Automotive decline ‘inevitable’

South Africa's car sector, the country's largest manufacturing industry, faces a third successive year of declining sales.

Johannesburg - South Africa's car sector, the country's largest manufacturing industry, faces a third successive year of declining sales as a weak economy and rising interest rates hit demand for vehicles, the head of its manufacturer' association said on Thursday.

After four successive years of growth in new vehicle sales from 2010 to 2013, total sales in 2014 fell 0.7 percent, followed by a 4.1 percent drop last year.

South Africa's central bank cut its economic growth forecast for this year to 0.9 percent from 1.5 percent, slightly above the 0.7 percent and 0.8 percent estimated by the International Monetary Fund and the Wold Bank respectively.

“The industry's outlook has become more pessimistic for 2016. The industry is looking at a rather unfavourable environment as far as economic growth is concerned,” Nico Vermeulen, director of the National Association of Automobile Manufacturers of South Africa, told Reuters.

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“2016, we think, will be an even more difficult year and we're now forecasting domestic vehicle sales declining by between 9 percent and 10 percent in volume terms to about 375 000 units, down from 412 826 sold in 2015.”

Sales volumes grew by 20 percent-plus in the years when the economy grew at 5 percent or more, Vermeulen said, and that a decline looks inevitable with economic growth expected to be only 0.9 percent this year.

The automotive industry contributes 7.2 percent of South Africa's GDP, accounting for R3.8 trillion ($238 billion) in 2014.

The likelihood of above-inflation price increases for new vehicles, as well as the prospect of further increases to interest rate after the central bank raised rates by 50 basis points in January, is expected to dampen domestic demand for new vehicles.

Vermuelen has higher hopes for exports, however. Assuming an improvement in the global economy, Vermeulen said car exports could rise by 12.5 percent this year, lifted by demand from Europe and United States.

He added that Mercedes Benz had resumed exports of the new C-Class model after parent company Daimler relaxed production conditions for its four C-Class plants around the world, while Toyota is launching a new Hilux model this month.

Exports to other African countries are declining, however, with increased customs duties in Nigeria and regulatory changes in Algeria denting prospects in two key markets, Vermeulen said.

Vermeulen said that imminent wage talks and the potential for strike action pose another threat.

“If South Africa cannot supply, that will go somewhere else. So if we become unreliable in terms of supplying global markets, that will definitely have implications for future models being allocated here,” he said.

REUTERS