SA consumers having to buy vehicles at lower price points

‘I think we’ll see EVs at the upper luxury level … [but] for the mass market [it’s] far too premature’: Dr Martyn Davies – Deloitte’s Africa auto sector leader.

ALISHIA SECKAM: Let’s get into some trend-spotting now and analyse some key trends identified by the Deloitte Global Automotive Consumer Study and how they’re likely to impact the South African marketplace.

[Dr] Martyn Davies, who is Deloitte’s Africa auto sector leader joins me for that conversation. Thanks so much, Martyn, for joining us bright and early this morning. Spotting trends matters so we can glean some perspective. We can gain some foresight on where things are headed. With interest rates rising and costs escalating front of mind for any consumer right now, where, oh, where is pricing heading? How much of an idea of that have you managed to get out of this study in particular?

Dr MARTYN DAVIES: Good morning, Alishia. Thank you for having me. Well, I think [for] the South African consumer, as Zak [Zak Calisto, CEO of Karooooo] was outlining in your previous conversation, it is skewed between inflation from below and taxation from above. So for the middle class under pressure of course, inflation is all-important. The recent trend continues – of very inflated pre-owned car prices. And also because of relatively what we’ve seen again in the last week or so, an undervalued, lesser valued rand pushing up prices on the import side of new vehicles.

So I think for the next year, perhaps, the story of 2022 (the mega changes), is largely inflation at the global level. So that’ll continue in the car sector [whether] pre-owned or new.

South African consumers of course will be under increased pressure when purchasing and maintaining and running vehicles.

ALISHIA SECKAM: So within that scenario where we’re looking at so many factors fuelling inflation, that big bugbear, and growth still very much temperamental if it is going to come through, how are OEMs (original equipment manufacturers) containing inflationary pressures on vehicle prices? Are they managing to pull those levers that are proving to be effective enough to incentivise some demand in a slow to no-growth economy?

Dr MARTYN DAVIES: It’s tough. Ultimately I think there are maybe a few factors to consider here. Firstly, of course, OEMs are providing should we say more software applications in vehicles. It’s no longer just about the hardware of the car, it’s about the software that is offered with it. That’s increasingly the trend.

I think the second factor is it’s not so much the OEM’s choice, it’s market driven.

So consumers are buying down. Typically it’s small hatchbacks and relatively small-to-medium-sized SUVs at the expense of the premium luxury brand.

I think those are the key issues to consider.

Thirdly, I think it’s ultimately – and this is where the interest-rate cycle turn will have a dramatic impact – that consumers are heavily leveraged, as you refer to. And what’s the capital cost of finance? Are our financial service providers providing innovative finance? Yes, as much as they can in a relatively high and a rising interest-rate environment. So [with] all of these factors together, I wouldn’t use the phrase ‘perfect storm’, but it just talks to a situation where South African consumers are having to purchase vehicles at lower price points, purely because of the state of the economy.

ALISHIA SECKAM: Martyn, are these cost parameters very much front and centre? Is it far-fetched, thinking about a South African consumer market that responds positively and quickly to the EV [electric vehicle] market – and let’s not forget power-supply constraints here that possibly add to the burden of venturing down this space anyway?

Dr MARTYN DAVIES: I think there’s a bit of an overreaction when it comes to the Eskom factor of power supply. For most people, if we were to drive EVs en masse, it wouldn’t be like a European type of scenario where people are trying to charge cars on on-street parking. Most people have parking in a garage at home or in a carport or wherever it may be. It would be quite easy to charge the vehicle even with a two, two-and-a-half hour or whatever it may be load-shedding situation.

The real challenge here is first the lack of product, and of course pricing. The average new-car price in South Africa is roughly around R360 000 or R370 000.

The entry-level price for an EV is approaching R600 000. So it’s significantly above the price point where it needs to be.

And we may see some new OEMs entering the market, not from a manufacturing perspective but selling EVs in the local marketplace at a lower price point. At the moment – you mentioned Deloitte’s Global Automotive Consumer [Study] – we found that South Africa is countering the trend in a very bad way – when we stood out as 84% of South African consumers still wanting to buy an internal combustion engine. That’s the highest in the world across the 26 countries we surveyed. That compares to South Korea at 37%.

So there’s this very strong dependence on an internal combustion engine. Only 2% of South African consumers actually wanted to buy an EV for their next vehicle. This is what we’ve just found. So, will it be regulatory driven? I think the government needs to incentivise, of course, or [it needs to be] consumer driven. At the moment it’s not consumer driven. I think we’ll see EVs at the upper luxury level come into play and perhaps for intra-urban logistics current companies. But for the mass market [it’s] far too premature.

ALISHIA SECKAM: Yeah. Well, we’ll wait and see how this all plays itself out. It’s an interesting playing field.

Let’s leave it there, Martyn. Thanks so much for having joined us this morning. That of course was [Dr] Martyn Davies, who is Deloitte’s Africa’s auto sector leader.

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