High costs, sluggish market deter new entrants, says car dealers’ body

The government’s desire for the creation of more black-owned motor dealerships is being undermined by the sheer cost of setting them up, says Brandon Cohen, chairperson of the National Automobile Dealers’ Association (Nada).

The start-up cost of buildings, vehicle service equipment, spare parts and vehicle stock can run into hundreds of millions of rand. Buildings alone, including brand signage, can cost up to R120m, to meet the franchise standards of global motor companies.

“Global manufacturers aren’t going to change their procurement policy for a small market like SA,” says Cohen. It is no wonder, he says, that newcomers are not rushing to invest in dealerships. “Frankly, you’re often better off leaving your money in the bank,” he says.

Nada represents over 1,500 franchised dealerships. Cohen says the sector employs over 70,000 people and has investments running into “tens of billions of rand”.

Return on investment is very low, he says. It can take up to 15 years to get your initial money back — particularly in the current market environment where new vehicle sales are shrinking.

Figures released by motor industry body Naamsa show that, despite a brief lift in July, sales of cars and commercial vehicles so far this year lag 2023 by 6.3%. Cars alone are 5.1% down. It’s likely to be 2025 at least before the market returns to pre-Covid levels.

“The market won’t grow until the economy does,” says Cohen. “We need job creation. More jobs means more car sales.”

The presence of more than 50 car brands in the local market — with more, mostly Chinese, on the way — makes for cut-throat price competition. Profit margins on new vehicles, Cohen says, are wafer-thin. That’s why the majority of dealerships in the country are group owned. Many independents have gone out of business in recent years, or been sold to dealer groups.

Groups like Motus, Imperial and McCarthy enjoy the added advantage of central administration, which cuts overheads of individual premises. Few black business people are prepared to invest in dealerships under present circumstances. However, “government does not accept this”, says Cohen.

“Officials say they understand but then tell us we have to figure out a way to create more black-owned dealerships.”

One solution may be for black investors to start out as franchised workshops and service centres for motor companies, then expand the business later into fully fledged dealerships. That would allow them access to what Cohen says is the most profitable part of the full-dealership model — vehicle service and spare parts. This is followed by what is known as F&I — commissions from finance and insurance companies for putting customer business their way at the time of vehicle purchase. The third most profitable part of the business is used-vehicle sales, with new vehicles at the bottom of the pile.

Dealerships aren’t the only things the government wants to see in black hands. Cohen says the Competition Commission is redrafting 2021 guidelines for competition in the automotive aftermarket. The guidelines were intended to encourage competition in vehicle servicing by allowing owners to use independent workshops rather than those of franchised dealers.

furlongerd@fm.co.za