Many Challenges Ahead
As we enter the new year, one thing is certain: 2009 is going to be extremely challenging. I was almost moved to tears by a media statement from General Motors South Africa (GMSA) I received at the beginning of 2009. I am not a member of the rapidly growing South African Doom and Gloom Club, but I have to share its contents with you.
Wrote GMSA: “2008 was a tough year for the industry. On average, more than 10 000 fewer vehicles were sold each month in 2008 when compared with 2007. Reduced dealer throughputs had several dramatic results for the local motor industry: innumerable jobs were lost as volumes fell, dozens of marginal dealerships closed doors, product lines were rationalised and even a complete brand ceased trading.”
See what I mean? It could make even a grown man cry. Of course, the statements were all true; 2008 was not the best of years. The good news is that it wasn’t quite as perilous for the commercial vehicle industry. According to annual sales figures released by the National Association of Automobile Manufacturers (NAAMSA) and Associated Motor Holdings (AMH), while the passenger car segment declined by 24.3% versus 2007, light commercial vehicle (LCV) sales dropped 17.1% to 169 480 units, medium commercial vehicle (MCV) sales were almost 20% down at 12 143 unit sales, and heavy commercial vehicle (HCV) sales fell 7.6% to 6 956 units.
But there were two really good bits of news: sales of extra heavy commercial vehicles (XHCVs) and buses actually rose – by 7.4% and a substantial 18.3% respectively. A total of 14 056 and 1 508 extra heavies and buses were sold respectively. So that is the year that was. But what will transpire this year? I asked some of the industry captains to do some crystal ball gazing and give their predictions, both in terms of numbers and trends. This is what they had to say:
AUTOMOBILE ASSOCIATION OF SOUTH AFRICA (AA)
Rob Handfield-Jones, head of public affairs at the AA, warns that the age of the vehicle parc will tick upwards as companies defer new fleet buying decisions and hold onto their existing vehicles amid uncertainty over the economy. “The economic squeeze may also lead to reduced vehicle maintenance, resulting in more breakdowns. The AA assists a large customer base of light delivery vehicles through its Fleetcare arm, so we will be monitoring roadside assistance patterns in this market very carefully over the coming months,” he comments.
Frank Beeton, FOCUS columnist and Econometrix consultant, is predicting 35 000 commercial vehicle unit sales this year (over 3 500 kg Gross Vehicle Mass (GVM) sector). He points out that a number of factors will boost sales, including potential interest rate cuts, Soccer World Cup projects, the Confederations Cup (the visitors will need to be transported), a stable rand, and softer oil and fuel prices.
Fiat Group Automobiles South Africa is of the opinion that the market will remain subdued for the most part of the year. “Our main consideration is in the light commercial segment and entry to medium commercial segment where we compete with our Fiat Strada, Doblo and Ducato ranges. In this segment our feeling is that the LCV market will end on a volume of approximately 150 000 units,” says Roberto Nobili, Fiat Professional country manager.
As has been evident, South Africa is not immune to the worldwide credit crunch but, in a local context, Nobili says there are a few “silver linings” to these economic “clouds”. “The remaining infrastructure expenditure for the Soccer World Cup will have the greatest impact on the heavy and top end of the medium commercial vehicle segments. The ongoing decrease of the fuel price will provide stimulus to the market. The lowering of interest rates will also have a positive effect on buying patterns, particularly during the last quarter of 2009,” he remarks.
Jacques Brent, vice-president sales and marketing at the Ford Motor Company of Southern Africa, anticipates the LCV market declining by between 10 and 12% in 2009 against 2008, which is slightly lower than the decline experienced for 2008 over 2007. “We are forecasting around 140 000 LCV unit sales in 2009 based on NAAMSA reports. The overall economic slowdown that affected commercial vehicles mid-way through 2008 will continue into 2009. The second half of the year will, however, see some recovery as economic conditions start to improve and stabilise,” he tells FOCUS.
GENERAL MOTORS SOUTH AFRICA
Malcolm Gauld, vice-president of sales and marketing at General Motors South Africa, did not quote actual figures but he expects “some improvement in consumer confidence as inflationary pressures ease as interest rates fall throughout 2009”. “We anticipate a tough 2009 for the motor industry with further rationalisation and price increases unavoidable. The rand remains under pressure against international currencies with most manufacturers and distributors having no choice but to price aggressively throughout 2009. We only expect the economy – and new vehicle sales – to recover from late 2009 or early 2010,” he says.
Yay! There’s another optimist out there. I am referring to Craig Uren, chief operating officer of Isuzu Truck (South Africa), who points out that not all is doom and gloom. “There are a lot of established initiatives that cannot just be switched off! There is a great deal of resilience in this sector – underpinned by 2010 – which will remain the rallying theme and drive consumer demand,” he notes. Uren is predicting an over 3.5 t GVM market of between 27 000 and 30 000 units. “The MCV, HCV and XHCV markets will decline by 15 to 20% this year while there will be growth within the bus sector.” Uren says imported materials will continue to impact on pricing in 2009 and the rand will take some time to recover, but we should not be too glum. “After all, an industry of 27 000 units would equal that of 2005 – and that was in the middle of the long upturn,” he notes.
Eddy Chvatal, managing director of Iveco SA, is expecting a market of 34 500 units this year. “When it comes to future sales, I am not going to repeat what everybody is saying about South Africa being less exposed, about the falling inflation, about the rates going down, about the infrastructure expenditures. However, an indication of my positive sentiments can be drawn from our sales predictions. In 2008 Iveco sold 1 736 vehicles (878 MCVs, 83 HCVs, 500 XHCVs and 275 buses), and in 2009 we intend selling 900 MCVs, 80 HCVs, 550 XHCVs and 325 buses. These figures include exports to neighbouring countries which amount to 10% of volume,” he reveals.
MAN TRUCK & BUS
There is another person who has declined membership of the South African Doom and Gloom Club: Dave van Graan, management board member business development trucks at MAN Truck & Bus SA. Van Graan points out that despite the general collective despair and all the doom-and-gloom predictions in the wake of the world economic crisis, there are still numerous positives to take from last year’s commercial vehicle sales. “The overall market for trucks and buses with a GVM exceeding 8.5 t ended 2008 with sales of 22 521 units – 2.9% higher than 2007’s record high of 21 895 units. Plus, over 21 000 heavy and extra-heavy trucks were sold into the Southern African Customs Union,” he points out, smiling broadly. “And the increase in bus sales is a clear indication that various stakeholders are now actively building capacity to move higher volumes of commuters and tourists in 2009 and 2010.” So what will happen this year? Van Graan says that while the “doomsday” predictions of certain industry stakeholders will ensure that purchasing decisions are delayed in 2009, or provide a reason to cut back the financing of the customer base, 2009 will see a total heavy truck and bus market of 19 600 (13% down on 2008). This is made up as follows: 6 000 HCVs (8.5 to 16 t GVM), 12 000 XHCVs (over 16.5 t GVM) and 1 600 buses (over 8.5 t GVM). “Although this is down on 2008, it’s important to remember that 12 000 to 13 000 XHCV sales equates to more than double the demand of five years ago.
“The first half of the year will be as much as 20% down on the same period in 2008, with some recovery to similar levels seen in the second half of last year,” he notes. Van Graan is predicting tighter credit approval processes at financial institutions, resulting in bigger deposit requirements or even financial rejections. “We also expect the redeployment of existing fleets which are underutilised in sectors which have slowed dramatically,” he adds.
Furthermore, Van Graan expects a general “tightening” of the belt buckles which will cause operators to hold onto their existing fleets slightly longer than in recent years and delay new purchases.
The good news, though, is that he predicts a positive trend starting to develop in the third and fourth quarters of 2009 and into 2010.
McCARTHY MOTOR HOLDINGS
Brand Pretorius, chairman of McCarthy Motor Holdings, is predicting 153 000 LCV sales this year (down about 10% on 2008), 10 500 MCV sales (down around 12%) and 19 000 HCV sales (down 15%). He is basing these predictions on the negative impact of the global recession on foreign direct investments, as well as exports. Furthermore, he believes that local GDP growth is likely to be less than 1%. According to Pretorius, low commodity prices and poor demand are placing the mining sector under severe financial pressure. Similarly, corporate earnings in manufacturing and retail have declined sharply. “Capex is consequently being trimmed; therefore vehicle replacements are being postponed,” he notes.
Private fixed investment has already slowed down considerably and Pretorius also highlights a number of other negative factors. “Company failures are up almost 60%, business confidence has declined sharply and is likely to remain low until the last quarter 2009. Truck prices have increased substantially so they are less affordable now,” he explains.
MERCEDES-BENZ SOUTH AFRICA (MBSA)
Kobus van Zyl, vice-president, commercial vehicles at MBSA, says the market is seeing a reduction in volumes: “We know that 2009 will be tough but we are confident that all the effort, time and investment we have put into our current infrastructure will pull us through the expected challenges. The World Cup is, however, positive – there are 1 500 bus units up for tender and a further 400 required for the bus rapid transit (BRT) system project.” Van Zyl says that the global economic turmoil has started to seriously affect the overall South African commercial vehicle market. “This is noticeable, for example, in the transportation of exported commodities such as platinum and manganese, where South African mining houses have been reducing some mining operations or have shut down furnaces. Because road transportation between operations and the ports is preferred for these commodities, the amount of road transport contracts is dropping significantly and road transport operators are similarly postponing or cancelling replacement vehicle purchases,” he reveals.
The bus business, however, remains resilient, as this segment is certainly less prone to the effects of the international economic meltdown. “The bus business is driven primarily by local or internal factors such as the growing infrastructure requirement to pull off a successful 2010 event. This segment remains strong as a result of government initiatives aimed at developing a more efficient and inclusive public transport system,” he comments.
Van Zyl describes the reduction in the fuel price as “great news”. “This will have a very positive effect on operators’ cash flow. Unfortunately, due to continued uncertainty generally, this will not necessarily lead to new vehicle sales,” he warns.
Ian Riley, divisional manager Freightliner/FUSO, anticipates 8 046 MCV, 4 632 HCV, 9 752 XHCV and 1 950 bus sales.
NATIONAL ASSOCIATION OF AUTOMOBILE MANUFACTURERS (NAAMSA)
NAAMSA believes that the LCV market will contract by about 5.5%, while sales of medium and heavy trucks and buses should hold their own. Furthermore, assuming a benign inflationary environment going forward, and in the event of additional fiscal and monetary interventions to provide stability to the South African economy in the short term, the association is predicting a recovery in domestic sales towards the back end of the second quarter.
“On balance, 2009 will be another challenging year for the South African automotive industry, characterised by expected lower levels of production due to reduced demand in major export markets, modestly lower overall domestic sales, intense competition, and continued pressure on margins and industry profitability. All stakeholders will have to continue to focus on improving efficiencies in terms of production costs, service delivery and customer fulfilment,” a NAAMSA spokesperson tells FOCUS.
Bob Jones, sales director, highlights two important factors – one positive and one negative. “On the negative side, there is the credit squeeze. The banks lent badly to this sector and now they say it is high risk. We don’t know the full impact of the credit squeeze yet. On a positive front, there is the World Cup. Based on this event in Germany, we know that there will be a significant positive impact on our economy, and thus our industry,” he says.
Bearing these and other factors in mind, Jones says that the XHCV sector will remain static at best, although we could see a 10 to 15% drop in sales in that sector this year. To ensure that Navistar International’s volumes don’t diminish, the company is looking at expanding its product range.
While he is upbeat about prospects for the Nissan Diesel brand, chief operating officer Johan Richards concedes that the year ahead could be challenging for the industry per se. Having said this, there are some positive factors.
“Firstly, interest rates look very positive. We believe that interest rates may fall 100 basis points on 11 February 2009 due to the bad economic growth. This may kick-start the economy and encourage a positive second quarter. Some economists believe the weaker currency, a wide current account deficit of 7.9% of GDP, and present double-digit inflation could convince South African policy makers to hold off on a cut until April, but this will take South Africa into a recession,” he warns.
According to Richards, there are several reasons for the current weakness in market demand, including high interest rates, insufficient credit availability, and a lack of business confidence. “Factors which might still upset any recovery include political violence, a fullscale global recession, depressed corporate earnings, retrenchments, significant vehicle price increases, and the inability of consumers to secure finance,” he notes.
While Richards says the bus market will maintain its momentum due to the Confederations Cup in June 2009 and then the Soccer World Cup in 2010, MCV sales should contract to 9 000 units this year (although he says MCV sales could pick up late this year). “We believe that the HCV market will come down to about 6 309 while the XHCV market should end at 13 263. The worst case scenario is a market of 25 000,” is his chilling prediction.
NISSAN SOUTH AFRICA
Wilhelm Baard, general manager: LCV business unit at Nissan South Africa, explains that the company’s financial year starts in April 2009 and ends in March 2010. “During this cycle our outlook is 129 400 LCV sales and 9 390 MCV unit sales. These figures compare with 146 773 and 11 165 during the same period for the previous financial year,” he tells FOCUS.
Predicting the future is already difficult in a healthy world. It’s even more difficult during a global and local fiscal crisis. It’s like looking into a mirror – you see what youwant to see. This warning comes from Kees- Jan Boorsma, managing director of Peugeot South Africa. But despite this he does have some interesting opinions when it comes to the 2009 total automotive market.
Firstly, he says that there is no reason to believe that the first quarters of 2009 will be different from the last ones of 2008. “But since we are comparing them with weak months in 2008, the decline will be less. I believe that the market will contract by 10 to 15%,” he opines.
Boorsma does not share the euphoria of some other industry commentators regarding the second six months of the year. “It’s like the ‘light at the end of the tunnel’: there is light but we change the length of the tunnel permanently, so we are always right. If we are realistic, household debt will not change in only six months. Inflation will be lower but prices will not go down (car prices, in fact, will go up – a lot). It is nice that fuel is getting cheaper, but for how long? The prime rate might go down but I doubt if that will be enough. Add some political instability and you must be a notorious optimist to see a better second semester. I bet a 2008 level for the second semester,” he says.
Boorsma adds that the decline in the commercial vehicle market in the last months of 2008 is a concern “because it shows that there is a much bigger and longer-lasting problem than we all believed”.
Fresh from the memories of a superb December 2008 sales month (it was a record for the company; Scania notched up a share of 9.2% of the XHCV market that month), Christoffer Ljungner, managing director of Scania SA, is very positive about the future of the market and the country.
“Of course, we are aware that there is a slowdown in some sectors such as mining. However, other sectors, such as general freight, are showing an increase. In 2008 some of our customers were holding back and were cautious, but at the end of the day they decided to purchase because they needed the trucks. We believe that this trend will continue in 2009. Our customers are positive and they feel that there is work to be done. As such, they need new trucks and will continue to place their orders,” he states.
The company believes that there is considerable potential in Africa. “Almost 50% of our business last year came out of Africa. We are the market leaders in Tanzania, Botswana and Namibia,” Ljungner declares. He adds that the company has almost finished upgrading its assembly plant. “We will boost capacity from 1 000 to 2 400 units per year. This shows that we are positive about the future. When the upswing does come, we will be prepared,” he notes.
SUPER GROUP INDUSTRIAL PRODUCTS
Erwin Stolze, marketing manager at Super Group, is forecasting 150 000 LCV, 11 200 MCV, 6 500 HCV and 14 400 XHCV sales this year.
Johan van Zyl, president and CEO of Toyota, is predicting continued downward pressure on vehicle sales, with initial forecasts for the total vehicle market of 410 000 units for the year, the lowest total since 2002. “While the pressure is coming off interest rates, with sustained downward movement expected through the year, and significantly lower fuel prices evident, we will have to manage the current low rand value. Inevitably this will require an adjustment in vehicle prices to cover the higher cost of imported content and fully imported vehicles,” he says.
“Many will be looking for a recovery during the latter part of this year but this may be a little optimistic given the current state of the global economy. It is likely that we will be into 2010 before there is a notable improvement in trading conditions, and here we hope that Soccer World Cup fever will play a significant role in boosting confidence levels.”
TOYOTA SA – HINO DIVISION
Hino vice-president Piet van Wyk de Vries points out that towards the end of 2008, the secondary effects of the global and South African economic slowdown led to pressures to reduce production capacity, a loss of jobs and general uncertainty in the economic environment. The bad news is that he believes the full impact of these events and the ripple effect thereof on local truck sales has not been realised. “Therefore, we’re predicting a further decline in volume against 2007 and 2008,” is his view.
“Another factor that will certainly influence sales during the year is the weak South African rand which will lead to significant product price escalations which, in itself, will depress demand,” Van Wyk de Vries continues. “The further uncertainty caused by the forthcoming election and its outcome will encourage ‘waitand- see’ procurement behaviour. The same applies to the non-resolution of the Zimbabwean issue.
“Thus, even though a turning point in the declining demand is foreseen in, or just after the third quarter of 2009, the market is expected to remain depressed from a year-on-year point of view.” Van Wyk de Vries is predicting 9 500 MCV, 6 000 HCV and 12 000 XHCV sales this year.
VOLKSWAGEN COMMERCIAL VEHICLES
Johan Cloete, general manager of Volkswagen Commercial Vehicles, is predicting a market (over 3.5 t GVM) of 30 800. “We believe that the MCV market will be 10 000 units or 17.6% down on 2008. The panel van/bus/taxi segment will keep on growing to about 45% of the MCV market, but the freight carrier market will decline thanks to reduced demand in the distribution market,” he believes. Cloete reckons that freight carriers will only account for 32% of MCV sales, versus the 40% share of old.
He says the HCV market will also be negatively affected by the downturn in the economy, the distribution sector specifically. A total of 6 000 unit sales are predicted.
Cloete expects 13 000 XHCV sales this year. “The bottom end of this market also serving distribution is expected to decline as well, while construction, farming and long-distance applications will hold their own. However, this will not be enough to boost the market to 2008 levels or above,” he believes.
When it comes to buses, Cloete is predicting 1 800 unit sales. “With all the national Department of Transport and BRT tenders that are out, this market will grow. However, this growth will be dependent on the capacity of bus and coach bodybuilders to deliver. Were it not for supply constraints, this market could exceed 2 000 units,” Cloete says.
Ultimately, short-term prospects are not good. “Large price increases will impact negatively on sales (some companies have already introduced 10% price hikes). We are in a recession, business confidence is the lowest in many years and GDP growth will only be 1.5% to 2% in 2009. A major risk for all OEMs is the volatility of the rand/US dollar/euro exchange rates coupled to the interface of the Japanese yen and the Brazilian real.”
There are some positive factors though. “We believe the inflation rate will come down, bringing the prime interest down by 3 to 4% during 2009 and early 2010. The increase in infrastructure spending by the government in all sectors has been mapped out to 2014 and beyond and shows a dramatic increase, although it has been delayed due to cash flow shortages.
“The reduction in the crude oil price, leading to a reduction in fuel prices, will put some cash back into the consumers’ purses and we hope this will have a positive effect on the consumer market and eventually on the commercial vehicle market. Ultimately, we see a drastic improvement in the market back to 2007 levels in 2010,” says Cloete.
Anders Lindblad, president of Volvo Southern Africa, is expecting a 15% downturn in the extra-heavy truck market. “I believe that the demand, need and the interest exist – both within South Africa and the export markets. However, financing is not available – that is the challenge. Even the large customers aren’t getting access to finance. The banks are most definitely risk averse and, as is typically the case when times are tough, they are not boosting the economy. Of course, this trend is not only apparent here, it’s a worldwide phenomenon,” he notes.
Lindblad says it’s extremely difficult to predict the bus market because of uncertainty as to when tenders will be awarded. He is expecting a 10% increase in the coach market though, and a 20% increase in the bus market this year. “There is a lot of demand, both for urban transport and for vehicles for the upcoming World Cup. I hope that at least 50% of tenders will be awarded soon,” he concludes.