BUSINESS BEAT: Uncertain future for used car market

Theodore May
6 Min Read

When Egypt’s economy began to head south in the second half of last year, the auto industry went with it.

But just as, in many ways, the Egyptian economy escaped the brunt of the crisis that hit many of the more developed markets, so too has the auto industry here avoided a calamitous hit.

Even though car sales were down for the final quarter of 2008, economists predict that certain market conditions will prevent major growth from occurring in the secondary, or used car market.

It took some time for broader macroeconomic troubles Egypt was facing to trickle down to the auto industry.

For one, explained Menatalla Sadek, a senior analyst at investment bank Beltone Financial, commercial vehicle sales, which make up a significant portion of the market, traditionally react slowly to changes in the market condition.

“Commercial vehicles are laggers in the cycle, she said. “A couple years ago, when there was a boom in Egypt, the commercial vehicles lagged by almost a year.

“While passenger vehicles have been hit, she added, discussing today’s climate, “commercial vehicles haven’t showed it yet.

Despite continued strength, though, in the commercial vehicle industry, passenger vehicle sales dropped in the last quarter of 2008.

Up until the mid-fall, passenger vehicle sales had been experiencing 40 percent growth, but consumers reacted quickly to deteriorating economic conditions.

The problem lay with the auto manufacturing companies who were not able to readjust prices to meet new expectations.

“People were expecting [car] prices to go down by 20 or 30 percent, said Sadek. “But most of the players in Egypt had inventory, she said, explaining that manufacturers are still trying to clear their warehouses of goods they purchased when steel, oil, and other input prices were high.

On top of that, Original Equipment Manufacturers (OEMs) who produce auto inputs found themselves unable to reduce prices enough to impact retail prices.

“OEMs are under huge stress because demand worldwide has decreased, added Sadek. They “have high overhead, so they have to pass it along to the manufacturer.

All of this may add up to one reason the Egyptian consumers have not flooded the secondary car markets yet. Simply put, consumers still expect the prices of new autos to come down in the short-term given declining commodity prices across the board.

Even though industry numbers for January are not yet available, experts predict that consumers continued to show their disdain for high prices by making what is traditionally the slowest month in sales even slower.

Analysts also predict that the used auto industry is unlikely to feel a flood of consumers fleeing the new car market because Egyptians have felt the effects of the economic slump more gently than those in the rest of the world.

“In Egypt, explained Sadek, “leverage is very low, so people didn’t feel the effect as much back in October through December.

Taking a medium-term view of the secondary car industry, experts predict that it is likely to continue feeling the impact of a 2004 tariff decision that substantially closed the price gap between new and used cars.

Up until 2004, tariffs on all cars were 105 percent, but in September of that year the government reduced it on small cars to 40 percent. This decision had some lag-time before the impact was fully felt, but it has continued to keep appetite for new cars strong since it narrowed the price gap.

The new traffic laws that will have a profound impact on Cairo’s taxi fleet is expected to harm the used car industry and offset much of whatever added business it is receiving during the economic recession.

The new law mandates that taxis over 10 years old must be off the road by the time their licensing expires this year or next. Industry experts predict that upward of 30,000 taxis could be making an exit.

Often, taxi owners relied on the secondary car market to replace their old vehicles. With the new law, though, and with the government offering an ambitious financing plan to help owners purchase new taxis, the used car industry may lose an important segment of its business.

“It will be a main driver of the auto industry in 2008, predicted Sadek of the change in the taxi fleet.

Much of the future of the used car market may also depend on how banks readjust their auto loans to reflect the changing economic conditions. Until the start of the recession, auto loans were a rapidly growing industry, allowing many more the opportunity to purchase a new car.

Though there are signs that the banks have tightened their restrictions for issuing credit, it could begin a real movement towards the used car industry if loans are too hard to come by.

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