Anyone who has even thought about investing in that new car smell in recent times will know that vehicle prices have risen at a faster rate than general inflation.
“Double digit inflation” is commonly blamed for the downward spiral in new vehicle sales, but just how severe have these price increases been?
To get a clearer picture on how affordability has been impacted we put together a sample of cars from popular segments of the market, and compared their current list prices to those from September last year and in the same month in 2014. Before delving into the reasons for the increases.
The sample of 34 cars saw an average price increase of 17.9 percent over two years, but it’s also clear that the majority of that inflation took place during the most recent year. If you asked Captain Obvious, he’d tell you that the South African currency was to blame. The rand, which was already on the back-foot for most of 2015, plummeted against all major currencies in December last year after the so called ‘9-12’ saga in which former Finance Minister Nhlanhla Nene was fired.
In June 2014 (allowing some lead time for the September prices in our sample), the rand was trading at around R10.60 to the US dollar, R14.30 to the euro and R17.70 to the British pound. Yet by early January it was trading around R16.88 to the dollar, R18.36 to the euro and R24.50 to the pound.
But wait, I hear you cry, the rand has come back since then!
Sure it has, to some degree. Although the local currency has experienced some volatility during the year, the trend has been towards gradual recovery, with the currency having traded in the 14-15 range to the dollar for most of this year and at the time of writing (September 27) it was trading at R13.54 to the dollar, R15.21 to the euro and R17.48 to the pound.
Although it’s still 27 percent weaker to the dollar than it was in mid-2014, the rand has lost just 6.3 percent to the euro in that time and it has actually appreciated against the pound by 1.32 percent, in the aftermath of Brexit.
Prices increased in stages
The other side of the coin, no pun intended, is that the currency does not operate on a flat graph and one can’t expect car prices to react to every movement in the currency as they would literally be all over the place. In the short space of time between early November last year and mid-January this year for instance, the rand plummeted 22 percent to the dollar and 21.5 percent to the euro, but we didn’t suddenly see 22 percent car price increases taking place overnight. Instead car prices increase in stages, and after speaking to a few industry representatives, the consensus was that car companies are prepared to bite the bullet and implement gradual increases when the currency is weak, and then make back some of that money when it strengthens.
What about locally-produced vehicles then?
Although they are less vulnerable to the exchange rate, and the carmakers that build them (BMW, Ford, GM, Mercedes-Benz, Nissan, Toyota and VW) also gain production incentives that they can use to subsidise the vehicles that they import, even locally built vehicles are subject to currency fluctuations due to the various imported components needed and then there’s general price inflation to factor in too, also influenced by wage increases. Producer price inflation is currently running at around seven percent per annum.
The Naamsa spokesperson that we interviewed pointed out that although the association can’t comment on the exact pricing strategies of manufacturers and importers, its trend analyses have revealed that the impact of the exchange rate can be quite dramatic. At times of rand strength manufacturers tend to keep price increases below CPIX (SA’s general consumer price index), while the opposite applies when the rand is weak.
So where to from here?
We spoke to a few car companies and the consensus was that the rate of new vehicle price inflation is likely to slow down, but that is also dependent on the exchange rate stabilising around current levels.
In fact, a VWSA spokesperson said that its export business helps cushion the impact of rand weakness: “Fortunately for VWSA our business model ensures that despite losing money on many cars sold locally our export business largely compensates for this.”
Our contact at Toyota SA pointed out that the above-inflation price increases that we’ve seen across the board would not slow down unless the rand stabilised: “Forex rates need to at least be below R14/USD, R15/euro and above 9 yen/rand for us to start seeing the normal increases in the region of 5 to 6 percent per annum”.
A Hyundai SA spokesperson added that if the rand remains around its current levels, the importer might be able to hold its prices and that it was unlikely that there would be any more increases this year.
The bottom line
Above-inflation price increases have made cars less affordable than they were a few years back. However, if the rand plays along, it seems that vehicle price inflation is also likely to stabilise and possibly even fall below CPIX again.
But have prices already risen too far given where the currency is at the moment? Different cars are bought in different currencies and doing those sums would require a far more comprehensive analysis, but given that the rand is actually stronger against the pound than it was two years ago, it would only be fair if those sourcing cars from the UK embarked on some discounting in the near future. With a mere 6.3 percent loss against the euro, those importing from Europe would also do well to tread carefully around the SA consumer’s battered purse strings.
