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Premium car market outlook murky as South Africans continue to hunt for Asian bargains

23rd February 2024

By: Irma Venter

Creamer Media Senior Deputy Editor

     

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The South African new-car market has been shifting steadily over the last few years as consumers continue to battle persistent economic headwinds.

Times are tough. Interest rates, living costs, fuel prices and new-vehicle price tags are all high, driven by not only international turmoil, but also poor management of the domestic economy, especially in terms of power supply and logistics channels such as ports and rail infrastructure.

South Africans have reacted by opting for smaller and cheaper cars, as well as cars offering more extras and luxury compared with others in the same price band.

Chinese brands have been the big winners here, as well as Japanese small-car importer Suzuki.

Despite its origins, Suzuki brings in most of its vehicles from India – the global hub for small-car plants.

Suzuki, currently at number three in the domestic car market, has edged out its competitors one by one and now has Volkswagen, a local vehicle manufacturer, in its sights.

In the past five years, Suzuki has grown by more than 460% – from 8 833 vehicles sold in 2017, to 49 573 vehicles in 2023.

When considering the most popular vehicle types among South Africans, crossovers and sports utility vehicles (SUVs) have been the big winners, with buyers increasingly opting for vehicles with higher ground clearance over sedans and standard hatchbacks.

This is then also the market where Chinese importers have been making their mark, offering more for less, compared with other SUVs on the market.

Another trend has been increased interest in new-energy vehicles (NEV).

This shift is perhaps not so much by choice, but more the inevitable outcome of a global market moving rapidly towards electric propulsion, be it battery electric vehicles (BEVs) or hybrids.

Growth in the domestic NEV market, especially the BEV market, has, however, been stymied by a lack of more affordable models, with those on showroom floors largely expensive premium vehicles.

The interesting question is whether these more affordable BEVs will come from China, once they arrive, or whether they will be produced locally.

Elsewhere, China has been winning the BEV price war.

The Numbers
Lightstone compiles new-vehicle sales data for the South African market.

According to its numbers, Chinese-branded light-vehicle sales in South Africa, as reported to Naamsa | The Automotive Business Council, increased from 11 085 units in 2019, to 37 018 units in 2023 – or from 2.2% of the light vehicle market, to 7.4%.

Chery South Africa reports that it sold 16 110 vehicles in 2023 – all SUVs – up from 8 013 vehicles the year before.

Sales in South Africa of vehicles built in India, a global hub for smaller vehicles, jumped from 103 530 units in 2019, to 157 557 units in 2023 – or from 20.4% of the light vehicle market to 31.6%.

Lightstone also reports that the weighted average price of a new light vehicle sold through the dealership channels in South Africa was R518 646 in 2023, up from R397 366 in 2019.

This may sound like growth, but when considering that new light-vehicle price inflation was 3.2% in 2019, 6.3% in 2020, 6.5% in 2021, 4.6% in 2022 and 6.2% in 2023, it becomes clear that South African consumers are simply forced to pay more for the same vehicle.

NEV sales in South Africa in 2019 reached a meagre 407 units.

In 2023, the tally increased to 7 664 vehicles, with BEV sales at 902 units and plug-in hybrids at 267 units. Hybrids were the clear winner at 6 495-unit sales.

Hybrids are much cheaper than BEVs, locally made, and they offer some relief from high fuel prices because of their better fuel consumption.

According to Toyota South Africa Motors (TSAM) – the bestselling automotive brand in South Africa for 44 years – the more affordable segments of the South African car market – B and sub-B – saw the introduction of an additional 12 new variants in 2023, which is “an indicator of the appetite for vehicles at the affordable end of the market”.

According to Volkswagen Group South Africa sales and marketing director Thomas Milz, 63% of the South African new-car market now comprises smaller and more affordable vehicles.

“We have seen the market develop into an affordable market as interest rates increased.”

Milz acknowledges that Chery and Suzuki have both been the winners in this market. However, he notes that “competition is good. It gives us a kick to do better”.

He adds that Volkswagen has been in South Africa for 72 years and that it plans to remain for another 72 years.

“It is about sustainability in the market and providing customers with a great value proposition.”

TSAM notes that the number of models available in South Africa from India increased from 34 in 2022, to 44 last year, with China upping its model quota from 10 to 15.

India now accounts for 42% of all the passenger cars sold in this country, says TSAM.

Toyota’s Hilux bakkie, assembled at its plant in Durban, remains the most popular vehicle in South Africa, at 37 382-unit sales in 2023.

Toyota, Volkswagen, Isuzu, Nissan, BMW, Mercedes-Benz and Ford have assembly plants in South Africa.

A Premium Market in Trouble
The National Automobile Dealers’ Association (NADA) says the shift to Chinese and/or cheaper vehicles, partnered with a move to preowned vehicles, is putting the new premium market under pressure.

“There is a discernible trend among South African consumers opting for more budget-friendly vehicles,” says NADA national chairperson Brandon Cohen.

“This shift is driven by a confluence of factors such as economic challenges, high interest rates and escalating fuel costs.

“There is also, however, a surge in demand for preowned and demo cars, particularly in the premium segment, which is impacting new-vehicle sales.”

Cohen notes that the allure of Chinese vehicles lies in their competitive pricing, good levels of quality, as well as high-tech specification.

“This trend is reshaping the competitive landscape and poses challenges for traditional premium dealerships.”

Cohen notes that some people are electing to remain loyal to their premium brand.

“They are opting to extend the maintenance plans on their vehicles, rather than buy a new vehicle.

“However, the majority are transitioning from new cars to preowned ones, leading to significant growth in the premium preowned car market, compared with new-car sales. This trend is gaining momentum month after month.”

“These ongoing trends towards affordable and alternative options raise questions about the sustainability of the traditional premium segment in South Africa,” warns Cohen.

“With consumers increasingly prioritising economic considerations, this shift might indeed be a fundamental one, shaping a new reality for the automotive market in South Africa.”

Volkswagen’s Milz notes that the South African new-car premium market has halved in the last five years, shedding some 30 000 units.

Volkswagen sells the Audi premium brand in South Africa.

Cohen adds that the adoption of NEVs is indeed on the rise but highlights that the preference in the South African market seems to lean more towards hybrids, rather than BEVs.

“The success of Toyota Corolla Cross sales exemplifies the local inclination towards hybrid technology.”

Cohen says sales data also suggests that the shift to electric and hybrid vehicles is happening gradually, and is influenced by factors such as charging infrastructure development, consumer awareness, and the availability of more affordable vehicle options.

“Challenges such as range anxiety and ownership costs, as well as government’s new NEV support policy, are all crucial for unlocking the full potential of NEVs in South Africa.”

Cost Increases on the Cards?
Cohen highlights another potential trend, and threat, in the local automotive industry for 2024 – rising costs, owing to global instability.

He says there is widening instability in the Middle East, with the Red Sea shipping channel under attack and the US and UK responding to this threat with attacks of their own.

“This is already starting to affect oil prices but may also begin to upset global supply chains again, similar to what happened during Covid-19, with shipping companies electing to pass by the Cape rather than risk attack up north.

“This rerouting could lead to the reprioritising of vehicle supply, as well as component shortages.

“What is certain is that the extra cost of diverting vessels that are not even destined for the South African market will increase operating costs for manufacturers.

“These costs will likely have to be borne by all customers, including dealerships and consumers.”

Looking ahead, Cohen says challenges for the South African automotive market in 2024 include persistent high interest rates, ongoing political and policy uncertainty –it is an election year – as well as geopolitical instability.

“These factors will collectively influence consumer sentiment and confidence.

“The current state of the automotive market in South Africa is one of significant challenges.

“There has been a noticeable decline in passenger-vehicle sales over the past five months. Ongoing challenges with power supply and, more recently, water, elevated interest rates, as well as financially vulnerable consumers, all contribute to a strained environment.”

Cohen adds that each increase in the interest rate alters the affordability dynamics for consumers, impacting on the maximum rand value for which new-car loan approvals can be secured from financial institutions.

“The convergence of elevated new car prices and the adverse effects of a weakened rand creates a challenging scenario, resulting in diminished affordability.

“This is a concerning culmination of factors affecting the automotive industry.”

Trade Wars Coming
South Africa’s automotive industry will not be the only one struggling in 2024, it seems.

Researcher BMI expects slowing growth in global new-vehicle sales, estimated at 3.8% growth in 2024, compared with 8.8% in 2023.

Much of this weakness will come on the back of now fulfilled pent-up demand caused by shortages during the Covid-19 years.

BMI also believes that the global electric vehicle market (EV) will start to face price challenges as it starts to mature.

The EV market is moving from the first- adopter phase, with an average yearly sales growth rate of around 50%, to mass adoption, with growth rates now expected to be about 10%.

This stage will see a more price-conscious consumer base; higher vehicle trade volumes; and increased competition.

It is also expected that China, producing cheaper BEVs, should see some pushback from the West, warns BMI.

Europe may very well introduce tariffs to protect its struggling auto sector.

Elon Musk, the CE of electric vehicle producer Tesla, also warned in January about the strength of Chinese electric car exports in a company earnings call, as reported by The New York Times.

“Frankly, I think if there are no trade barriers established, they will pretty much demolish most other companies in the world,” he said.

Chinese EV brands have moved from a 1.1% share of the European passenger-car market in 2018, to 5.6% last year.

Should China, however, launch a trade counterstrike, it could affect Europe’s pace of electrification, as the continent’s vehicle manufacturers remain dependent on global BEV supply chains.

China has an exceptionally strong presence in the global EV supply chain, reaching from critical mineral mining to EV battery component production and on to EV assembly.

Another significant trend in the auto sector for 2024 will see vehicle manufacturers move increasingly towards a direct-to- consumer model, notes BMI.

By selling directly to consumers, manufacturers are able to eliminate dealership mark-ups, while also gathering insights into consumer behaviour. This will see dealerships morph largely into new-vehicle handover and service points.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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