New-car dealers slice profits to rev up shrinking sales

New-car dealers in South Africa want your business really badly. Desperate to rev up declining new-car sales, they are offering discounts and incentives on an unprecedented scale and extending finance periods up to 84 months.

Announcing TransUnion’s latest Q3 SA Vehicle Pricing Index (VPI) this week, TransUnion Africa CEO Lee Naik said consumer confidence and spending remains low due to rising inflation, increased fuel prices and currency volatility, contributing to a decrease of more than 8.4% in the sale of financed vehicles compared to Q3 2022. Industry body Naamsa reported South Africa's new-vehicle sales dropped 9.8% year on year to 45,075 units in November, the sixth month of declining sales this year and fourth consecutive month of negative growth.

Car manufacturers and dealerships have stepped up to the challenge, enticing consumers with discounts, incentives and focusing on monthly payments, says Naik.

“With the repo rate remaining at its 14-year high — unchanged from last quarter — the rise in fuel prices, and inflation increasing to 5.4%, consumers have lower disposable incomes and borrowing costs have risen,” he says.

“Lower-income individuals now constitute a smaller portion of total vehicles financed, indicating economic constraints. We are seeing that financially distressed consumers are gravitating towards more affordable mobility options, including older, lower-cost used vehicles.”

It has spurred new-car dealers to cut into profit margins to boost sales. New-vehicle prices increased from 5.8% in Q3 2022 to 6.5% in Q3 2023, against the latest CPI at 5.4%, but TransUnion says new-vehicle price increases are, on average, below inflation after discounts.

“The largest discount cited in Q3 for an entry level urban vehicle was 12.69%, meaning that the after-discount price is actually lower than the listed price in Q3 2022,” said Naik.

“The focus is on premium vehicles, with a price increase of just 5.6% compared to Q3 2022. Small SUVs, crossover models and mid SUVS follow, at 6.6%, 6.9% and 7.3% respectively for the same period. Hatchback and hybrid models show the highest increase, both at 8.0%.”

In contrast, used-vehicle prices show dramatic increases, according to TransUnion.

“Looking at the three-year price increase for mid SUVs we see a rise of 19.4%. In the same period, the price increase for crossover vehicles is not far behind, at 18.6%, and small-SUVs and premium vehicle increases are at 17.6% and 17.0% respectively,” says Naik.

According to used-car trader WeBuyCars, during the Covid-19 pandemic, used car prices increased dramatically because of a shortage of new vehicle stock caused primarily by chip shortages and shipping delays.

In April 2022 when used car prices were at their highest, the average used car price was 28% more expensive than a year before. Prices have normalised since then and in November 2023 are down 8% compared to April 2022, according to Rikus Blomerus, chief marketing officer at WeBuyCars.

According to TransUnion, banks are financing 1.4 used vehicles for every new vehicle sold compared to a 2.05 used-to-new ratio in Q3 2022, indicating a preference for financing new vehicles over used ones. This shift is attributed to the attractive opportunities presented by new vehicles, including support and discounts, as well as the introduction of new entry-level models from existing players and Chinese brands, says Naik.

Another trend has been the notable increase in the average loan amount for financed vehicles, says TransUnion. In Q3, the average loan value increased to R359,000, up from R317,000 in Q3 2022. This increase reflects not only rising prices but also a combination of changing consumer preferences and a shift towards premium vehicle segments for some buyers.

The third quarter of 2023 witnessed an array of discounted vehicles, cashbacks and buying support across various vehicle brands, underscoring the depth of the pricing strategies adopted by dealers and their original equipment manufacturers (OEMs) to stimulate new vehicle sales, says Brandon Cohen, chair of the National Automobile Dealers’ Association (NADA).

“Financial institutions are playing a key role by offering financing up to 84 months, subject to internal criteria, with no balloon payment option at the end. Leasing and step-payment options are also being introduced by financiers to further support sales in the dealer environment,” he says.

TransUnion says alternative financing solutions are coming into play, with more consumers accessing unsecured and personal loans, while short- to medium-term leasing, or hiring, of vehicles is on the rise.