The almost 30% year-on-year plummet in new vehicle sales in March is a harbinger of still worse to come, with economists and vehicle dealership group chief executives predicting further sales slumps of anything between 10% and 70% in the months ahead.
Most expect new vehicle sales for April to largely comprise sales that were in progress but not yet finalised because the number of trading days in March was slashed by the Covid-19 lockdown.
In addition, the severe deterioration in the value of the rand following the announcement of the lockdown and the subsequent credit rating agency downgrades is expected to result in new vehicle price hikes – further exacerbating the slump in sales and the plight of vehicle dealerships.
JSE-listed Combined Motor Holdings (CMH) chief executive Jebb McIntosh says it’s difficult to make a new vehicle sales prediction when there is uncertainty that the lockdown will be lifted on April 17 and they can return to work.
“I think sales will be very low [in April]. Probably about 70% lower,” says McIntosh.
“It will be months rather than weeks before we get back to a reasonable level of sales. Unfortunately there will be casualties in the industry because of cash flow difficulties. It’s going to be a difficult couple of months. I think total industry sales will probably be 50 000 or 10% less this year than last year.”
The new vehicle sales slump will negatively impact the cash flow, profitability and financial performance of vehicle dealerships.
Aftermarket activity will help
McIntosh says CMH will manage this as best it can, adding that he believes the workshop, parts and used-car sides of the business will to an extent hold up reasonably.
“The main impact will be on the new car side, where decreased volumes will decrease profitability levels. It’s just to what extent we can balance it out.
“It’s the most difficult time I’ve been through and I’ve been around [in this industry] for 40 years,” he says.
Osman Arbee, CEO of JSE-listed automotive group Motus, which was unbundled in 2018 from Imperial Holdings, anticipates new vehicle sales to slump by about 25% this year to 400 000 to 420 000 vehicles from the 536 000 sales achieved last year.
Arbee says there will be hardly any car rental company sales this year because international visitors will not be coming to SA as they might still be in lockdowns and will have less disposable income.
No quick fix
“If we get to 410 000 to 420 000 new vehicles sales this year we will be lucky. I think the next 12 months is history because we will just be in survival mode. There’s no quick fix or silver bullet.”
Arbee says original equipment manufacturers (OEMs) generally do not want their dealers to fail and will come up with various ways to support them.
But he stresses that this support will be insufficient to make a loss situation profitable and will only make the situation “more bearable”.
Arbee believes there might be some downsizing in dealerships, but this will not be material because the bulk of the downsizing occurred during the 2008 global financial crisis.
“The big groups will see it through. The smaller groups will cut their cloth accordingly, cut their staff and get what assistance they can from OEMs.”
Arbee says Motus will be partially insulated from the impact of the new vehicle sales slump because of its integrated business model, with the group having a vehicle importing and distribution business, a vehicle financial services business, an aftermarket parts business and a vehicle dealerships business.
Ships diverted, factories closed
Brad Kaftel, MD of the Hatfield Motor Group, a dominant independent dealer of Volkswagen and Audi products, says it is a difficult time after an outstanding level of demand for new vehicles in the first two weeks of March.
Kaftel says it’s difficult to forecast new vehicle demand if the lockdown is lifted on April 17 because a lot has happened economically during the 21-day period, including credit rating agency downgrades, the depreciation of the rand to “a ridiculous level” and delays in getting new product, because ships on their way to South Africa were diverted away from the country and factory closures in South Africa and Europe.
He says the only positive is that Hatfield Volkswagen had about two months of stock in hand that will be priced at a euro exchange rate that is a lot better than it is today.
“We’re going to go out there as hard as we can and do the best we can [post lockdown].
“We’ve been going 22 years and have not had to retrench yet,” says Kaftel. “That isn’t on the agenda right now.”
“As long as we sustain ourselves and are in the black we are happy. We are not a listed company that is trying to make an extra 10% a year.”
He says opportunities will present themselves to businesses that do well and get through a difficult economic environment.
“That is how we have grown our business over the years. We’ve generally acquired good businesses in tough times.”
Mike Mabasa, CEO of the National Association of Automobile Manufacturers of South Africa (Naamsa), says it is still in the process of revising its forecasts.
The CEOs of all local vehicle manufacturers believe the forecasts should not be revised until the lockdown has been lifted and they’ve seen the new vehicle sales figures for April 2020, he says. “But we are under no illusion that this is going to be a very difficult year for the industry.”
Azar Jammine, chief economist at Econometrix, says there are a number of different scenarios for the impact of the post Covid-19 business and economic environment on the new vehicle market.
He says the new vehicle market for April will be dramatically lower and questions when sales will recover because the economy has received a tremendous shock and a new vehicle is one of the last things people and businesses think about when times are tough.
“We’re talking about a heavily negative market,” says Jammine.
“The extent to which it is negative will clearly depend on the overall improvement in economic activity.”
He says if the virus is suppressed reasonably quickly and the lockdown is lifted by mid-May, that is quite a good scenario and some semblance of normality will then return to the new vehicle market in the second half of the year.
The changing shape of the market
However, Jammine says that even in this “best case” scenario, the new vehicle market will be down by between 10% and 20% for this year.
He points out that there are two other negative scenarios, one suggesting a U-shaped new vehicle market and the other a L-shaped market.
With a U-shaped market, sales will only pick up in the fourth quarter but if the lockdown continues “on and off for the next six months”, the market will be down by 30-40% “if we’re lucky”.
Jammine says the L-shaped market is the worst case scenario and involves no real meaningful recovery in sales.
It would see the market languishing at a much lower level for a period of time and the overall market ending up 50% or more lower for the year.
He says the passenger vehicle market will be more sensitive to the Covid-19 shock and in the best case scenario might end up 20% lower for the year, but 40% lower in the U-shaped scenario and 60% down in the L-shaped scenario.
Jammine says this will create a “terrible” situation for vehicle dealerships, but this is the type of “quite horrific” knock-on effects that will prevail in many industries down the line.
‘Probably the worst year since the 1960s’
Economists.co.za chief economist Mike Schüssler says new vehicles sales will be dismal after the lockdown, particularly as vehicle rental companies will not need cars because tourism will be severely depressed.
Schüssler anticipates “terrible” new vehicle sales in the first few months after the lockdown is lifted and by more than the 29% slump in March this year.
“Assuming this is just a month-long lockdown, I think this will probably be the worst year the new vehicle market has had since the 1960s and the lowest sales it will have for many decades.
“People don’t buy houses and cars if there isn’t confidence,” says Schüssler.
Schüssler says this will probably cause a lot of mergers in the motor industry and the disappearance of a lot of dealerships.
“There is no backup plan here. Relative to our size in terms of GDP, we’re not pumping in a quarter of the money the US and Germany are because we don’t have it.”