Over the past decade, the face of the SA luxury car market has changed dramatically. Buyers are now spoilt for choice, but the market has not grown much in real terms. Rather - like the SA economy as a whole - it has shown resilience in the face of changing conditions
This is a view shared by many of the motoring industry's leaders and analysts. They cite similar factors in the shaping of the market.
Corporate buying power
The main reason for market stability is the consistent demand for new vehicles from corporate clients - directly, through the purchasing of company vehicles, or indirectly, through car allowances.
Companies supply the funding for about 85% of all new car sales. The acquisitions usually form part of companies' operating budgets and are, therefore, generally not subject to economic and market fluctuations.
Econometrix MD Tony Twine says the price of luxury vehicles "is not important to the absolute or relative performance of the market".
He says buyers in the luxury car segment are not as vulnerable to price fluctuations as private buyers because corporate support gives them a financial buffer against cyclical ups and downs.
Response Group Trendline executive director Neal Bruton says dealer sales over the past three years of vehicles costing more than R200 000 have remained consistent at between 25% and 35% of the total market.
His observation is based on analysis of the luxury vehicle dealer market and does not take into account government and rental business.
"We expected a contraction in the market in the latter half of last year, mainly as a result of the weak rand and sharp increases in vehicle prices. However, the effect was not as great as expected and the luxury sector maintained a healthy 25% share of the total market.
"The performance corresponded well with a 27% market share in the second half of 2001 and I expect the market to perform in a similar manner in the last six months of this year," Bruton says.
An important contributing factor to sales volumes is companies' willingness to pay top and middle executives more to retain them and one of the perks they offer is a car allowance.
"This is a consequence of the shortage of skills in the country. Companies are forced to offer attractive packages, including car-buying schemes, to top personnel to keep them on the payroll," says Bruton.
McCarthy Motor Holdings chairman Brand Pretorius agrees: "The brain drain is leaving the country with a huge shortage of skills for crucial positions. Corporates are responding by paying top management higher salaries and offering better incentive schemes and fringe benefits."
Wider model choice
Another reason for the luxury car market's resilience is the increase in the range of models within the sector. More choice has led to a blurring of boundaries between traditional segments and a shift in buying patterns.
Pretorius says the explosion in sales of luxury sports utility vehicles (SUVs) has changed the composition of the segment and, given the changing needs and demands of buyers, the trend towards lifestyle vehicles looks set to continue.
SUV sales have also been stimulated by an influx of new models such as the BMW X5, the new Jeep Cherokee, the Range Rover, the new Land Rover Discovery, the new Toyota Prado and, lately, the Kia Sorento and Volvo XC90.
Both Twine and Bruton support Pretorius's view. "There has been a definite move towards segment G [recreational luxury 4x4s] vehicles and a lot of sales at the top end of segment D [medium sedans] have been absorbed into the segment," says Twine.
Bruton says sales of luxury all-terrain vehicles (ATVs) have grown from 1,9% of total new vehicle sales by dealers in 2001 to 3,8% in the first quarter of this year.
In contrast, the luxury multipurpose vehicles (MPV) market has contracted from 5% to 3,7% in the corresponding period and sales in the compact ATV market have slowed from 1,6% in 2001 to 0,8% in the first quarter of 2003.
But it is not only the booming SUV market that has contributed to the stability in the luxury car market. Other model derivatives have also driven sales, albeit by smaller margins, says BMW SA MD Ian Robertson.
"By expanding our range in the premium sector and entering the lifestyle market, BMW has been able to maintain and even grow our share in the overall and luxury car markets, though more competitors have entered the market in the past five to 10 years.
"Exciting models such as the Z3 roadster, the recently launched Z4, the new 7-Series and the X5 models have created additional interest in the market," says Robertson.
"This high level of interest will be stimulated even more by the soon-to-be-released 5- and 6-Series and the forthcoming X3. With Mini we have entered the small hatchback market, offering a premium car in a smaller segment."
The activity in the market and numerous model launches from other manufacturers such as Peugeot (with the 607) and Renault (with the Vel Satis) has led to stiffer competition among manufacturers and importers.
Says Bruton: "If one compares the sales of top-end BMW 3-Series models with its competitors, it is clear the new Mercedes-Benz C Class and Audi A4 have put pressure on its sales performance.
"In 2000, the 3-Series was the leader in the segment, with a market share of about 60%. By 2002, the figure had dropped to just above 40%. It now stands at about 30%."
The introduction of the new 3-Series in 2004/2005 is expected to reverse the trend.
The luxury car market may not have shown much growth, but, in percentage terms, it is seven-eight times bigger than those in other countries. Robertson says luxury vehicle sales translate into about 80 000 units/year, comparable with volumes in smaller European countries.
"BMW SA's market share of 9% of the new car market is the highest of all BMW subsidiaries in the world, showing the SA luxury car market is far bigger than one expects it to be."
A changing buyer's profile
The main reason for the swing away from luxury sedans to upper-class SUVs is the changing needs and expectations of consumers. "Buyers now not only want mobility, they want versatility, and, above all, a safe vehicle that is compatible with their lifestyle and status," says Pretorius.
"Most of these attributes are found in top-line SUVs. Buyers also feel less vulnerable in this type of vehicle because of the higher seating position, and flagship SUVs have the same array of active and passive safety systems found in traditional luxury sedans.
"Car buyers in SA have never been so well informed. With access to the Internet becoming more commonplace, they have extensive product knowledge," he says, "and with more transparency, they would like to be in control of the buying process from start to finish."
Pretorius says the new type of consumer wants a seamless buying experience and the whole ownership experience to be hassle free.
"For this reason, manufacturers are creating extended service and warranty plans, and buyers are willing to pay for them, as long as they are guaranteed a problem-free motoring experience," says Pretorius.
He says the influence of black economic empowerment and affirmative action is slowly filtering through society's structures, creating a new generation of well-heeled buyers.
"The emerging breed of consumer is image driven and at the forefront of technology. Only the latest and greatest is good enough, so the brand is everything. Personal profiles are matched with the brand, so a statement can be made."
The changes have already forced motor retailers to start adjusting business models. "The Internet now forms an integral part of retailers' marketing strategies, and services such as McCarthy Call-a-Car are likely to expand and become more sophisticated.
"Also, since projecting the right image is paramount, dealerships are forced to upgrade facilities and invest in professional sales staff, with the right demographic profile," says Pretorius.
The latter move will represent another step towards employment equity, according to Pretorius, "since sales staff will need to understand and appreciate the needs and expectations of the new generation of buyers".
Changing buying patterns
Buying patterns and habits are also slowly moving away from traditional lease or hire-purchase financing options.
"There is a growing trend in the luxury car market towards keeping a new vehicle for only about two years," says Bruton. "The reasons for this are threefold: after two years the demand for an approved used car is still high; the vehicle retains a high trade-in value; and it is usually still under warranty.
"Customers in the luxury-car market are now also more inclined to experiment with the wider array of vehicles available, and are probably not as loyal to a brand as they used to be. They are trying different brands and different types of vehicles, making use of all the special deals being offered in a competitive marketplace," he says.
Robertson says he would like to see a change in mind-set in this regard. "Why do people still want to own a vehicle when attractive alternatives to owning a depreciating asset are available?"
"Big corporates don't own their computer systems, they lease them for a period, and then upgrade them. The same goes for a fleet of aircraft, so why can't the same mind-set be applied to vehicles?"
Robertson says there should be innovative leasing and finance schemes to keep customers in the market and open it up to other buyers. "Affordability is not such a problem in the luxury car market, but it is still, to a large extent, limited to those who have access to corporate or state car allowances. With some innovative financing schemes, the market will grow," he says.
BMW is already leading the way with its R3 175/month programme over 42 months. It allows buyers the option of predetermining their cost of motoring over a fixed period, with the option, at the end of the period, of purchasing the vehicle with a balloon payment or exchanging it at a similar cost.
But, says Twine, these financing schemes may stimulate the market to a degree, but the effects are only at the point of inception. "The graph will move upwards," he says, "but after that it stays at the higher level and does not show real growth."
Keeping a new vehicle for a shorter period has led to a large stock of "new" used vehicles. Manufacturers have already responded to the phenomenon by establishing franchise operations selling manufacturer-approved used cars.
According to Bruton, this is another option for buyers in the luxury market. "It is a powerful substitute for a brand new vehicle. These vehicles are usually new models that are just run in, fully reconditioned and more affordable.
"Furthermore, buyers run little risk when buying a new model, low-mileage pre-owned vehicle and could opt to drop out of the new car market altogether," he says.
Customers now expect high trade-in values for their vehicles, says Pretorius, but, with the present high level of stock of expensive luxury used vehicles and attractive deals on new vehicles, trade-in values are dropping.
Economic factors
In line with the vision of the motor industry development programme (MIDP), exports have become important to local motor manufacturers. Exports are growing year on year and, with the effective import duty on luxury cars dropping from 38,5% to 30% in 2007, it is possible "the affordability of luxury vehicles in relative terms may increase", says Pretorius.
This, coupled with income tax concessions, lower interest rates and higher salaries because of the skills shortage, could lead to growth in the luxury segment. But, he warns, the market is still sensitive to economic turmoil. Conversely, an increase in business confidence will result in an enhanced "propensity to buy".
Bruton agrees and says if the overall level of activity in the economy increases, demand in the vehicle market will increase too. "The luxury car market is healthy, but could be stronger."
Twine is more forthright in his analysis: "The only real contributing factor to a bigger luxury vehicle market will be a bigger economy," he says. "In my view, economic growth is still paramount to expanding the market."
