AUTOFORUM - Informed and innovative

Data, insights and strategy

Nov 26, 2024 Paul-Roux de Kock, Lightstone


Data, insights and strategy

 

By Paul-Roux de Kock, Chief Analytics Officer at Lightstone

Robust conversations in the automotive sector are rooted in industry-wide data, and when data is accessible and transparent, it opens up significant opportunities for the entire industry. However, it’s equally important to recognise the evolution of competitive strategy. While shared data can reduce subjective assumptions, it doesn’t replace the value of executive intuition, personal insights, or a company’s competitive strategic and operational edge.

Analysing an individual company’s internal data is valuable for making micro-level decisions. However, accessing reliable industry-wide and adjacent industries’ data offers a broader perspective on economic dynamics, leading to a deeper understanding of consumer behaviour and nuanced industry dynamics.

This is why ongoing industry discussions, such as those during SA Auto Week, have been centred around data. These conversations highlight how enhanced data sets - like new vehicle sales data reported to naamsa, combined with Lightstone’s augmented insights on vehicle specifications, retail price trends, and residual value forecasts - paint a more comprehensive picture of South Africa’s automotive industry.

Affordability

At the 2024 SA Auto Week, discussions highlighted a notable consumer shift from luxury brands to more budget-friendly options, such as those offered by Suzuki and emerging Chinese manufacturers. This trend reflects the economic pressures facing South African consumers, who are increasingly favouring mid-tier vehicles that offer features comparable to premium brands but at a more affordable price point.

A basic affordability analysis illustrates the reasons behind this shift. The combined national weighted average price of light commercial (LCV) and passenger vehicles sold in South Africa is currently just under R530 000. Financing such a vehicle over a traditional five-year period at the current prime interest rate would typically require a monthly income of at least R39 000.



 

This calculation follows the broad affordability guideline that monthly vehicle payments should not exceed 30% of an individual’s gross income. Given that this threshold is significantly beyond what most South Africans earn, the automotive industry has responded in two major ways:

·       Innovative financing solutions: Traditional manufacturers and financial institutions have introduced creative financing options, such as extended payment terms, balloon payments and guaranteed buyback programs, to make monthly payments more affordable.

·       Market entry of new brands: Emerging brands, primarily from China and India, have entered the market and gained traction by selling high volumes of lower-priced models. This trend is evident in the weighted average price patterns of these brands, as illustrated in the accompanying graph.

Brands like Suzuki have successfully focused on budget-friendly models, propelling them to become the third-largest seller of light vehicles in recent years. Similarly, new entrants from China have adopted strategies that involve introducing low-priced models to quickly gain market share but then over time readjusting their pricing and moving their focus to selling more higher-value SUVs, as evidenced by the overall pricing trends of GWM and Haval.

This movement underscores a broader industry trend: a shift from long-established, often more expensive brands to newer, more affordable alternatives in most market segments. While perceived value-for-money varies across different segments, the overall trajectory points towards a growing consumer preference for cost-effective vehicle options.

Opportunity and choice – and more vehicle imports

Looked at another way, the rising demand for affordable vehicles is creating new opportunities for manufacturers to enter the market while offering consumers a wider variety of choices. This trend is evident in the Import vs. Local data, which highlights the growing abundance of choice in both light commercial vehicles (LCVs) and passenger cars. 

 


 

Since 1994, the number of vehicle options has steadily increased, and while we have not yet returned to the peak levels of 2007/2008, we are currently in the third cycle of growth. This latest growth phase, beginning in 2020, is largely driven by Chinese brands.

The data also highlights a growing dependence on imported vehicles from countries with lower production costs, particularly India. While these imports provide South African consumers with more affordable vehicle options, they place substantial pressure on the local manufacturing sector and the supporting industries associated with vehicle manufacturing.

To mitigate local risks, it is essential to find innovative ways to boost local vehicle production. Achieving this requires the industry to harness data-driven insights to inform government policies and strategies, ensuring that South Africa’s automotive sector remains competitive and resilient amidst global market challenges.

Policy changes

The call for policy reforms presents a balanced argument on both fronts:

·       Reducing import duties: Lowering excessive import duties could help alleviate affordability constraints, boosting demand for new vehicle sales in South Africa.

·       Promoting local manufacturing: Encouraging the production of affordable electric and hybrid vehicles locally could stimulate growth and position South Africa as a competitive player in the global automotive market.

Collaboration between the government and the private sector is crucial to addressing key challenges, such as infrastructure deficiencies and export-related barriers, which currently hinder the industry’s growth. Strategic shifts in policy can help ensure the industry’s long-term success, and President Cyril Ramaphosa’s comments at SA Auto Week is therefore welcomed.

The president used data to contextualise the industry’s importance – it contributed 5.3% to GDP and, at R270.8bn, accounted for almost 15% of the country’s exports in 2023, and it created jobs for nearly 500 000 people across the supply chain. More than two-thirds of vehicles produced locally by seven manufacturers were exported to 148 countries around the world.

He reaffirmed the government’s commitment to supporting the industry, noting plans to update the NEV (New Energy Vehicle) white paper, first released in December 2023. The updated policy will support the transition to cleaner vehicles, including hybrids and plug-in hybrids, and introduce subsidies to encourage consumer adoption of NEVs. Although no specific timelines were provided, the announcement was positively received by the industry, signalling good news for consumers too as electric cars and hybrids could become more affordable.

The SA Automotive Master Plan to 2035 aims to increase local vehicle production to 1.39 million units annually, representing 1% of global output. For context, 633 332 vehicles were produced locally in 2023. Achieving this ambitious goal will require not only policy innovations but also strategic collaboration between stakeholders to address the economic, infrastructural, and technological challenges ahead.

How data helps inform the strategy of OEMs and dealer groups

Lightstone produces retail valuation estimates and used vehicle retention forecasts for the majority of vehicles in South Africa, enabling us to create indices for various categories of cars. These indices provide our clients with strategically valuable insights tailored to their specific needs.

One concern often raised is the perceived poor second-hand value retention of affordable Chinese brands. To address this, we developed a Used Vehicle Retention Index (UVRI) that grouped vehicles into buckets of vehicles brands that originated out of Europe and the USA, another bucket of Japanese brands, and then a bucket of Chinese brands to compare.

We saw that in 2019 the bucket of Chinese brands held around 75% of their value after two years, whereas  Japanese or European buckets of brands would hold closer to 85% of their value over the same time frame.

The dynamics shifted significantly during the global chip shortage following the COVID-19 lockdowns. Limited availability of new vehicle stock caused the UVRI for Chinese brands to climb rapidly, closing the gap with Japanese and European brands. From August 2021 to May 2023, Chinese brand vehicles were retaining value at levels comparable to their traditional counterparts.

Since mid-2023, the gap between the UVRIs of Chinese and traditional brands has widened again, but not to pre-pandemic levels. This suggests a notable perception shift in the market. Traditional brands still hold a strong reputation and higher second-hand value retention, but the index indicates that the growing trust in Chinese brands has positively impacted their second-hand value retention lately. 

 


 

These types of insights enable dealer groups to make more informed decisions about the brands they choose to represent in South Africa that goes beyond new vehicle sales by offering valuable insights into the types of brands they are willing to feature on their second-hand floors.

Manufacturers and importers have relied on our insights for more than two decades to guide their design, manufacturing, pricing, and marketing strategies. Data-driven insights over the past decade have highlighted a growing preference of South African consumers for bakkies, SUVs, and crossovers over sedans which fundamentally shifted the manufacturing and import strategies of established brands. New market entrants also benefit significantly from our integrated insights. By combining Lightstone’s Automotive, Property, and Retail data, they are empowered to strategically determine ideal dealer locations, select the right models to launch with, and develop competitive pricing strategies for the unique South African market - ensuring a strong foundation for successful market entry.

Data to insights to value

We believe that the true power of data lies not in the data itself, but in its ability to solve real-world problems and create new opportunities and “superpowers” for our clients. High-integrity data enables businesses to confidently shape their strategies and accurately meet customer needs, while our predictive and prescriptive insights, powered by explainable AI, deliver unique competitive advantages in their operations that isn’t complicated or daunting to use.

Data helps our industry see the unseen, turning perceptions into facts. Its power, and the strategies it fuels, depend on being fully representative and transparent. By embracing shared data, the industry can harness collective strength to accelerate growth and innovation, while also utilising our predictive insights and AI to build and sustain unique competitive advantages in their operations.

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