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Despite Covid-19 hazard, auto industry hopeful of 2021 sales recovery

5th February 2021

By: Irma Venter

Creamer Media Senior Deputy Editor

     

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This year should see the South African automotive industry claw back some of the losses experienced in 2020, despite the second wave of Covid-19 raging across the globe.

Market commentators believe the 2021 South African new-car market should improve on last year, and that the used-car market will be able to retain its buoyancy this year.

Also, new-vehicle exports should witness some growth, while the potential tide of job losses at retail level has been stemmed.

Travel to and from work, and for recreation and business purposes, has also settled into a more predictable pattern, allowing dealerships, rental companies and service centres more certainty on the volume of work they may expect.

Some uncertainty remains, however, especially if the pandemic spreads unabated, further hurting an already crippled domestic economy.

New-Vehicle Sales
New-vehicle sales dropped by 29.1% in 2020, to 380 449 units – a level last seen 20 years ago, says National Association of Automobile Manufacturers of South Africa (Naamsa) CEO Mikel Mabasa.

At this stage, Naamsa anticipates sales to grow by 15% in 2021, to 438 000 units.

“We believe 2021 will be a much better year than 2020, as we are working from a low base in 2020,” says Mabasa.

He says the general South African economy serves as a leading indicator for new-vehicle sales and, with the domestic economy showing signs of recovery under Alert Level 3, there is an expectation that new-vehicle sales will follow suit.

“We are also encouraged by the fact that vehicle rental companies are returning to the market, following large-scale defleeting last year, owing to travel bans and airport and border closures,” he notes.

The roll-out of a vaccine will also see some normality return to the South African economy, even though Mabasa questions whether people will return for a second jab, as required by some vaccine regimes.

“The reality is that buying a vehicle is the second-biggest investment for many South Africans after buying a house,” says Mabasa.

“We have seen people postpone the decision to buy a car in 2020, instead extending their service and motor plans to keep their vehicles longer. We don’t want to see the same trend in 2021. We want people to return to the market.”

National Automobile Dealers’ Association (NADA) chairperson Mark Dommisse describes the hard lockdown at the start of the Covid-19 pandemic in South Africa in April as a “dire situation”.

“But, from June onwards, franchise dealers pulled out all the stops as we entered Alert Level 3. They went from survival mode to ultimately recovering their financial positions strongly.

“While financial performance since lockdown has been better than expected, dealers have emerged from some tough trading conditions for about three months last year to become a lot leaner and [more] efficient – much to their surprise, perhaps.”

Dommisse says the last months of 2020 brought some stability to the market, with government and rental companies expanding their fleets again.

“Low interest rates also helped a lot, with banks also playing their part in providing relief to cash-strapped customers. In fact, government and the banks played a huge role in creating a stable car market over the last few months.

“Despite this, you do get the sense that the industry, the economy and South Africa are permanently on a knife edge, even now in 2021,” he adds. “There are global forces at play over which we have no control, such as the riots in the US, which had a domino effect on the rand.

“Despite this, I do believe that we are in a better position than in 2020, with a market stronger than anyone perhaps expected.

“I think getting to 450 000 units this year would be a tremendous result.”

Dommisse is equally positive that dealerships may see a return to some form of normality in terms of vehicle servicing and parts sales.

“Services and parts sales make up 50% of a dealership’s income.

“Continuous lockdowns meant less commuting, which meant a sharp decline in vehicle services. Fewer kilometres on the road also meant fewer accidents, which had a massive impact on the panel industry.

“We saw some return to normality in September and October, with pre-holiday services close to normal.”

Dommisse says NADA did not witness a revolution in terms of online car shopping last year.

“People wanted to come out of their houses to a safe environment and dealerships proved to be that environment.

“We found that consumers did what they have always done – they did their research online and then came to the dealership to see the car for themselves.”

WesBank CEO Chris de Kock says it is “hard to see” how the 2021 new-vehicle market could be lower than the 2020 market.

“However, given that there is still so much uncertainty about how Covid-19 is going to impact the economy, especially in the first half of 2021, I expect new-car sales to remain under pressure as a result of subdued demand from both the retail and corporate sectors, as well as government.”

He adds that the new-car market has seen steady volumes in the entry-level and cost-conscious segments at the expense of the premium end of the market.

“We see no economic evidence to suggest that this will change significantly this year.”

De Kock notes that the top end of the market is typically not impacted on by changes in economic factors, as can be seen by the performance of brands such as Porsche.

“However, the level below this has been under constant pressure for the past five years and will likely remain so. Customers who typically shop in this segment have been negatively impacted by the weak performance of the local equity market, the lack of growth in property assets and the low earnings on variable remuneration (shares and performance bonus payments).”

Market Uncertainties
Dommisse believes there remains a number of variables that could still upset the apple cart in 2021.

“Last year was absolutely frightening – this year we feel as if we are on a permanent knife edge. It seems as if government has created a stable lockdown management system, but what will happen if the death and infection rates go up?

“That could be a major challenge and I don’t know how government will react.
“Will we get a stricter lockdown?”

The hospitality, tourism and liquor industries are also under severe pressure, Dommise adds, which means that their contribution to the fiscus remains diminished – which doesn’t bode well for the February Budget.

“This is especially true of the liquor industry, which normally contributes significantly to South Africa’s revenue.”

Also, the rand is currently extremely volatile, making long-term planning quite difficult.

Naamsa’s Mabasa does not see South Africa returning to a hard lockdown equal to Alert Level 5 last year.

“We cannot afford another hard lockdown. We’ll maybe go to Level 4 if the situation doesn’t improve, but I don’t think we’ll have another shutdown.

“The auto industry can still operate under Level 4, even if with a reduced number of staff.”

Looking ahead, Dommisse says a successful dealership principal this year will be one doing his or her business planning around the worst-case to the medium-case scenario.

“Take the last six months of 2020 and do your business planning around that period. Don’t bet the house that the economy is going to come roaring back – be cautious.”

Dommisse adds that the Covid-19 pandemic saw six amalgamations between dealerships from April 1 to September 30, as well as the sale of 19 others and the closure of a further 38.

According to statistics from the Motor Industry Bargaining Council, 16 183 jobs were lost in the entire South African auto retail aftermarket from March 1 to September 30 – not just dealerships.

Dommisse notes that some of these jobs have, however, returned to the market, with the number not as bad as originally anticipated.

Used-Car Market and Aftersales Service
While De Kock is not too optimistic about the new-car market, he is more positive about the used-car market.

“The used-car market has been exceptionally strong in the last six months, driven by customers seeking to downscale their vehicle-related costs,” he notes.

“I expect the used-car market to remain buoyant as consumers continue to seek to lower their vehicle-related expenses.”

Dommisse says most dealers are short on used-car stock.

“Demand is strong and there seems to be an undersupply of used cars. We expect the used-car market to remain buoyant this year, with dealers facing the challenge of finding stock to feed this demand.
“The big win of 2020 was definitely the recovery of the used-car market.”

Price Increases
De Kock has some good news for consumers in terms of new-car price increases.

New-car price increases were high last year, especially in the second and third quarters, as the rand weakened substantially, he notes.

“Given the better performance of the currency in the last quarter, I expect vehicle prices to remain at current levels, or, in fact, to see better value being offered by manufacturers – mostly in the form of larger purchasing incentives.”

De Kock doesn’t, however, expect the South African Reserve Bank to provide consumers with much joy in terms of further interest rate cuts.

“Interest rates are already at historic lows. I don’t anticipate more than perhaps another 25-basis-point decrease, which will make little difference in the market.”

De Kock adds that WesBank is seeing a normalisation in payment behaviour, following a period where many consumers struggled to make their monthly payments.

“Covid-19 created a lot of stress for a number of our customers who either lost or earned a reduced income during the lockdown period.

“The relief measures offered to these customers helped them navigate through the worst of this time, and we are now seeing a return to normal payment behaviour in our books.”

De Kock notes that WesBank took the initiative to tighten its lending criteria late in 2018, as it anticipated tough economic cycles for both 2019 and 2020.

“We are now well positioned to become more aggressive in terms of approval limits, depending on how the economy fares in the next few months.”

Exports and Brexit
Naamsa believes that vehicle export numbers from South Africa should also improve this year.

New-vehicle exports from South Africa contracted by 29.8% in 2020, to 271 819 units.

Mabasa says vehicle exports could gain around 20% in 2021.

This will, however, be influenced by the economic conditions and Covid-19-related lockdowns in overseas markets.

Mabasa is positive that South African new-vehicle exports to the UK – South Africa’s biggest export market – will continue without a hitch following Brexit on January 1.

“South Africa had been able to negotiate with both the UK and the European Union to make sure that we can continue our exports under much the same conditions as before.

“Having looked at the terms and conditions, we are comfortable that there is nothing that will affect us too adversely. There will be some tweaks, yes, but we can work with that.

“We are comfortable that we can maintain our levels of exports and imports to and from the UK.”

There is, however, a sense of unease within the auto industry and government about the implications of a decision by the UK to bring forward an earlier proposed ban on the sale of new cars powered purely by either petrol or diesel from 2040 to 2030.

This is very much in line with similar decisions by some other European countries as they work towards a lower-emissions environment.

More than 60% of South Africa’s vehicle exports go to Europe, says Mabasa, with South Africa not currently producing any electric vehicles (EVs), and with hybrid production limited to one or two brands.

Should this production situation continue, the worst-case scenario is that South Africa could see the value of vehicle and component exports to Europe drop from R201.7-billion in 2019, to R150-billion in 2030, and to R40.3-billion in 2040, says Mabasa. (No inflation and exchange rate increases were taken into consideration for these estimates.)

This could also see the automotive industry’s contribution to South Africa’s gross domestic product decline from 6.9% in 2019, to 4.6% in 2040.

Further, employment in the vehicle and component manufacturing industry could drop from 110 250 people, to 53 802 people.

This means government needs to find and develop some support mechanism for the global move to EV production, as well as for increased domestic EV sales, says Mabasa.

New APDP
This year, vehicle manufacturers will operate under a revamped Automotive Production and Development Programme (APDP), which will come into effect on July 1, six months after the proposed starting date of January 1.

Mabasa says the changes are largely administrative, but notes that there is more of a focus on empowerment and localisation in APDP 2, compared with the first iteration of government’s support programme for the local auto industry.

He says the delay in implementation follows a delay in finalising some support mechanisms at the South African Revenue Service.

“Also, vehicle and component manufacturers would base their claims under the APDP on production in the past two consecutive quarters. However, Covid-19 wreaked havoc with these numbers.

“If we started on January 1, all claims would have been based on quarters three and four of 2020, which would have provided a heavily skewed picture.”

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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