One of South Africa’s biggest industries under threat

The domestic automotive industry, a cornerstone of the South African economy, has faced challenges due to energy constraints and weakened demand arising from the cost-of-living crisis. 

This is according to FNB economists in the bank’s latest Economics Weekly, who said the automotive industry accounts for an estimated 5.3% of GDP, with 3.2% coming from manufacturing and 2.1% from retail. 

The manufacturing segment employs approximately 125,222 workers, and when considering the entire value chain, the industry supports over 400,000 jobs. 

The automotive sales and production landscape is a crucial indicator of economic health.

“However, the industry has recently faced challenges due to energy constraints and weakened demand arising from the cost-of-living crisis,” they said. 

An important factor is the diverging performance between new and used car sales in South Africa.

Despite a modest 1.5% y/y increase in total new vehicle sales in July, overall volumes have been under pressure, showing a year-on-year decline since August 2023 due to weak demand fundamentals. 

Year-to-date (YTD) performance indicates that total sales volumes are down by 6.2%, with new passenger vehicles declining by 5.0% and new commercial vehicles by 8.4%. 

While the YTD decline in commercial vehicles may reflect a correction following robust growth last year, the weakness in passenger vehicles underscores significantly weak consumer fundamentals. 

The rise in interest rates – from a low of 3.50% at the pandemic’s peak to 8.25% currently – has materially impacted consumer balance sheets and affordability. 

In addition, vehicle pricing, influenced by factors such as the rand exchange rate’s performance, has further eroded consumer affordability for new vehicles. 

As a result, consumers are either holding onto their vehicles for longer, delaying the replacement cycle, or increasingly participating in the used vehicle market.

To gain insights into the used-car market, FNB relies on two key datasets. 

Firstly, the Stats SA data on the real value of motor trade sales, a proxy for revenue, reveals some interesting developments. 

In the first half of 2024, real motor trade sales for used cars increased by 3.0%, while those for new vehicle sales declined by 9.7%. 

The second dataset, from the National Traffic Information System (NATIS), provides insight into registered used and new vehicles. 

FNB said the data shows increased participation in the used-car market. 

Registrations of used vehicles were up by 4.8% in the first half of 2024 compared to the previous year, while registrations of new vehicles declined by 5.6% over the same period.

Used vehicles are generally more expensive than before the pandemic, but the notable moderation in inflation should help underpin consumer preference for used vehicles.

In response to weak demand and normalisation from the robust growth experienced post-pandemic, domestic motor vehicle production has experienced a modest decline, falling by 3.0% YTD. 

Other automotive segments are also under pressure, with the production of bodies for motor vehicles, trailers, and semi-trailers down by 9.1% and the production of parts and accessories sharply declining by 17.8%. 

The external trade balance data further reflects this general weakness in the domestic automotive sector, with the nominal rand value of imported vehicles, aircraft, vessels, and associated transport equipment down by 23.3% in the first half of the year, compared to a significant increase of 39.0% in H1 2023.

“Overall, while the domestic automotive sector is experiencing cyclical weakness, particularly due to weak demand, part of this downturn can be attributed to a correction following the solid post-pandemic performance,” the economists explained. 

“Cost-of-living pressures, including rising vehicle prices, have slightly benefitted the used car market as consumers try to avoid the premium in new vehicle prices.” 

However, they said an impending interest rate cutting cycle, a more stable rand exchange rate, and expected improvements in household disposable income should provide some support to the automotive sector moving forward.