There has been a clear buying-down trend in the South African new-car market over the last four to five years, says Volkswagen Group South Africa (VWSA) MD David Powels.

South Africans bought smaller, more affordable cars in 2013, and the trend is set to continue this year, especially as consumers experience increasing pressure from higher interest rates, vehicle price increases, toll fees (in Gauteng) and rising fuel prices.

There is also growing competition in this more affordable segment of the market, which creates more consumer choice and, subsequently, increasing interest in this segment of the new-car market.

Powels says the buying-down trend is not unique to South Africa, and that the same trend is evident in Europe, for example.

He notes, however, that the trend “is not great for car companies”, as small cars brought small profits, and bigger cars bigger profits.

VWSA sells the locally made Polo, one of VW’s small car offerings, and the entry-level Polo Vivo in South Africa.

The Polo Vivo topped local passenger car sale charts last year at 34 126 units, with the Polo second at 26 402 units.

VWSA was its German parent company’s twelfth-biggest market by volume, with 81 835 units sold in 2013.

Powels expects a new-car market of around 455 000 units this year, which is “still bullish”, compared with some other, slightly more negative forecasts.

South Africa sold 450 561 passenger cars in 2013 – the second highest in the country’s history.

The last time sales were around this level, the market collapsed rather spectacularly from 481 558 cars sold in 2006 to 258 129 new passenger cars sold in 2009.

Powels believes, however, that South Africa’s new vehicle and vehicle production markets are in a much better space than in 2008 and 2009, when the global recession took its toll.

Yearly sales of 450 000 passenger cars a year are “clearly more sustainable” in the current environment.

Powels says the 2006 market had little to no credit regulations, which led to unsustainable lending practices, while the market had also seen no price increases for several years, putting the automotive business model under pressure.

“We really believe that the current market of 450 000 units provides a far more robust platform. This is not to say it can’t go down 5% or 10%, but it shouldn’t tumble [as it did in 2009].”

Powels says the local automotive industry can ill afford a cycle that “goes up too fast and down too fast. It is bad for the entire value chain”.

The buying-down trend is set to continue, however.

This means that VWSA has to consider bringing a vehicle to the local market in one of the segments in which it currently does not compete – the micro entry-level car.

“We need to get into the bottom end of the market, but the question is making it work financially.”

However, cautions Powels, “We are not looking at something right now.”

The VWSA boss is equally convinced that South Africa’s manufacturing base is in a much better position than in the period prior to the global economic recession.

In 2006, Ford Motor Company of Southern Africa “had no aggressive export programme”, but currently has one producing the Ranger bakkie for the local and overseas markets. Mercedes-Benz is also “much more aggressive”, while BMW is also expanding exports, adding to the volumes already produced by Volkswagen and Toyota.

This means South Africa is a more diversified export base, exporting more vehicles.

“This means we are in a much better space now than in 2008 before the market crashed,” says Powels.

However, that said, achieving government’s and the automotive industry’s target of building and selling 1.2-million new vehicles a year in South Africa remains elusive.

“Some ingredients to bake that cake are still missing.”

One of these ingredients is a lack of a programme driving up the “demand side of the business”, says Powels.

“Have we really put our minds to finding ways to increase the affordability of new cars? The accumulative taxes on some new vehicles run up to 40%.”

Powels says the market is unlikely to grow through brand competition or a surge in new first-time buyers alone.

“We need to find a model where everyone wins. Where the aggregate revenue increases for everyone, government included. We are not saying it will be easy, but we need to find an innovative way to grow demand.”