside of the control of the motor industry,” Mabasa said. So who ultimately benefits from these taxes and duties?
“The taxes paid on vehicles go to the fiscus as part of government’s generation of taxes to comply with its obligations to deliver public goods and services. It should be noted that the purpose of the tariff structure under the automotive production development programme (APDP) is to incentivise the industry for its investment and localisation activities in exchange for the duty rebate mechanisms, and not to generate revenue,” he said.
“Naamsa duly recognises the current fiscal constraints of government but also recognises that even a small tax concession on vehicles would result in improved vehicle affordability and subsequently higher new vehicle sales which would ultimately benefit government via increased taxes on more vehicles sold.
“Discussions are ongoing with government to support higher new vehicle sales through tax concessions, which would be of mutual benefit to the industry as well as government.”
According to the organisation, the trading environment in SA is extremely competitive compared to global standards. In 2021 there were no less than 43 passenger car brands and 3,077 model derivatives, the greatest selection of market-size ratio found globally, confirmed by Naamsa.
The department of trade, industry and commerce (DTIC) had not responded to our queries, including an inquiry about the benefit of emissions taxes, by the time of publication.
Buying-down trend to continue
Dr. Martyn Davies, automotive industry leader and managing director of emerging markets at Deloitte, said he was staggered by current prices for new and pre-owned vehicles. Davies spoke to us soon after his firm released its annual Global Automotive Consumer Study, which surveys 1,000 consumers across 26 countries.
He forecast that supply chain disruptions would continue in 2022, while conflict in Ukraine and Russia would exacerbate trading conditions in the local motor industry. Adding rising interest rates to the equation, Davies said that consumers are going to balk at unsustainably high prices.
“South Africans are moving down the curve because of stagnant growth, structural decline and incomes not keeping pace with inflation, the middle-class squeeze between inflation and taxation results in the purchasing of cheaper vehicles,” he said.
“R800,000 for a Golf GTI? It’s crazy. The new Polo GTI, R600,000-plus! What you’ll find, is that they’ll still sell, just in lesser volumes.”
According to Davies, there will be an increasing erosion of market share among premium and luxury brands. He also cited Chinese automakers as ones to watch closely, referencing brands like Haval and Chery.
“The Chinese products are a real sweet spot, offering typically small to medium sport-utility vehicles at a price point lower
than the traditional competition.”
The pre-owned market
The National Automobile Dealers’ Association (Nada) said that it was unfair to say that pre-owned retailers have been taking advantage of pandemic-related stock supply shortages, in their pricing mark-ups since March 2020.
“Stock is currently extremely limited and used cars are costing more to source now than ever before,” read a statement from the organisation, responding to our list of questions.
Regarding the practice of “on the road” fees; Nada said that dealers are permitted to charge for licensing and registration, initial fuelling and delivery costs. It added that licensing costs are different in every municipal district and claimed that the cost of delivery is determined by the circumstances of each client.
“For example, it is cheaper to prepare a vehicle and deliver the unit to the customer at the dealership, than it is to place the car on a carrier and deliver it 500km away.”
In 2017 the National Credit Regulator (NCR) ordered Volkswagen Financial Services and BMW Financial Services to refund buyers “on the road fees” that were said to be illegally charged to credit agreements.
Nada clarified that “Volkswagen Financial Services and other matters were directed at lenders financing items without being able to show what these were exactly for and whether they aligned to the NCA, it was not directed at dealers.”
Volkswagen appealed the matter before the National Consumer Tribunal (NCT), which upheld the order of the NCR.
The company lodged an appeal to the High Court in Pretoria. “The appeal has suspended the order of the National Consumer Tribunal and therefore VWFS SA will proceed with business as usual pending the outcome of the appeal, set down for hearing on the 26 October 2022,” it said.
Trade and retail values
Consumer credit reporting agency TransUnion publishes an Auto Dealers’ Guide, widely regarded as the authority when it comes to second-hand car pricing in SA. The book outlines trade and retail values – the former being what a dealer would pay a customer for the vehicle, the latter being what it would sell for.
“While dealers tend to use this data as a guide, banks and insurers tend to lean heavily on these values to determine financing and insurance risk,” said Kriben Reddy, head of TransUnion Auto Africa.
Any consumer who has tried to get the best trade-in on their vehicle, or buyer seeking the best deal would be justified in wondering why there is often a significant difference between the retail book value and the amount the car is actually listed at, on a dealer floor.
“Establishing a fair price for a used car has never been an exact science, as no two used vehicles are the same,” Reddy said.
“A used vehicle’s price has traditionally been determined by a range of factors, including make, model, mileage, the condition of the car, and the demand for it in the market.
“Motor vehicle dealers purchase vehicles based on all these factors, as well as stock holding and demand. These factors contribute to the price the dealer gets for the vehicle on the showroom floor, which can be higher or lower than the dealer guide.”
Nada added that reconditioning costs, depending on age and mileage of vehicles, were also taken to account. “The lack of used vehicle stock in the market, as is currently the case, leads to higher prices being paid for vehicles,” it said.