SA Ratings Downgrade: What It Would Mean for the Motor Industry

CarWarehouse

The dreaded credit rating downgrades of South Africa by the influential ratings agencies may, or may not, happen... but suffice to say the motor industry will adapt and prevail. Whereas economic factors preclude a recovery in the new vehicle market in the short term, used car sales are expected to keep climbing as consumers seek out good value – especially in the under-R200 000 segment of the market  

The tectonic plates of the automotive industry are shifting...

Hope, so they say, springs eternal – and it is simply not in my nature to pen negativity. You could even draw on quantum physics to propound that penning doom will ensure doom – although when it comes to that level of science I have to admit to being more than just a little out of my depth.

More to the point, the question on South Africans' lips right now is: will we or won't we. Have a credit rating downgrade in early December, that is.

Now let's just hypothetically presume the worst and say that those 3 all-powerful ratings agencies – Standard & Poor, Moody's, and the Fitch Group – do downgrade us. Well, it won't ensure quite the carnage that's predicted in the automotive industry. At least not immediately as most manufacturers and OEMs take forward cover for up to 6 months.

'The worst-case scenario is unthinkable'

But I am sticking my head on a block and saying that it won't happen. I'll go one further and say that this time next year we'll see not the R30 to the dollar that's predicted by the doom-mongers. No, we'll see R12 to the dollar. The thought of the worst happening, and up to a predicted trillion Rand in investment leaving our shores is, well, unthinkable.

Now bear in mind that I'm writing this in mid-November, and that the political and economic landscape is changing – and seismically so – on a daily basis.

Already we've seen the NPA drop charges against Finance Minister Pravin Gordhan, and while promulgating those charges has been estimated to have cost between R50 and R100 billion in lost investment and capital outflow, the Rand rallied a little on this news. In the same week that former Public Protector Thuli  Madonsela's report entitled State of Capture was released, the rand again rallied against major currencies. And as a social media commenter quipped: that report will be downloaded more times than the latest Kardashian sex tape.

Now it's true that the economy is not currently in the best of shapes. Consumers are heavily indebted, and the cost of living continues to soar above levels of salary increases. So it's not rocket science to predict that new car sales – already substantially down over last year's, by over 18% in dealer channels – will continue to tumble. At least for the time being.

Demand will drive up used car sales

At the same time, used car sales will continue to soar, and we find ourselves in a remarkably unique position where used or pre-owned vehicle sales are on the rise, driven by customer demand.

Another trend is that more new and used vehicles are being financed below the average of R200k. The fact that consumers are displaying a preference for affordability is an indication that value for money now far surpasses the need to drive the latest, most prestigious car, and dealerships really do need to take heed of this movement.

What's more, we now find ourselves not only in a contracted market, but we have more vehicle derivatives on our showroom floors than ever before. This gives the South African market an absurd number of new models proportional to market size.

The blind pursuit of volumes

Another worrying – no, despicable – trend is that dealerships have become like ducks force-fed to produce foie gras. This mindless pursuit for volumes simply has to stop.

It's crystal clear that trying to push for, shall we say, 800 000 units in a 600 000 unit market brings about some unintentional and undesirable consequences. One of these is dealers selling cars for little or no profit while their overheads continue to climb, driven by bloated staff numbers and flashy, expensive dealerships.

It’s time for those dealers to realise that consumer patterns have changed, and it's of crucial importance that dealers invest more in the training and development of their staff, and in understanding consumer needs.

It's equally imperative that dealerships stop carrying dead wood in terms of surplus staff and stock. Otherwise, there will be blood on the floor with some dealerships being forced to close their doors – and perhaps even some OEMs ceasing to trade on the market.

Common sense will prevail

But common sense will prevail, the motor industry will live to see another day, and we will not see a downgrade to junk status – we just need to be more attuned to current market conditions.

To sustain the longevity of this beautiful industry and to sustain profit we must seek solutions sooner rather than later. But I am no prophet of doom and can see a strengthening of vehicle sales in around 12 to 18 months.

I also sincerely believe that sanity will prevail and that the powers that be will encourage direct foreign investment to stimulate economic activity – and hopefully deal with pressing issues such as chronic unemployment, crime, and the myriad economic ills we face. 

Above all remember: together we stand, divided we fall. I’ll never stop dreaming that one day all South Africans will be one big happy family, loving and understanding each other, not looking backwards to the past but only to the future (adapted from La-Toya Jackson).

More reading:

3 Must-ask Questions for a Used-Car Salesman
The Motor Industry Ombudsman Of South Africa - In-Depth Q&A
Car Theft Insurance Claims: When Are You Negligent?
Vehicle Warranties: The Devil's in the Detail

Interested in buying a used car?

Start your search on Cars.co.za

Comments