In January 2005, a litre of unleaded petrol cost R4.22 in Gauteng. In January 2008, it had escalated to R7.33, and in May this year to R12.05.
At this latest price, driving a fuel guzzler using 10 l/ 100 km for 400 km a month would add up to a bill of R482, compared with R241 a month, driving a smaller car using 5 l/100 km. In 2005, it would have been R168.80 and R84.40 respectively.
The fuel price is only one cost in a basket of prices that have risen steadily over the last few years, placing increasing pressure on consumer income. This pressure has also seen a rise in the sale of smaller cars, which use less fuel, cost less in insurance and come at a smaller monthly down payment.
Lower interest rates and a swarm of new entry-level vehicles, boasting an array of features found previously only in more expensive cars, have also provided a push to the small-car market.
Browsing through the vehicle listings in the motoring section of a daily newspaper reveals that there are about 60 vehicles available at under R130 000. A few years ago, it seemed the budget-conscious had two options: driving a Volkswagen Citi Golf or the Toyota Tazz.
Today, nearly every manufacturer has a vehicle available under R130 000, with consumers spoilt for choice.
The rise in sales in the segment also means that the budget market has become the space where dominance in South Africa’s passenger car market may be won or lost.
Volkswagen was king in the passenger car market recently, with its entry-level Polo Vivo the best-selling car in South Africa. The demise of the Toyota Tazz in 2006, and the failure of Toyota to immediately plug this gap, saw the longtime South African overall market leader lose ground in the passenger car segment.
However, now the Japanese manufacturer is back with the Indian-made Etios and is eager to regain the ground lost in a booming budget car market.
Entry-level vehicles are models such as the Suzuki Alto, the Fiat Punto, the Ford Figo, the Chevrolet Spark, the Tata Indica, the Toyota Aygo and the Volkswagen Polo Vivo, says automotive industry commentator and former McCarthy Group CEO Brand Pretorius.
As not all vehicle manufacturers report monthly sales to the National Association of Automobile Manufacturers of South Africa (Naamsa), it is difficult to track the segment’s precise growth. Of the Naamsa numbers, entry-level vehicles made up 14.6% of the new-vehicle market in 2007, growing to 23.2% – the biggest new-vehicle segment – in 2011, says Pretorius.
When including the nonreporters, such as Hyundai and Kia, it “could be more than 25%, or even closer to 28%”, says Pretorius.
“People are more price sensitive these days, especially with the high fuel price,” he adds. “There are also many attractive small vehicles available at good prices and with high specification levels.”
Pretorius notes that the rental market has been a key driver of the budget car segment, especially as specification levels have increased, with this market responsible for 35% of sales, on average, in this segment.
WesBank regards new cars with a cash price of up to R120 000 as budget cars, says WesBank sales and marketing executive head Chris de Kock.
According to WesBank’s research, as well as trends in new vehicles financed, growth in this category is estimated to be around 45% over the past four years, he notes.
De Kock says this growth has been driven by “a combination of factors”, such as low price increases on new cars, improved customer affordability emanating from a low-interest- rate environment, as well as an increased supply of new models in this category.
“According to information received from Transunion Auto, the inflation on new-car prices has been significantly reducing and is currently well below the national consumer price index figures,” he adds.
“Couple this with a couple of salary increases for the average Joe since 2009 and it almost seems that new cars have become more affordable.”
De Kock says this is evident in the shift in the ratio between new cars and used cars in the WesBank book. During 2009, WesBank, on average, financed two used cars for every one new car. This ratio has moved in favour of new cars, with WesBank currently financing 1.4 used cars for every 1 new car.
“Vehicle manufacturers have also made new cars a lot more attractive by adding maintenance plans to lower segment levels and by trade-in assistance programmes which have also become an industry norm,” notes De Kock.
“In addition, the impact of the National Credit Act has also afforded customers the opportunity to structure finance transactions for longer periods in order to reach favourable and affordable payment levels on installment sale agreements.”
Going forward, De Kock says WesBank does not foresee a sudden shift in the short term and that current, positive trends should prevail for the remainder of 2012.
“The budget market should continue performing very positively.”
However, De Kock also takes cognisance of a few things which may affect this growth adversely. These include factors which will have a direct impact on motoring cost and customers’ overall monthly disposable income. They include car price increases, rising interest rates, fuel prices, as well as other service costs, such as municipal services, toll fees and insurance costs.
Absa Vehicle and Asset Finance dealer sales GM Wessel Steffens says Absa would also regard an entry-level vehicle as one priced around R120 000.
He is equally positive that the budget car market has not run out of steam yet.
“We expect that the entry-level market will continue to grow due to current economic pressures and pressure on consumer spending.”
Among the factors boosting budget cars are possible increases in interest rates in the fourth quarter of 2012, consumers’ relatively high debt-to-income ratio, high fuel prices, growing environmental awareness, as well as a strategy by vehicle manufacturers to introduce more and more entry-level vehicles into the South African vehicle market.
“We are also seeing manufacturers who never traded in these segments moving into these markets.”
One company back with a vengeance in the entry-level market is Toyota.
While the Toyota Aygo has made something of a dent in a segment now dominated by Volkswagen, the Japanese manufacturer hopes its Tazz replacement, the Etios, will bring it closer to the glory days when the Tazz had a 50% share in the sub-B segment, spending eight years of its 11-year life cycle as the segment leader.
Toyota regards the smaller Hyundai i10 and its own Aygo as A-segment cars, and the higher-specced, roomier Yaris, Ford Fiesta and Volkswagen Polo as examples of B-segment cars, with sub-B segment cars being those that are often priced as A-segment cars, but which offer more size, such as the Renault Sandero, the Ford Figo, the Polo Vivo and Toyota Etios.
Toyota South Africa Motors (TSAM) corporate communications manager Leo Kok says it is the company’s aim to make the South African public “fall in love” with the Etios, as they did with the Tazz many years ago.
These efforts will include “probably Toyota’s largest marketing campaign in years”.
Why would Toyota spend such money on a small car? Because the sub-B segment has grown by 100% year-on-year, says Kok.
However, it is a brave new world out there and much has changed since 2006 when there were a limited number of entry-level vehicles available, at very low specification levels.
“Customers are smarter now – they know about engine size, market trends and what they can get for their money,” acknowledges TSAM product planner Bongeka Dyonas. “They have a long shopping list of what they want and there are many competitors. In the past, it was the Tazz and the Citi Golf, but now there is lots of choice.”
She adds that Toyota is hoping for a 28% share in the sub-B market once Etios sales are at full pace.
Kok expects around 20% of Etios sales to made to what would have been Yaris and Aygo customers, with the remaining 80% to be incremental sales for the Toyota brand.
TSAM has a current allocation of 20 000 Etios units a year from the Indian plant where the vehicle is produced.
“The Etios is one of the key cars which will help us regain a foothold in the passenger car market,” says Kok.
Toyota sold 207 169 Tazz models in South Africa from 1996 to 2006.
New players in the market since Toyota exited – the Aygo only arrived in South Africa in 2011 – have been the Chinese and the Koreans, seemingly luring customers to their brands by providing more vehicle extras than the local market has previously seen.
Kia’s Picanto, for example, offers keyless entry.
Kia Motors South Africa product marketing manager Andre Pretorius says modern budget cars are set apart by the “all inclusive package” they can offer, such as features once only found on models in a more expensive segment.
Great Wall Motors (GWM) offers its Steed workhorse bakkie at below R130 000, as well as the hatchback Florid.
“GWM believes the budget car market offers significant room for growth in South Africa, especially seen against the current economic climate, [characterised by] fuel and food price increases and potential interest rate hikes,” says GWM’s Tanya Ramos.
“On the one hand, consumers might be forced to downsize and reconsider the vehicles they drive, with regard to fuel consumption in particular. On the other hand, first-time buyers might have to be more frugal when making their first vehicle purchase.”
GWM expects the budget car market to grow by 8% this year.
Hyundai Automotive South Africa (HASA) is less optimistic, however.
HASA corporate communications GM Deon Sonnekus says the company does not foresee any substantial growth in the foreseeable future, largely owing to possible interest rate hikes and general cost of living increases.
“Although there has been a buying-down trend in the car market into the budget category during the past three years, many new middle-income-class buyers buy into the R160 000-plus segment,” he adds.
That said, though, Sonnekus notes that the finance approval rate in the budget sector has grown from 55% to 65% of applications in the last two years, meaning more consumers are getting their hands on a new budget car.
He adds that consumers should be able to expect more from a modern budget vehicle, especially with the advanced technology available to car manufacturers.
“Build quality should not be at a lower level because of its entry-level status and neither should the design look as if it has been neglected for the bigger, more pricy models.”
One Apple Unlike Another
It is difficult to compare apples with apples when it comes to the budget car market.
Some manufacturers add or take away specifications, such as radios and airbags, to produce a car they believe a significant amount of customers will want at a price they are willing to pay.
As the budget car market remains price sensitive, payment markers can play a big role in the consideration to buy a vehicle or not.
There is the magic R100 000 mark, such as Citroën South Africa’s (CSA’s) C1, offered at R99 900.
“An entry-level car is a fundamental access point into any brand,” says CSA price and product manager Robert Wheeler. “It provides a mechanism for new customers to enter the Citroën brand at a very competitive price point.
“For the C1, every effort has been made to squeeze the maximum amount of value at the most affordable price possible.”
Built on the same platform and at the same plant as the other budget contenders, the Aygo and Peugeot 107, the C1 offers an antilock braking system with electronic brakeforce distribution and dual airbags as standard.
Compare this with the Peugeot budget contender, at R116 500. It offers ABS with EBD, air conditioning, a radio/CD player, as well as driver, passenger and side airbags as standard, along with a five-year/100 000 km full maintenance plan.
It is the same platform, but a different look, a different badge and a different offering altogether.
This means buying a budget car can often become a game of extras, in terms of which car features which elements as standard and which as optional, and which of those the customer needs, wants, or can afford. However, it can also simply boil down to the finance the customer can secure. Is it R100 000 or R120 000?
Peugeot public relations GM Toni Herbst says a budget car is often a first car, a family’s second car, or the downscaling to a vehicle with less running costs – which means buyers should also consider service costs often not included in the price, and not only price and specifications.
Volkswagen Group South Africa com- munications GM Matt Gennrich notes that competition in the budget car market is expected to remain fierce as “more and more competitors enter this segment”, with pricing then determined by customer demand.
But is a pricing model of between R100 000 and R130 000 sustainable, even if it lures many customers?
“This will depend very much on what happens to the exchange rate,” says Gennrich.
A continuously weakening exchange rate could see the price of imported cars increase, providing some benefit to locally made vehicles, such as the Vivo.
In any event, price increases are expected.
Specifications may also start to change to either attract customers or compensate for manufacturers’ inability to price, adds Gennrich.
One manufacturer which has managed to cut its price – perhaps in anticipation of the Etios launch, but ostensibly owing to the switch to local manufacture – is General Motors South Africa (GMSA).
GMSA dropped the price of the new Spark, previously made in Korea, by 7%, to R107 500, says General Motors Sub-Saharan Africa planning VP Ian Nicholls, without a loss on specification levels.
“The successful implementation pro-gramme for the Spark has brought numerous advantages for the company. One of these is a significant saving in costs and a degree of insulation from imported cost pressures; another is improved manufacturing synergies with overseas General Motors plants, such as in Korea.”
While Nicholls is positive about the outlook for the budget car market, he expects that growth will only be “marginally higher” than the overall industry growth, expected to be rather subdued this year, at a single digit.
The yearly potential for the budget car segment is close to 80 000 units and it officially only reached 65 000 units in 2011, leaving still much room for growth, says Renault South Africa communications and brand head Danielle Melville.
“The budget segment will continue to be key, given that it is an access point for the majority of South Africans, who, in the past, did not have the financial means or vehicle choice to enter the industry.”
Renault says the entry-hatch market grew by 75% and 65% in 2010 and 2011 respectively. However, “this was off a lower base, given the near total collapse in 2009. We expect growth to continue this year, albeit modestly, at 22%, as the segment edges rapidly closer to its full potential over the next three to four years – 2013 growth is forecast at 15%.”
Renault produces the entry-level Sandero hatchback at the Rosslyn plant, near Pretoria.
Pretorius is optimistic there is still some long-term life remaining in the budget car market, despite warnings of economic pressures curbing growth potential, or market saturation.
“If you look at segment percentages elsewhere, we are far behind places such as Europe, where the budget car market makes up around 50% of the market.
“There is still a lot of growth potential in South Africa. The budget car market will remain a buyer’s market for the foreseeable future, where great battles will be fought between manufacturers.”
As to who benefited most from the recent boom in entry-level vehicles, especially in the absence of Toyota, Pretorius says the winners have been Volkswagen, Kia, Hyundai and Ford.