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Covid-19 Lockdown Possibly an Existential Threat to Automakers in SA

  Leo Kok

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 30 Mar, 2020



Impact of Covid-19 on the local automotive sector

The automotive industry is bracing itself for a tough time ahead, as manufacturing plants and retail sales across South Africa grind to a halt.

Last week, all seven vehicle manufacturers and many auto assemblers, truck and bus makers and the over 500 component manufacturers heeded the call by the government to halt all non-essential activities in order to contain the spread of the Covid-19 virus. This means that no production, export, retail sales or vehicle repairs and maintenance will be done until the lockdown ends on Thursday 16 April.

For the automotive industry, as for many other manufacturing and retail sectors, this lockdown adds to its growing list of concerns and threatens to become an existential crisis if not contained.

To place the concerns over the impact of Covid-19 into perspective: Last year, the automotive market declined by 2.8% to 536 626 vehicles, which confirmed nearly a decade of steady declines, barring a small increase in 2017. Keep in mind that the automotive sector is South Africa’s largest manufacturing sector with over 110 000 people in direct employ and with an industry turnover, in 2018, of more than R500 billion. At the moment, the industry accounts for just less than 7% of South Africa’s GDP.

At the start of the year, industry executives and industry bodies stated that 2020 would see the market shrink further. WesBank, well known for its accurate predictions, placed this decline at 3.5% or over 18 000 units, putting the market at just above 500 000 units and in its weakest position since the era following the 2008 economic crisis.

By all expectations, the industry will now decline to well below the 500 000 mark, owing in part to a loss in production and retail sales for the next three weeks. At the same time, similar slowdowns in export markets will affect these factories’ ability to offset its local sales declines against export orders.

On local soil, vehicle retailers will perhaps be the hardest hit automotive subsector, owing to an unprecedented period of no sales and clients who even prior to the global virus outbreak was holding onto their vehicles longer and buying fewer new cars, bakkies and trucks.

One should also consider that the automotive sector is now fully integrated into the global supply chain, with local manufacturers sourcing parts and exporting fully built-up vehicles and components, such as leather seats and catalytic converters, to over 100 markets across the world.

With an estimated third of the globe now in some kind of lockdown, these export markets and many of the international component suppliers that receive parts from or send parts to South African factories are also adversely affected and may delay the post-lockdown recovery.

This started even before the Covid-19 crisis, with a year-to-date decline of 18.6% in vehicle exports.

On local soil, vehicle retailers will perhaps be the hardest hit automotive subsector, owing to an unprecedented period of no sales and clients who even prior to the global virus outbreak was holding onto their vehicles longer and buying fewer new cars, bakkies and trucks.

Vehicle retailers are known to run ahead of their income, often spending their expected quarterly incentives on sales support and other expenses well before they are in fact calculated and paid by the vehicle brands.

With Covid-19, these retailers not only lose their ability to make sales targets, but like so many other businesses, they have to keep servicing their overheads, such as salaries, rent and the money tied up in its stock of parts and components. Service centres and used vehicle sales, often a saving grace when the new vehicle market slows down, are of course no help during this time.

These retailers also have little hope of catching up on lost sales after the lockdown ends. Buyers are scarce and likely to be scared of committing to a new 54-, 60- or 72-month instalment before seeing if their job or business will survive the post-Covid-19 fallout.

One should also spare a thought for the smaller vehicle brands, where every sale is a conquest and a loss of sales, both during and after the lockdown, will hit the hardest. Think of recovering brands, such as Peugeot and sister Citroën, who have shown promising signs of growth, but remain small. Other brands, such as Opel and Subaru, continue to sell fewer than 100 vehicles a month across its entire network and they are therefore more vulnerable to a recession.

At the same time, manufacturers, banks and other players in the automotive value chain will see their resources stretched and will not be able to offer a large helping hand to retailers. Indeed, some dealers have already reported that banks are discussing lower commission structures on new business after the Covid-19 lockdown.

Before the lockdown, Naamsa highlighted the plight of consumers in an economic report. In the report, it listed a number of negative economic indicators, such as GDP growth, a lack of consumer confidence and the negative state of the Absa Purchasing Managers’ Index, all affecting or pointing to a very low level of customer confidence. They warned that both corporate and private customers, bruised and battered by low economic growth, spotty electricity supply and a glut of bad news, were not inclined to buy new vehicles. This is expected to become worse now that a global virus and a possible global recession are added to the list of concerns.

One should also spare a thought for the smaller vehicle brands, where every sale is a conquest and a loss of sales, both during and after the lockdown, will hit the hardest. Think of recovering brands, such as Peugeot and sister Citroën, who have shown promising signs of growth, but remain small. Other brands, such as Opel and Subaru, continue to sell fewer than 100 vehicles a month across its entire network and they are therefore more vulnerable to a recession.

On a broader scale, the local manufacturers have much to worry about as well. Global vehicle manufacturers have been plagued by an oversupply of production capacity and things are going to get worse.

Whatever the ultimate impact of Covid-19 on the South African automotive sector, only time will tell, but be assured that it will not be pleasant.

Volkswagen, for instance, recently said to Reuters, that it is losing over $2 billion a week during the Covid-19 crisis. Since they have no way of recouping these losses while markets remain locked down, they will have to look at other ways of cutting costs. The first will be laying off some of its staff across the world and later closing some plants, although they have not yet mentioned this option.

Ultimately, one could add many more concerns to the list mentioned above. Vehicle manufacturers are no doubt going to slow down or postpone their promised capital expenditure in order to have some reserves to carry them through a recession. We also do not have a clear idea yet of how something like Covid-19 could permanently alter people’s buying patterns, keeping them from spending money or making them buy smaller, more affordable vehicles.

Whatever the ultimate impact of Covid-19 on the South African automotive sector, only time will tell, but be assured that it will not be pleasant.



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