Economic Update

Published 25 Aug 2017

Improved sales in key segments of South Africa’s automotive industry point to a modest rebound in domestic demand, though much of the growth in the sector stemmed from rising exports.

Domestic sales of new vehicles were up 4.1% year-on-year (y-o-y) in July, according to the National Association of Automobile Manufacturers of South Africa (Naamsa). A total of 46,719 units were sold that month, just under 80% of which were dealer sales, with the car rental industry (13.9%), the government (3.9%) and corporate fleets (3.1%) accounting for the rest.

The strongest increase came from new passenger car sales, which were up 6.2% y-o-y at 30,826 units. Growth in light commercial vehicles sales was more muted by contrast, with 13,774 units sold in July, representing a 1.7% y-o-y rise, while sales of medium and heavy trucks bucked the trend, easing by 16.15% and 3.7%, respectively, to 598 and 1521 units.

Domestic vehicle sales encouraging given macroeconomic backdrop

Naamsa said the domestic automotive industry was holding up relatively well in what it described as a “difficult economic environment” – South Africa is expected to see GDP growth of 1% this year – with the improvement in new car sales and the steady performance of light commercials encouraging producers.

However, Naamsa also warned that growth would likely be constrained in the coming months. “Domestic new vehicle sales [are] closely correlated with the overall performance of the economy and confidence levels,” its report said. “The fundamental challenge confronting the country at present [is] a lack of confidence, on the part of business and consumers.”

That being said, some economic indicators suggest a more conducive local sales environment. Growth is expected to tick up slightly in 2018, to 1.2%, but perhaps more importantly, the latest vehicle pricing index (VPI) from TransUnion, covering the April-to-June period, showed a decline in y-o-y inflation on new passenger cars from 8.4% to 5.4%.

Naamsa, meanwhile, noted that the recent interest rate cut of 25 basis points to 6.75% could offer additional relief to South African buyers, with a more stable exchange rate to also help temper vehicle inflation.

Exports lead growth, tighter emissions standards on the way

While increased sales in the domestic market are encouraging, a more marked acceleration has taken place in the export segment.

Overseas sales of South African-manufactured vehicles posted a gain of 22.2% y-o-y in July, with 35,486 new vehicles shipped – an improvement from 30,826 units in June and 29,035 in May.

Europe remains the most important trading partner for the South African automotive industry, accounting for just over half (50.3%) of total automotive exports last year, and an even larger share of total vehicle and automotive component imports (55.6%), according to the Automotive Industry Export Council.

While automotive export growth to the EU in rand terms in 2016 was somewhat exaggerated by exchange rate fluctuations – up 28.2% at R86bn ($6.5bn) – euro-denominated sales figures were also robust, reflecting a 11.3% increase.

However, potential policy shifts in some exports markets, in particular Europe and the UK, could see automakers sharpen their focus on lower-emission and diesel-alternative engines.

There are proposals to ban the use of diesel vehicles in a number of EU countries, and a longer-term shift away from petrol-fuelled vehicles is under way across Europe. Five of South Africa’s traditional top-10 export markets – Germany, the UK, France, Spain and Belgium – are in the EU, while Australia, Japan and the US have also tightened emissions controls.

Among these markets, the UK announced it will ban the sale of new diesel and petrol-fuelled cars by 2040, as has France, and the EU is considering imposing quotas on hydrocarbons-fuelled vehicles to encourage the adoption of electrical power and new technology. Meanwhile, cities and regions in several EU countries are already imposing restrictions on fossil fuel-powered cars.

This shift should provided added incentive for automakers in the country – which include BMW, Ford, General Motors, Mercedes, Nissan, Toyota and VW – to adjust their product lines to meet the new regulatory hurdles in the European market.

BMW, for example, has taken steps to expand its non-diesel engine portfolio in South Africa. The company recently invested R6bn ($453.2m) to prepare its Rosslyn plant near Pretoria to produce its next-generation X3 series, which includes two petrol engines specifically destined for overseas markets.

Speaking to industry media in March, Tim Abbott, CEO of BMW Group South Africa and Sub-Sahara, said the company plans to target Europe as the main market for the new vehicles, with production slated to begin next year.