Despite the current decline, the market is still in a far stronger position than it was in 2003, says Toyota SA and Naamsa president Johan van Zyl, and although the market will consolidate throughout 2009, there will be resumption of growth from 2010 through 2012, when the market should recover to the highs of 2006.

Excerpts from Dr Van Zyl’s Mid Year Review:

Historically there is a tendency to view the South African economy in isolation. The political transformation that took place back in 1994 has however seen the country steadily become more closely aligned with global trends with acceleration towards this over the past 5 years. Today, as part of the greater global community, we have a far greater exposure to global economic trends than we did in the past and what we are experiencing now in terms of a change in economic fundamentals is largely driven by external circumstances that are impacting throughout the world.

As a developing nation we might react to this change in global economic structure differently to the developed nations, but ultimately the impact on consumers will be very much the same, as the world comes to terms with inflation on a global scale, largely driven by massive increases in oil and commodity prices. We are currently experiencing the phenomenon of global inflation, something rarely seen in modern economic history.

In this presentation we have chosen 2006 as our benchmark year as it was at this time that the South African motor industry began a phase of significant growth.

Global economic snapshot:

Today the oil price has replaced gold as the prime global economic indicator. Tracking the average price of Brent Crude from January 2006 we find that this commodity first tested the $60 a barrel threshold early in the first quarter of 2006 and then remained above this level, testing the $80 a barrel mark briefly in August before dropping back below $60 a barrel at year-end. By February 2007 we were paying much the same for oil, as we had been the year before but with upward pressure on the price again evident.

Since March 2007 this upward pressure on crude oil prices has translated into a 100 per cent plus increase in price through the $120 a barrel threshold and on towards $140 a barrel. The upward spiral in the oil price, aside from having a significant impact on business confidence, has a direct impact on virtually every aspect of our lives.

Other major commodities like aluminium, copper, platinum, and steel, all fundamental to the global manufacturing industry, have experienced pricing pressure in sympathy with oil. Like oil, the factor most quoted as driving the increased demand and thus firmer prices for these commodities, is the explosion of economic activity in China and other emerging Eastern economies. China leads the pack in excess of 10 per cent growth in GDP in the past two years, which is expected to stabilise at around 8 to 9 per cent through 2010. India too is expected to achieve economic growth of 7 to 8 per cent in the same period with Russia not far behind.

Steel has increased by 64per cent since April 07, platinum by 81per cent, copper by 52 per cent, and aluminium by 12 per cent.

The increase in the price of oil has had a direct impact on production costs in the global agricultural sector. A secondary impact has been the redirection of agricultural resources and products to the production of bio-fuels as a substitute for crude oil based fuels.

The result is significant upward pressure on global food prices, not just at the supermarket check out counter in our diverse shopping baskets, but more alarmingly amongst the three main staple foods of maize, wheat and rice. The price of rice has increased by 219 per cent over the period; wheat is up by 145 per cent, and maize by 53 per cent.

Domestic economic snapshot:

As a developing economy, South Africa would tend to be more susceptible to a change in global economic fundamentals than the more mature economies of many of our trading partners.

A key factor in our economy is the vulnerability of the Rand balance of payments pressures. Downward pressure on the Rand that have seen the currency lose as much as 16per cent in value against major currencies since the beginning of 2008 and serves to compound the effects of global commodity and basic food prices.

The impact on the price of fuel at the pump has been particularly painful for South Africans with almost commuters almost totally reliant on motorised transport.

Almost a year ago South African consumers were riding a wave of confidence as the promise of sustained economic growth and prosperity were being realised. The downward side of that scenario was an expansion of credit and household debt, which together with the global inflationary pressures, has resulted in the Reserve Bank taking strong action as inflation moved out of the 4-6 per cent band and into double figures.  The series of interest rate hikes that have taken the prime lending rate from 10,5 per cent to 15,5 per cent since June 2006 have added further pressure to the cost of living for Mr. Average in South Africa.

Our Mr. Average would be a university graduate in the early phase of his career, married, with two small children. Typically he would be just stepping on to the housing ladder and would have a bond of R500 000. His car would typically be a Yaris sedan or similar sized vehicle.

Assuming that Mr. Average took out his bond early in 2006 and purchased his car at the same time his estimated spend on housing, car repayments, basic foods, and fuel would be around R11 500 per month in 2006. The cost of the same items in 2007 rose by R1 460 in 2000 and during the first half of 2008 this additional spend increased to R2 672.

Quite clearly our Mr. Average, who might otherwise have been looking to purchase a new vehicle, and perhaps even upgrade, at the end of his 36 month finance period, will now have to consider this very carefully and will come under the scrutiny imposed by the National Credit Act to prevent him from committing himself beyond his means.

The result is that private buyers who were very active in the vehicle market in the recent boom years are now carefully considering their purchasing options.

Business confidence has been similarly affected and is now at its lowest level since 2006.

The South African vehicle market:

The global market for vehicles tends to be a cyclical one with a positive growth trend over time, but with periods of lower demand between the high points of demand. Not surprisingly the South African market follows this trend. Over time we see that in each new cycle the market peaks at a higher level than the previous cycle after a period of consolidation. We are in one of those periods of consolidation now with forecasts favouring growth in the medium to long term.

Despite the current decline in market performance, the market is still in a far stronger position than it was in 2003 at the end of a four year period when little change in demand for new vehicles was experienced as the market tested the 400 000 vehicle a year threshold.

Current forecasts favour a period of consolidation through 2009 with a resumption of growth from 2010 through 2012 where the market should recover to the highs of 2006 and 2007 and potentially test the 800 000 vehicle a year threshold through 2015.

In 1995 South African buyers could choose from 20 vehicle brands with representation in the country. In 2008 that choice has expanded to 61 brands.