Post-recession market more robust, but in search of demand driver – VW

20th February 2014

By: Irma Venter

Creamer Media Senior Deputy Editor

  

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

South Africans bought smaller, more affordable cars in 2013, and the trend was set to continue in 2014, especially as consumers experienced increasing pressure from higher interest rates, vehicle price increases, toll fees (in Gauteng) and rising fuel prices.

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

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

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

VWSA sold 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 expected a new car market of around 455 000 units this year, which was “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 believed, however, that South Africa’s new vehicle and vehicle production markets were 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 were “clearly more sustainable” in the current environment.

Powels said 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 down [as it did in 2009].”

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

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

This meant that VWSA had to consider bringing a vehicle to the local market in one of the segments in which it currently did 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, cautioned Powels, “we are not looking at something right now.”

The VWSA boss was equally convinced that South Africa’s manufacturing base was 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 had one producing the Ranger bakkie for here and abroad. Mercedes-Benz was also “much more aggressive”, while BMW was also expanding exports, adding to the volumes already produced by Volkswagen and Toyota.

This meant South Africa was 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,” said Powels.

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

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

One of these ingredients was a lack of a programme driving up the “demand side of the business”, said 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 said 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."

Edited by Creamer Media Reporter

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