Heading for a downturn?

[Rebel]

Dave, I stick to my story. Consumers fail the affordability test under the NCA for bigger ticket items. Thus suppliers sit with more stock and they have to get finance to do so. Credit still under pressure but sales are dropping. Interest rates not the culprit.

[Dave A]

It just goes to show that a slowing economy bites in different parts for different types of business. Being in the service industry, stock is pretty much an on-demand sort of thing - it doesn't factor in working capital much.

Now in retail and wholesale, different story. Turnaround time for stock must be the major working capital issue.

But surely you just reduce stock levels to compensate?

[Rebel]

Cutting down on stock is one thing - that is if you are not locked into the normal deals where you sign long term agreements take take x amount of stock for x discount. Difficult to now cancel these deals before they run out. Vehicle traders (secondhand) do business in taking that older vehicle in for something better. They build stock with every deal.

[Dave A]

Inflation figures are definitely headed in the right direction.

South African inflation braked sharply in December, partly on a big drop in fuel costs, data showed on Wednesday, hardening the case for an aggressive interest-rate cut next week.

Statistics South Africa said CPIX (consumer inflation less mortgage costs) -- which will be replaced in January as the targeted measure for monetary policy with a re-weighted consumer price index (CPI) -- slowed to 10,3% year-on-year.

December's reading was its lowest level since March 2008, dipping from 12,1% in November, and confirms price pressures are fast receding in Africa's biggest economy.

All-items CPI slid more-than-expected to a one-year low of 9,5%.

Analysts said the trend -- CPIX peaked at 13,6% in August last year -- opens the way for a 100-basis-point interest-rate cut on February 5.
full story from M&G here

The big headache now is growth.

[Dave A]

South African new vehicle sales in April 2009 were down 43,1% year-on-year (y/y) compared with a fall of 30,3% y/y in March, figures from the National Association of Automobile Manufacturers of South Africa (Naamsa) on Tuesday showed.
full story from M&G here

[Darko]

I read on moneyweb a while back that the solution is not all that complicated. Drop the price of new vehicles!!

There was more behind it than my simple one liner - I will try to find it and post an extract here.

[Darko]

Can't find the bloody article niow...was about 1 month ago. Went along the lines of:

rather get something for your stock - even if at 80-90% of original asking price than get nothing for stock that just sits on the floor, brings in no cash at all, and accelerates the downfall of the industry.

The USA I believe are offering major discounts while SA dealers do not. Instead, they offer a silly service, extended warrant etc etc - nothing of substance. I will also never understand why our cars are so expensive here either. With the ZAR strengthening, shouldn't we see a further reduction in new car prices (in addition to the suggested discounts to save the induustry)?

[IanF]

SA Ranking

Look at this site:
USA GDP 13,751,400 million Dollars
SA GDP 283,007 million Dollars
Only 48.5 times larger where do you as a global company concentrate.

This is from the World Bank site, at least we are number 29 not to bad. When I was told one fact from the paper merchant that a few years ago in New York City they consumed more of a popular paper for letterheads in one week than SA uses in 3 years then you get your snotklap. But we are the largest in Africa

[Darko]

ianF, was that directed at my previous post? If so, I'm not sure I understand.

[Dave A]

A series of posts doesn't always make a fluent conversation, Darko
They're independent thoughts on a theme, so it can seem a bit disjointed at times.

Interesting point you raised on pricing in hard times. I had thought of starting a thread on it a while back and then the thought leaked off to unconscious places.

I read an article (which I'm not going to bother trying to hunt down) talking to what the international upmarket hotel accommodation industry was doing on pricing at the moment. Basically, despite low occupancy rates, they weren't dropping their prices but were throwing in extras - like breakfast or dinner. The logic behind this is that once you bring down your prices, it's a very long process to get them back up again.

It gave me some food for thought. My first thought was that with lower volumes you actually need higher margins to get through. I'd suggest this should be achieved through improving efficiencies rather than pushing prices up though.

Ultimately, I'd also suggest that before dropping prices to below cost, you first need a clear strategy to get back to profitable sales again as quickly as possible; to limit your losses and before you run out of money. This might be relatively simple if you are clearing dead stock to raise money to put in more viable stock, but does the motor industry have that escape hatch?

Companies who drop prices in an effort to drive volume by "buying" market share could end up only accelerating their own demise, especially if their competition responds in like manner. And if the market is competitive enough (and I believe the motor industry is), some of your competitors responding is virtually guaranteed.

[Darko]

Dave A,

I guess it is a difficult one with no "right" answer.

I just don't think that the hospitality / accommodation industry can easily be compared to the motor vehicle industry. The business models are so different. One purchases high value stock items and is very sensitive to FX amongst many other things whilst the other has a relatively small cost base (not taking into account opportunity cost) whether there is occupancy or not. Also, throwing in extras in the hotel industry is one thing, but as for cars its another. It's also a lot easier to get away with throwing in extras for hotels as opposed to motor vehicles - i.e. R1000 per night will now incl breakfast and dinner. lets say the breakfast is normally R50, and the dinner normally R100 - the extras amount to 15% of the occupancy. If motor car dealers were willing to cut 15% of the cost of a vehicle then we would be talking. A few rubber mats and free Park Distance Control does just not amount to the same type of value in extras.

If I was shopping for a car for say, R300K (max budget) and it was offered at a discount of 15% to sell for R255K i would grab it in a hurry. I would not be interested in paying for that same car for the original price but with some non-essential extras thrown in with residual finance balances that are out of this world.

I just can't get my head around the fact that a dealer would rather go under, with a yard full of depreciating stock, then try to recover what he can by pricing to sell. And i'm not suggesting they should sell at below cost, but as close as dammit to cost.

I would agree that with lower volumes you need higher margins....but that's if you retain the current cost base and expect the same ROI. And from what I'm reading, volumes aren't low - they are almost non-existent. Time to adjust the expected ROI and get what you can, lower the cost base and ride the storm. The alternative is do nothing, don't budge on prices and shut shop quickly with a yard full of stock.

Dropping prices adequately should "theoretically" increase volumes (in an ideal world) and it might not be all that bad. Even if competition does it, fine. It's more about industry survival - and there is always competition in any market conditions.

Car purchasing also differs greatly to hotel accommodation as it is very sensitive to the willingness of banks to finance. I guess this throws a major spanner in the spokes as well.

But what are your thoughts on car prices decreasing in the wake on a strengthening rand / weakening foreign currency?

I read somewhere that a Nissan 350Z retails here for around R500K. The same car retails in the US for around 26,000USD. So there are taxes, duties and FX considerations - does that really make up the huge disparity in pricing?

[wynn]

Wot I said in an earlier thread.

Gubbermunt drops tax, VAT and HP interest on certain classes of locally manufactured vehicles

Instantly, without giving any bailout grants, they create demand, job security follows and economy churns in the MV markets.

Same with primary residences below a certain price, create demand and churn in the construction industry.

Don't know what to do with mining though?

[Dave A]

Oh boy!

The sale of new vehicles declined sharply in May, confirming households' aversion to debt and consumer worries over job security.

According to the National Association of Automobile Manufacturers of SA (Naamsa) on Tuesday, sales in all segments of the South African new vehicle market, as well as export sales, continued to register sharp falls in May compared to the corresponding month last year.

Aggregate Naamsa new vehicle sales for May 2009 at 25 819 units reflected a substantial decline of 13 697 units or 34.7 percent compared to the 39 516 units sold during May 2008.

Factoring in aggregate vehicle sales reported by the AMH Group, the year-on-year decline amounted to 32.9 percent, Naamsa said.

Sales of Naamsa new light commercial vehicles, bakkies and minibuses at 7 905 units during May 2009 reflected a massive decline of 6 074 units or 43.5 percent compared to the 13 979 units of the corresponding month last year.

Taking account of the light commercial vehicle sales reported by the AMH Group, the year-on-year decline amounted to 6 180 units or 41.6 percent, Naamsa noted.
full story from Business Report here

Expected down, I'm sure - but this is really grim.

[Dave A]

South Africa total industry new vehicle sales fell by 25,9% year-on-year to 34 503 units in July, the National Association of Automobile Manufacturers (Naamsa) said on Tuesday.

When stripping out sales from Associated Motor Holdings -- which reports separately -- sales fell 27,4% to 30 731 units, Naamsa said.

Vehicle sales remain weak, having been in decline for more than two years, knocked by soft domestic demand, while a global downturn has slashed exports.

Exports were down 60,3% in July at 11 220 vehicles.
from M&G here

But if I'm reading that right, figures are up substantially on the May 2009 figures.

[Dave A]

South Africa total industry new vehicle sales declined by 23,2% year-on-year to 33 867 units in August, the National Association of Automobile Manufacturers (Naamsa) said on Wednesday.

When stripping out sales from Associated Motor Holdings and Amalgamated Automobile Distributors -- which report separately -- sales fell by 26,2% to 29 667 units compared with August last year, Naamsa aid.

Vehicle sales remain weak, having been in decline for more than two years, knocked by soft domestic demand, while a global downturn has slashed exports.

Exports were down 66,7% in August at 9 030 vehicles.

"This was an improved performance in relation to previous months," Naamsa said, noting that August 2009 contained one less working day than August 2008.
full story from M&G here

It look like we're at the bottom of the trough, then. Or even starting to recover.