Nicholas Nkosi, Head of Vehicle and Asset Finance – Retail Banking at Standard Bank, believes that the automotive industry in South Africa is a resilient sector that today is in a better position than ever before to weather the cyclical downturns that have always been a part of life in this exciting sector. Part of the reason, he says, is that the local industry has the export market to lean on when times get tough. Here he shares his thoughts on this topic and the market, past, present and future.
For many in the vehicle, original equipment manufacturing and allied automotive fields, 2015 will be the year in which the golden days of car sales ended. Their view will be bolstered by the fact that several years of low, stable interest rates and car prices that rose lower than the ruling inflation rate came to an abrupt end. An era of affordable cars was replaced by a business environment in which the price of new cars exceeded the inflation rate. Adding pain was the rand, which tested new lows against major currencies and interest rates that began a slow climb upwards. All these negative factors were reflected in new vehicle sales which began to drop significantly as the year progressed.
For veterans of the industry, this scenario is really nothing new. They accept that the vehicles market in South Africa has for many years been a barometer of economic activity-as such, it has usually been one of the first to be impacted on when there is a downturn in the economy. Like those veterans who have seen it all, I believe that we are again experiencing a temporary downturn whose longevity will be decided by factors that are beyond our control. More importantly though, I join them in the view that the industry is currently occupying a better space than it ever has before.
The reason is that diversification within the sector now helps ‘tip the scales’ in a positive way, compensating for a reduction in sales volumes in one area through increased activity in another. For example, in July last year, domestic car sales declined by 6.1%, dropping to 54 112 units compared to July 2014. This followed a decrease of 8.8% in June sales (36 506 units) against comparable 2014 figures. Sales have increased in the rental market where one in six new cars is destined for fleets across the country.
However, figures released by the Department of Transport show that exports of locally assembled cars have moved counter-cyclically. Sales have risen steadily and, despite depressed economic conditions prevailing in major markets serviced by our exports, it looks as though this trend will continue. By the end of June 2015, the local assembly industry had sold 28 291 units to markets abroad. The significance of this blandly stated number is that it represents a very respectable increase of 24.4% in sales since June 2014.
Our export activities have become so much part of day-to-day business that we forget that much has changed in South Africa over the years. We have come a long way since the days when a handful of manufacturers in South Africa provided a limited numbers of models to motorists. The time when local content was a primary objective of our industry and content was decided by a vehicle’s weight – leading to South African cars probably having the heaviest bonnets in the world – have mercifully gone forever. In their place has arisen a dynamic industry that has literally become a world stage for manufacturers from across the world.
Yes, the price of cars has increased; yes, sales are dropping and yes, there will be challenges ahead as the industry faces down what could be a long downturn. But, on the positive side for motorists, competition for market share has seen the arrival of some of the world’s most desirable new models. Jostling for market share has meant that dealers have become increasingly imaginative with offers. To a degree, this has negated the impact created by the rise in interest rates and kept local motorists buying new vehicles.
A diverse marketplace and plethora of manufacturers will ensure that buyers are spoilt for choice. Undoubtedly, the key to sales growth will lie in value for money and offerings that grab the imagination of drivers. In this regard, there have been several highlights during 2015 that point the way forward for markets.
In the competitive small car segment a new niche has been carved for the arrival of budget models. It offers people buying a car for the first time the chance to acquire a brand new vehicle, rather than having to settle for a pre-owned model. To date, these models sell well considering that they are selling in a very crowded market space where their chances of success are limited.
Niche manufacturers, especially those from Asia, have maintained a presence in South Africa. They are determined to increase sales locally by demonstrating that their vehicles don’t need to take a back seat to anyone when it comes to styling. Increasing quality of their offerings is also high on the agenda. Combining price, eye-appeal and quality will make these manufacturers the people to watch in the future as people look for purpose-built vehicles that offer real value.
For importers of vehicles that have price tags of more than R 1 000 000 and can just be admired from afar by most of us, the market will remain healthy as the well-heeled continue to pull out their chequebooks so that they can enjoy the exclusivity offered by majestic British, or sleekly styled Italian and continental offerings. Having just said that, price will be a deciding factor for many looking for a new car, it is worth reminding ourselves that another vehicles market truth emerged during 2015. Rather than price, this trend has demonstrated that other factors can decide destinies when it comes to sales.
This truth also recognises that in a sector as challenging as the vehicles market, nothing can be taken for granted. In particular, the lesson is that when times are tough, consumers are more likely to put their money behind something that is fresh and leave old loyalties behind them. They will even turn away from vehicles with iconic names and proven capabilities to try something that promises new levels of motoring excitement. I refer here to the high-end of the leisure vehicle market. Double-cabs and 4 x 4’s have always been rated for their functionality and prowess off-road rather than styling. During 2015, however, this sector where tradition and loyalty were bywords saw a new challenger emerging to upset the status quo. It had all the regulation toughness, but unseated the reigning sales champion because of its rugged good looks.
At the other end of the market, bakkie wars have raged with motorists seeking out car-like comfort and styling as selling points when selecting one manufacturer and one model above another.
There will always be a demand for new cars and South Africa, like other countries in Africa, will be looking to first-time buyers to bolster sales in various categories. Predictions are that smaller cars will grab an increasingly larger slice of the cake with hatches and sedans dominating sales. When looking at increasingly congested city streets, the prevalence of toll roads and expanding public transport, this appears to be a foregone conclusion.
Working with the industry to meet new realities will be financial institutions that will be instrumental in providing the finance for purchases. For these institutions interpreting and introducing new legislation and making sure that loans meet ever-increasing regulatory demands will be vital. No review of South African manufacturing would be complete without a reference to Africa’s financial renaissance and the prospects for our local car industry to take advantage of the burgeoning middle class that is rising across the continent. Presently, although there are more people with discretionary income in Africa than at any time in the continent’s history, much will depend on the establishment of an infrastructure that offers better roads and ease of trade across borders.
There is no doubt that the prosperity and future of South African manufacturers is tied to the continent. We have the infrastructure, capacity, sophisticated facilities, export experience and skills to serve the rest of Africa. If we are to meet the target of producing 1 000 000 vehicles locally as proposed by the Automotive Production and Development Incentive Programme, a presence in the rest of Africa is a prerequisite.
Already a South African manufacturer is cooperating with a group in Nigeria to produce utility vehicles. Their lead will undoubtedly be followed by others and a new chapter will be opened in South Africa’s illustrious automotive history.