There’s good news for those entering the new vehicle buying market this year, with price increases expected to be low and dealers offering a range of marketing incentives, from trade-in assistance to discounts on vehicles.
This is the view of Kriben Reddy, head of auto information solutions at TransUnion, which on Tuesday released its latest vehicle price index.
Mark Dommisse, chair of the National Automobile Dealers’ Association, says people in the entry level vehicle market are being offered very aggressive deals because of the mix of cars being bought and the reduction in the new vehicle market to about 536 000 units last year from about 550 000 in 2018
Dommisse says overall light commercial vehicle sales fell last month by a whopping 16.3% compared to sales in January last year, with dealer sales falling 15%.
This is “telling a tale” about consumer affordability in this segment, he says.
“That is quite scary, so I think we are going to be in for a tough ride but I do think the entry level segment in the market has a lot of volume to it and the manufacturers will all probably push volume in that direction by offering incentives like free insurance for a year and quite good bank finance deals. That is where the market uptick will probably come.”
Azar Jammine, chief economist at Econometrix, expects continued support of brands from manufacturers through marketing incentives.
He points to how “good deals” helped boost new vehicle sales in November and December last year – and how these sales fell away in January when these incentives were no longer available.
While Jammine says the new vehicle market will be under continuous pressure this year, he expects replacement demand to prevent it from collapsing. He anticipates total sales for the year to be slightly negative compared to 2019 at about -2% or -1%.
Reddy says the challenge facing this sector is that to get a customer into a new vehicle, you have to get them out of the old vehicle first.
He stresses that in many cases the very deal structures that are meant to stimulate the market, such as offering terms of up to 84 months on car finance, are having the opposite effect by taking customers out of the market for longer.
If you take a deal over 54 months, conventional wisdom is that you are going to be back in the market after 36 months – while over 84 months, you are taking that customer out of the market for another one to two years, he says.
Reddy adds that the used-to-new vehicle ratio has increased, rising from 2.03 used vehicles financed for every new vehicle in the fourth quarter of 2018 to 2.09 in the same quarter last year.
In the used vehicle market, more than 36% of vehicles are under two years old, with 6% of those being ex-demo models, he says.
“This indicates that consumers are opting for older vehicles as pressure on disposable income increases.”
He adds that the percentage of new and used cars being financed below R200 000, between R200 000 to R300 000 and over R300 000 has remained broadly consistent over the past seven quarters.
This means that after allowing for inflation, consumers are spending less on cars, and opting for less expensive entry level vehicles.
He says the average loan size in the fourth quarter of 2019 is similar to that of the second quarter of 2013, suggesting that consumer buying power has effectively remained flat, or fallen in real terms, for the past six years.
TransUnion’s vehicle price index shows that new vehicle price increases have remained below inflation for more than two years.
Reddy says despite this, the number of new vehicles financed in the fourth quarter of 2019, a key indicator of sales, fell by 1.6% compared to the same period a year ago while the number of used vehicles financed increased by 1.4%.
TransUnion reports that new vehicle pricing slowed to 2.9% in the fourth quarter from 3.3% in the third quarter, with used vehicle price inflation increasing to 1.2% from 1.1%.
Uncertainty not helping
Reddy says the stagnant new vehicle market reflects ongoing low consumer and business confidence, with continuing load shedding and pending decisions on South Africa’s investment rating having a clear impact on both growth prospects and market sentiment.
“In the face of these levels of uncertainty, constrained consumers are delaying vehicle purchasing decisions.
“The major issue facing the local automotive industry is the need for structural reform at a macroeconomic level.
“We need to see sustained positive economic growth to get the new car market moving, and the challenge is that in 2019 we weren’t there.
“The problem is that it is unlikely this situation will change in the short term, indicating that we may continue to battle for some years yet.”
Reddy says vehicle exports provide a bright spot by retaining jobs and keeping production lines going.