Car industry to recover faster?

A lot has been said about the lockdown owing to the COVID-19 pandemic, the current economic contraction and reduced income for many people in South Africa, leaving the question whether all industries, and specifically the car industry, will be able to recover and if so, how quickly.

Car industry to recover faster?

According to Prof Waldo Krugell, Director of the School of Economics at the North-West University, it is expected that most industries, including car sales, will possibly return later rather than sooner, with spending currently postponed owing to a reduction in income for many. “The South African economy is practically in a recession, and the forecast is that the GDP will contract by 7% this year,” says Prof Krugell.

He quotes data from the Coronavirus Rapid Mobile Survey (NIDS-CRAM) that shows that 31% of households experienced a reduction in income in April. StatsSA data, updated to the end of May, show that take-home income declined by 7%. Employers earning between R6 000 and R10 000 a month were the hardest hit. Add to this that visits to malls are at 70% to 80% of the levels before the lockdown and turnover is approximately 20% lower.

“What this means for business depends on how sensitive the demand is to a change (in this case a reduction) in income, or as it is commonly known, the income elasticity of demand,” says Prof Krugell. “When income decreases, people usually spend less. When the income elasticity of demand is high, a reduction in income causes the quantity demanded to decrease by proportionally more. The buyers are very sensitive to a change in income.

To have a closer look at this, products and services can be classified according to high and low income elasticity and whether trade was allowed during the lockdown.

  • The orange block shows spending that did not happen during the lockdown, and in future will be limited by the loss of income that people have experienced.
  • The green block shows spending that has been postponed. There should be a strong demand in future, since spending on these items is less sensitive to a reduction in income.
  • The blue block at the bottom left shows the products/services/industries that lost income during the lockdown, but demand should return strongly.
  • The demand for the products in the top right-hand block will return later with spending currently postponed owing to lower incomes.

South African estimates of income elasticity coefficients are hard to find, but according to an article published by Roelof Burger and his co-authors, they used data from the 2010 Income and Expenditure Survey to get the following results. They estimated income elasticity coefficients for five income groups and a number of product categories:

“You can put the coefficients in rand terms, for example: For high-income earners (>90% side of the distribution) a loss of R1 of income will reduce their spending on meat, vegetables and oils with R0.09. It will reduce their spending on clothing by R0.40 and on recreation by R2.04. Those with lower incomes cut their spending on luxuries and fun things proportionally more than they cut their spending on food,” says Prof Krugell.

According to Prof Krugell, the effect on the car industry, owing to lower incomes, effectively means the buyer will look for smaller, more affordable cars when buying new.

“It is expected that the second hand vehicle trade will experience a faster recovery, especially from the low to medium income categories. However, the luxury car market might take longer to recover, but will possibly recover to the same levels experienced pre-lockdown.

In reality, according to Hugh Morgan from the Morgan Group, factors like where your business is situated, for example, in a rural area or in the city, as well as levels of service experienced by the customer, could also influence the speed of the recovery.

“The prime rate us currently at an all-time low, which could get buyers to the dealer floor earlier than expected, but I have to warn customers to take the necessary care when making a decision as this will in all likelihood not last,” says Morgan.

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