Petrol gets cheaper when the Rand strengthens. But why not cars? We delve into what makes car prices tick when the exchange rate fluctuates.
South Africa is an exciting country to live in. At times perhaps too exciting. If you want to express confidence in a country’s future, its exchange rate is usually the indicator you use and of late, South Africa is trending better with the Rand trading a lot stronger in the first quarter of 2018.
The Rand does hold all of us who get paid in it ransom. It’s one of the world’s most traded (and speculated upon) currencies and if you look at a graph, nearly impossible to predict. Many eminent economists and respected business people have made bold predictions about the Rand, only to have the animal graphic currency do the exact opposite and embarrass them.
A stronger Rand has inarguable benefits: cheaper international travel and more affordable Netflix. But cars? What about the cars, will they get cheaper or not, and why?
Fuel is only part of the deal
If you consider the monthly ownership expense of a car, fuel is the element that changes most regularly. Each month the department of energy adjusts the South African pump fuel price according to the price of importing crude oil into South Africa.
Two factors influence the fuel price: the price of crude oil and our Rand/Dollar exchange rate. Oil prices have been low for nearly two years and with the Rand strengthening to the Dollar, fuel prices are fair.
The fuel price is easily affected by Rand strength, but car prices have to factor in resale values and long-term currency hedging.
South African retail automotive pricing does not work on a monthly adjustment basis. For both automotive importers and local legacy manufactures, the value of our Rands versus Dollars, Euros and Sterling does not convert into a scheduled four-week rolling adjustment. Naturally, the expectation is that car prices should fall, because brands require fewer Rands to pay for each car they are bringing to market. The truth, though, is a touch more complicated.
Not annoying everyone
If the Rand is gaining against all notable international currencies and South Africa’s business confidence is returning a non-doomsday scenario, why is that double-cab or hot hatch you have been configuring online for months, not getting any cheaper?
Technically, it is. When prices increase at a percentile lower than inflation, things are effectively becoming cheaper. The latest round of vehicle price increases has been well under inflation, which means in ‘real’ terms, cars have gotten cheaper. True, the prices have not decreased – they’re merely increasing at a slower rate than your purchasing power. The example clarifies when you compare price increases in the last quarter of 2016 (9.4%) to the same period last year (2.4%).
Technically if the same car's price increases by less than inflation, you're paying less for it.
“I don’t care for this ‘real price’ decreasing stuff, I want to see actual list price discounts on new cars if the Rand is getting stronger.” Many buyers subscribe to this logic and feel frustrated that their fuel gets cheaper when the Rand buys more overseas, but cars don’t. The reason you will never see sudden, noticeable, decreases in new car pricing is that brands don’t like annoying customers, especially those who bought a few months ago.
Any discounting would ruin the residual values of cars already in the market and for the few customers who might benefit from buying in a brief period of Rand strength, that discounting would be an infuriation to a great many more who bought two quarters or a year ago, at a higher price.
The Rand’s unpredictability has reached into double-figure digits over the last few years, and if car prices directly correlated with that, there would be huge capital accumulation and almost overwhelming demand in those months when it does strengthen. Imagine everyone delaying a purchase until the Rand strengthened and huge one-month discounts happened? It would make the supply chain untenable.
The volatility in such a price structure would make it impossible for dealers to hold stock or factories to build and supply a range of different models, consistently. In principle, it is disappointing that the only car pricing benefits you gain from a strengthening Rand appear to be less dramatic increases over time. It’s not all captive customer gloom and disenchantment, though…
By pleasing some
The trend for 2018 is a strengthening Rand and you are annoyed that it’s not correlating to a big enough discount on that SUV or Crossover you desire. Although pricing decreases won’t move your dream car from the realm of the impossible, into a probable financing deal, the car you could afford might become a bit more attractive thanks to a strengthening Rand.
You may find that if the Rand keeps strengthening that value will be added in the form of optional extras becoming standard fare.
By now you must be wondering what manufacturers do with the windfall from a strengthening Rand if prices aren’t discounted. Well, they add value to your deal by offering additional equipment. That hatchback or compact SUV you wanted to buy, when you started configuring it online, probably did not include a set of inched-up alloy wheels, Smartphone App synching or that handy reversing camera. Visit your local dealer now and suddenly myriad small equipment upgrades and incentives could be included in the price, as manufacturers sneak additional equipment into deals. This is the real flow of benefits channelled to customers as a result of greater purchasing power when product planners are ordering in Rand from a factory in Europe or the far East.
Adding upgraded features, usually comfort and convenience items within the cabin, make a car feel greatly more expensive and increases the perception of value experienced by anyone about to take ownership. It’s a win-win scenario, with owners who bought a year ago not risking increased depreciation due list price discounting, but having new owners experience an actual benefit to buying their car in a fortune time of Rand strength.
Stability is key
The South African car market is distinctly split between those legacy brands who have established manufacturing operations here (all the Germans, Ford, Nissan and Toyota) and a collective of importers. Despite the perception of local manufacturers being at a great advantage, many of the components used for assembly in South Africa remain imported, with the associated exchange rate risk profile.
If you are looking at specific brands and what they can possibly offer, it all depends on what their respective financial officers did. To counter the reality of risk encountered when ordering cars in Rand, many car company finance managers would hedge their exposure to any volatility by negotiating for a fixed exchange rate, which remains in place for a few months. This issue with this is that when that inevitable bout of Rand strengthening happens, the parent company factory is not always too keen for a renegotiation to allow its local representatives to profit.
With a volatile currency, such as the Rand, manufacturers will often buffer in currency movements so that fluctuations don't reap losses, this works both ways, however.
With Rand’s influence on car pricing, stability is the refrain. Brands want to protect customer’s car values over time, hence the policy of not discounting when the Rand is in hero mode. And when it’s in freefall, they hopefully have the correct forward cover hedged, to prevent above inflation increases. In the very short term, a timeframe of less than three months, it depends on a factory’s agility to alter orders and equipment grades for the Rand strength benefit to materialise into better deals. Some brands will have a supply chain which can absorb and process such inputs at the last moment, others won’t. If the Rand remains strong for a year or more, then transactional benefits at dealerships, with better equipment grades, should become available throughout the market.
If you are about to buy the same car your best friend bought a year ago, despite the Rand being about 11% stronger now, it’s not going to be cheaper, but chances are, you’ll get some options as standard to sweeten the deal.