What effect does the depreciating Rand exchange rate have on new car prices?

Many of us often watch the news or visit bank websites to see what the exchange rate is between the South African Rand and major international currencies, namely the Pound £ (British Sterling) and the Euro € and the US Dollar $. 

People talk about how the Rand keeps depreciating, and complain about how “everything” is getting more expensive.

Sudden change in exchange rate

Just 2 weeks ago the evening news showed the Rand at R 19.86 to the Pound, and we mentioned how, one of these days, it will be R20 for 1 Pound… well, just the next week it broke through the R20 barrier!

Consider the numbers:  as at this morning, 26 August 2015, the Rand-Pound exchange rate still stood at well over R20 for £1.  Yesterday’s banking websites showed a R20.64 per £1 exhange rate, and this morning it is R20.58.  Yes, for each British Sterling Pound you want to buy, you need to pay more than R20… approaching R21.

The Euro is at around R15 this morning, and a US Dollar will cost you about R13.

Price increase history over the past year

Prices of almost all new cars have increased over the past year (with only a very few exceptions).  Some implemented incremental increases of R 2 000 or R 5 000 per quarter, but some vehicles’ prices jumped by R 50 000 and more at a time.

A specific graph can not be drawn, as on many ranges some models’ prices were increased disproportionately to the rest of its model range.

A ballpark calculation is that new vehicle prices increased in the past year, comparing August 2015 to August 2014, by on average between 5% and 10%.  With the Rand getting weaker, this is likely to see further new-car price increases.

The scary equation is:  if the Rand drops by say 5%, new car prices could rise by the corresponding 5%.

The effect of the depreciating Rand exchange rate on new car prices

Due to the many new cars being fully imported or some of their parts imported to assemble locally, local manufacturers need to pay for these cars and/or parts in Pound, Euro or US Dollar.

What this means is that new-car prices are directly affected by the currency exchange rate.  While manufacturers often build in a cushion to allow for slight exchange rate fluctuations (to avoid changing the retail price too often) the fact remains that they need to pay for cars and/or parts using foreign currency.

One might think that every 1 Rand the ZAR currency loses against the GBP is not so bad, but off course we pay cars in 1 000s and 100s of 1 000s and 1 000 000s, so the effects of 1 Pound is not just 1 Rand – every £ 1 000, which was R 19 800 a few weeks ago, now costs +-R20500.  On a car costing £ 10 000 this means a jump from R 198 000 to R 205 000.  For every € 1 000 a car manufacturer needs to pay about R 15 000, and every $ 1 000 equates to R 13 000.

To use an example without mentioning any brand or product names, a car with recommended retail price of R 198 000, which factors in what the manufacturer paid for it in forex, could increase to R 205 000.  On more expensive cars, this off course multiplies – a R 400 000 car would suddenly be priced at +- R 415 000, just because of the weakening Rand.

Local car manufacture

Despite South Africa’s mineral and mining resources, manufacturing skills and wealth of productive intelligent people, South Africa does not have its own car.  Sure, cars are manufactured and assembled here, but the only fully locally designed and built cars were decades ago.

For one locally manufactured range of cars, for local and export sales, the manufacturer sources body panels and trim (seats, dashboards, rubber etc.) and electrical system and suspension locally, but will import the engine and gearbox (which needs to be paid in foreign money).

Passenger and light commercial vehicles available in South Africa make up a list of 58 brands comprising +- 370 model ranges of around 1 900 model derivatives (just counting the base models).

Yet, of the +- 370 model ranges, the only locally manufactured / partially assembled vehicles in South Africa include these few model ranges:  Volkswagen Polo Vivo and Volkswagen Polo hatch (the 2 top-selling new passenger cars), BMW 3 Series sedan, Mercedes-Benz C-Class sedan, Ford Ranger, Chevrolet Spark and Utility, Isuzu KB, Nissan NP200 and Nissan NP300 Hardbody, and the Toyota Corolla Quest, Corolla, Hilux and Quantum. 

Sales-wise these vehicles make up a large portion of local sales.

Will it affect imported car prices and sales more?

As seen from the list just above, many cars are of local manufacture, though many are fully imported or assembled using imported parts.

Yes, imported cars will be affected more, but locally-built vehicle prices as well, due to the increased cost of those parts imports.

New vehicles sales figures for July 2015 showed a drop of 6.1% compared to July 2014.  With more price increases further negatively affecting new vehicle affordability, sales will unavoidably be lower.

The solution for local manufacturers?

For vehicles built locally for export markets, local manufacturers get a reduction in import tax on other vehicles they import, which partially off-sets import costs.

For those who only import cars, prices will simply increase.  For those who manufacture cars in South African factories – as local government is unable to restrain the sliding Rand value and sustain the economy – local manufacturers need to increase their local parts content, relying less on imported parts.

Source:  duoporta vehicle information specialists