Standard Bank Multi-faceted consumer car market bucks economic trend
The South African new car market is bucking the economic trend with sales increasing by 4.1% to 163 092 units during the first three months of 2013 when compared to the same period last year. This is despite tough economic conditions, with the South African Reserve Bank expecting GDP to grow by only 2.7% during 2013.
Briefing the media at a Standard Bank event in Johannesburg, Sydney Soundy, head of Vehicle and Asset Finance at Standard Bank, said that the prosperity within the market is notable when compared to other sectors, which were feeling the brunt of reduced consumer spending and the cost pressure caused by higher inflation and fuel prices, among other factors.
“Consumers seem to be taking advantage of the low interest rate environment and clearly still have an appetite for secured credit,” Mr Soundy says.
Vehicle sales continue to be driven by passenger vehicles and individual purchases. As at February 2013 total vehicle instalment debtors and leases were made up largely by individuals, who made up 72% of the instalment and leases book.
Looking at the South African buyer reveals several interesting facts
“The majority of people applying for vehicle finance are between the ages of 18 and 45, constituting 62.4% of the market. These consumers display the highest level of awareness about technical changes to vehicles taking place in the industry, the brand offerings available, the legislation and the financial offerings available to buyers,” Mr Soundy says.
He notes that manufacturers have reacted to this knowledgeable sector of the market by ensuring that their offerings are competitively priced and offer the features demanded. One of the results is a diversified market in which about 70 brands of passenger vehicle are available, offering customers a choice of around 2 500 variants.
“About 65% of consumers are purchasing cars that cost less than R200 000. Toyota, Hyundai and Volkswagen are some of the manufacturers that have met the need for buying economical vehicles, capturing 50% of the new car market in this segment,” he said. Smaller engine vehicles (<1.7 litres) have seen the biggest sales growth in recent times, growing by just under 12% in 2012 from 2011, compared to growth of 9% and 1% for medium (1.8 - 3 litres) and large (>3 litres) engine vehicles respectively.
Consumers have been addressing the monthly affordability of repayments for their vehicles of choice in different ways, including through financing vehicles over a longer period, using the Residual Value option on their finance deals, and varying the extent of deposits offered.
The advent of the National Credit Act has also seen finance contracts taken over longer terms, with the average contract for new vehicles now being just over 60 months. “The average settlement period for new vehicles however, is just over 40 months,” Mr Soundy says.
Applications with a residual value request have increased, with the overall percentage of applications received with residual values at around 13% in the first quarter of 2013, from just over 11% in 2012. Consumers are seeing the benefit of this finance option, in which the monthly installments are reduced due to a residual value.
In the first quarter of this year, Standard Bank has seen an increase in the number of vehicle finance applications; however the percentage of applications with deposits have declined, with more consumers seeking to finance vehicles without a deposit.
Mr. Soundy also notes that although the traditional installment sale agreement remains very popular, consideration for alternative financing options, such as rental and leasing options, is gaining traction. “Astute consumers are well aware that a vehicle cannot be deemed an asset. They are shifting the risk of vehicle ownership and residual values, and the responsibility of disposing the vehicle at the end of the contract, to the financier.”
Looking ahead, Mr. Soundy notes that certain factors this year may work against growth in new vehicles sales. These include the Rand exchange rate which could put pressure on vehicle prices, continuing high levels of consumer household debt, and the high level of households with impaired credit records. Increases in food prices, energy prices (both fuel and electricity), and transport costs, including toll fees, will also impact on consumers’ disposable income. Inflation will be under pressure to remain below the target of 6% in 2013, impacted largely by the depreciation of the Rand and higher fuel prices.
“The Rand is likely to remain sensitive to both domestic and global developments. This could have a negative knock-on effect on vehicle prices,” he says. “However, the effect of the exchange rate has not yet reflected in car sales. Last year, vehicle prices rose by only 2.2% year-on-year.”
Mr. Soundy believes that the continuing current low interest rate environment and the competitive nature of the South African motor industry will provide potential boost for growth in the market.
He says that Standard Bank’s financing activities will continue to be based on responsible lending that takes into account cash flow optimisation for both personal and commercial customers. “Regardless of the economic situation, we will continue to assist customers by developing and providing financial services that make the acquisition of vehicles, whether for private or corporate use, as easy as possible.”