Is the end of the current sales growth cycle in sight for the South African motor industry?

Following a massive 25.9% drop in new-vehicle sales in 2009, compared with 2008, on the back of a global recession, the local market strengthened 24.7% in 2010, 16.1% in 2011 and 9% in 2012. Last year, growth slowed to 3.2%, to 650 620 units.

The National Association of Automobile Manufacturers of South Africa (Naamsa) expects only a modest uptick in new- vehicle sales for an “extremely challenging” 2014, at 652 000 units, owing largely to expected higher-than-inflation car price increases as the rand continues to fall against major currencies, and only marginal improvement in the South African economy.

Standard Bank vehicle and asset finance head Sydney Soundy says 2013 ended as the third-best year for domestic sales, with the baseline for growth in 2014, thus, fairly high.

He expects the market to grow 2% in 2014.

Factors inhibiting growth will include those stated by Naamsa, aided by the fact that the creditworthiness of South African consumers is not improving, with only 51.9% of credit-active consumers in good standing.

Also, the vehicle replace- ment cycle may be reaching its peak, with 2013 seemingly the end of the cycle, where consumers have been forced to replace their vehicles owing to age or mileage.

Soundy says even though the interest rate environment remains favourable for the financing of vehicles, this is likely to change with the upward movement of interest rates expected in the course of the year. Already the Reserve Bank pushed up the prime rate by 0.5% in January.

Factors that support growth include good demand in the used-car market – which bodes well for the new-car market as it enables trade-ins – as well as the fact that the South African vehicle market is a competitive one.

“South Africans are crazy about cars and manufacturers are pushing creative marketing and incentive programmes as they fight for market share,” says Soundy.

Econometrix director and chief economist Dr Azar Jammine expects further 0.5% rate hikes in March and May.

He says rising interest rates are bad news for the local automotive industry, as every 0.5% increase in the interest rate spells a 2% decline in vehicle sales.

He expects zero growth in new-vehicle sales in South Africa in 2014.

Credit Act to Bite?
WesBank research head Rudolf Mahoney says the asset financing company expects South Africa’s gross domestic product (GDP) growth to be around 2.6% for the year, with inflation to remain between 3% and 6%. The dollar:rand exchange rate is expected to average out the year at R10.50.

This is the most likely scenario for 2014, he notes.

Mahoney concurs with Soundy that the replacement cycle is over, which inhibits passenger car sales in 2014.

“Customers are also starting to hold onto their cars for longer as is evident from WesBank’s average deal duration, which is increasing.

“Car prices are also steadily increasing, considering WesBank’s average transaction value on new cars increased by 10% from December 2012 to December 2013.”

Mahoney also notes that consumer indebtedness remains a concern, especially as the flexibility allowed within the structure of the finance agreements, such as contract periods, balloon payments and so forth, is close to “reaching maximum levels”.

The National Credit Act (NCA) may also throw a spanner in consumers’ financial works.

Around 70% of passenger cars sold are financed through instalment credit finance, explains Mahoney.

“We are anticipating significant changes to the NCA, the effect of which will impact on our ability to extend credit to customers, and which may ultimately have a knock-on effect on the motor trade. There remains a lot of uncertainty,” he notes.

“The NCA came into force in 2007. It was slightly ambiguous with respect to the calculation of affordability and processes around reckless lending, as well as clearly defining the rights of both credit providers and consumers.

“The Act in its current format has not achieved its aim of reducing overindebtedness and National Credit Regulator statistics have shown a steady increase in people with credit- derogatory information on their bureau profiles. However, the global recession and subsequent fallout are also to blame.”

Mahoney says new NCA guidelines aim to give clearer direction and specifics around the calculation of living expenses in order to calculate afford- ability, as well as to define the rights of all parties pertaining to collections action when accounts fall into arrears.

It also introduces punitive measures for reckless lending practices.

This said, however, Mahoney is at least upbeat about the sales of trucks and bakkies in 2014.

Light commercial vehicles (LCVs) should see marginal growth of between 3% and 5%.

LCVs – and double-cabs, in particular – are subject to simi- lar financial parameters as passenger cars, says Mahoney.

“However, it has become clear that the corporate market is currently in a replacement cycle that should boost the sale of LCVs through single-cab workhorses.

“Heavier commercial vehicles should also benefit from the replacement cycle and I expect growth of between 5% and 10%.”

UD Trucks Southern Africa (UDTSA) corporate planning and marketing GM Rory Schulz expects the South African truck market to grow by 4.93% in 2014, compared with 2013. Truck sales reached 30 939 units in 2013, compared with 27 841 units in 2012 – an increase of 11.12%.

Growth of almost 5% should push the local truck market to 32 550 units in 2014.

Schulz says the challenges for 2014, possibly affecting truck sales in the local market, include the “huge upside risk” to inflation and the continued weakening of the rand against major currencies. This could, in turn, see truck prices, like car prices, move upwards at a rate higher than inflation.

Uncertainty around the forthcoming national elections could also influence investor confidence, having a ripple effect on the rand, added UDTSA MD Jacques Carelse.

Mahoney concurs that poli- tical uncertainty could upset the apple cart for new-vehicle sales, while disappointing GDP growth, another global meltdown, increasing interest rates (with talk of more rate hikes rife), a crashing currency, oil price shocks and signifi- cant labour unrest could do the same.

Naamsa president and Toyota South Africa Motors (TSAM) president and CEO Dr Johan van Zyl says the association will keep an eye on the labour sector following the split of the auto- motive industry’s biggest union, the National Union of Metalworkers of South Africa (Numsa) from its parent, the Congress of South African Trade Unions.

Numsa is threatening to abandon the trade union fede- ration and African National Congress partner in order to pursue its own political agenda.

“After some turmoil last year, we managed to successfully conclude our three-year wage negotiations. As an industry, we expect a reasonable level of stability this year,” says Van Zyl.

“We need absolute stability to ensure that we recover our image as a stable base for production and a reliable supplier of vehicles to the world market.”

Van Zyl adds that Toyota will do its best to maintain its South African market leadership in 2014 – for the thirty-fifth year.

Five Interesting Developments in the SA Market
One would expect a petrol price well above R13 would prompt an increase in the sale of hybrid vehicles, but 2013 proved this theory wrong.

Numbers from RGT Smart – the independent provider of new-vehicle sales, specification, pricing and export data to the Department of Trade and Industry and the South African automotive industry – show that local sales of hybrid and electric vehicles dropped by 28%, to 546 units, in 2013, compared with 2012, despite the availability of 31 models last year, compared with 25 in 2012.

Another interesting development is that the rich seem little affected by the current economic crunch. Sales of sport and exotic cars, such as the Porsche 911 and the Mercedes-Benz SLK, increased by 27% in South Africa in 2013, to 3 150 units, compared with 2012, while the local passenger car market grew a mere 1.8% in 2013, compared with 2012.

Other sectors showing the biggest growth were entry-level vehicles, up 11%, to 117 342 units, and sports utility vehicles, also up 11%, to 72 196 units.

A third number to note is that the best-selling vehicle in 2013 in South Africa was the Volkswagen Polo Vivo entry- level hatchback, made in Uitenhage, in the Eastern Cape, at 34 126 units, followed by the Durban-made Toyota Hilux bakkie, at 32 639 units.

More than a third of all cars, bakkies and trucks sold in South Africa in 2014, were sold in Gauteng, at 236 008 unit sales, followed by KwaZulu-Natal, with 84 284 units, and the Western Cape, at 73 018 units.

Another interesting development in the local market is that Mercedes-Benz South Africa (MBSA) will, in March, welcome its first South African-born CEO since the company became a wholly owned subsidiary of Daimler.

Arno van der Merwe will take over the reins at the local arm of the German auto giant when current CEO Dr Martin Zimmermann returns to Daimler’s Stuttgart offices as head of global services and parts for the Mercedes-Benz and smart brands.

Van der Merwe will retain his current role as manufacturing VP at the MBSA production plant, in addition to his responsibilities as CEO of the company.

He will join a growing club of South African CEOs of local manufacturing operations within multinational car companies, namely Mike Whitfield, of Nissan South Africa, TSAM’s Van Zyl, and Dave Powels, of Volkswagen Group South Africa.

Three Developments in the International Market
On the international front, the global automotive industry has experienced a seismic gender shift, with a woman now at the helm of one of the world’s biggest carmakers.

On January 15, Mary Barra (52) became the first female CEO of General Motors (GM) and also the first female to lead a global automotive company. She took over from Dan Akerson, who held the position since 2010. Barra joined GM more than three decades ago as a college intern and, prior to her appointment as CEO, served as global VP for product development.
The Wall Street Journal reported that GM was now the largest company by revenue to be run by a woman, with the group reporting sales of $152-billion last year.

In 2013, GM sold 9.7-million vehicles globally, up 4%, compared with 2012.

Appointing Barra is espe- cially interesting when con- sidering that women make 60% of car buying decisions in the US, and have an influential voice in 80% of the buying decisions.

A second shift that took place in the global market is that China has become the first country in the world where more than 20-million vehicles were sold in one year.

Total sales in China, the world’s largest new auto market, increased 14% in 2013, to 21.98-million units, with predictions of sales of more than 24-million vehicles in 2014.

Reports also show that local Chinese brands are losing market share to global brands such as GM, Volkswagen and Ford. Combined sales of local Chinese brands dropped 1.6% in 2013, to 40.3% of the overall market.

GM considers China its largest market, with sales of 3.16-million vehicles in 2013.

Another longer-term devel- opment to watch in 2014 and beyond is how three-dimensional (3D) printing – that much-hyped new manufacturing technology – will influence and direct the car industry.

About two years from now, the US’s Kor brothers, want to drive coast-to-coast in the Urbee 2, a car made mostly using 3D printing. In fact, more than 50% of the car will be 3D printed – typically everything one can see and touch on a car.

The Urbee 2 will be a three-wheeled car steered by the single rear wheel, and will weigh roughly 550 kg and reach speeds of up to 110 km/h.

The vehicle will be powered by a single-cylinder 7 hp engine, using either diesel or ethanol, and networked batteries driving two electric motors that produce the equivalent of 16 hp at peak output.

The chassis and framing will consist of chrome-moly steel tubing.

Three-dimensional printers can be as small as a microwave oven or as large as a minibus – although this metric is constantly changing, with researchers already punting printers able to produce houses.