Demanding times for transport sector

Although overall vehicle sales in South Africa increased by 4.1%, July and light commercial vehicle sales also showed an uptick, businesses, especially those engaged with the use of vehicle fleets, heavy duty vehicles and yellow metal construction equipment are facing a number of challenges that are placing obstacles in the path of traditional ways of obtaining the capital and finance injections they need for growth, says Standard Bank Vehicle and Asset Finance.

“Sales for all categories of vehicles touched 46 719 (1 849 July 2017), an increase of 4.1%. The other high point was the increase in export-led sales, which had shown sales of 35 486 vehicles, a gain of 6 456 units which represented a huge improvement of 22.2% compared to the 29 030 vehicles exported in July last year,” says Toni Fritz, Head of Asset and Vehicle Finance at Standard Bank. It is at this point that the good news ceases, adds Fritz.

“Medium and heavy commercial vehicle sales are still under pressure. During the month, medium sales dropped to 598 units. Heavy commercial vehicle recorded only 521 sales. This reflected a reduction of 3.7 % in overall sales compared to the corresponding month last year.

“Domestic sales of new light commercial vehicles, bakkies and minibuses at 13 774 units reflected a small gain of 231 vehicles or an improvement of just 1.7% compared to the 13 543 light commercial vehicles sold during the corresponding month last year. This followed an improvement of light commercial vehicle sales in recent months.

“The economic decline is still very much with us.  Recent financial results released by major construction companies reflect the generally slow economy. Although many of South Africa’s leading construction companies have looked into Africa for business, the downturn in commodity and oil prices has also reduced opportunities in key African economies such as Nigeria and Angola.

“The combination of all these factors has seen a decline in overall margins as companies cut back on profitability in order to secure projects for their order books. The reducing value of the pound against the US dollar has seen the rand’s value see-sawing in sympathy with these changes-pushing up the price of obtaining specialised equipment and vehicles.

“This outlook will definitely impact on business decisions whether to acquire new equipment, or high ticket commercial vehicles. Buying decisions could rest solely on the type of financing available, the cost of options and the willingness of banks to tailor packages to the specific needs of individual customers.

“Whatever decision is made, there is no doubt that the capital cost of equipment will be the deciding factor. However, there are several ways that the acquisition of equipment can be tailored to meet operating circumstances.”

Consideration could be given to:

  • Leasing equipment – which has several advantages for the manufacturing sector in particular. These include:
  • In tough economic times conserving precious capital. Instead of deviating money away from the business where it can be used to pay marketing costs, salaries and other costs, leasing may require only a deposit, with the rest of the payments coming from monthly cash flow.
  • Leases that can be tailored to the needs of the customer.
  • Options can include a full maintenance lease (FML), which provides the ultimate for machinery and equipment that may be exposed to rigorous operating conditions. For a monthly instalment over the period of the lease, all repairs and maintenance costs are covered. There are no unexpected surprises.
  • Being able to ‘buy-up ’and get better equipment. As a company is leasing, it may be able to get more sophisticated equipment, rather than be satisfied with lower spec equipment- which could occur if a ‘one-off’ purchase price is being considered.
  • Once the lease period expires, the equipment is simply returned to the bank. They then have to dispose of it, or sell it into the market, leaving the business free to either acquire new equipment, or purchase none at all.
  • Most lease agreements offer the business the chance to buy the equipment from the bank at the end of a lease at a much lower settlement figure. The advantage of this is that the buyer knows exactly what the history of the equipment is and how reliable it has been.
  • As the bank is the owner of the equipment, any concerns regarding its efficiency become the problem of the bank. As owner, it is required to either rectify the problems or replace the equipment.
  • Once a lease has been completed, new equipment can be acquired on a new lease. This is a huge advantage in cases where technology is changing rapidly.
  • Alternate sourcing of equipment and yellow metal. Traditional suppliers of heavy equipment require long lead times for orders to be fulfilled. The problem for local users is that these lead times are measured in months. The fluctuating value of the rand and need to buy cover for forex transactions add to costs.

In addition, market demands can change in the local economy which remains dependent to a major extent on large capital projects.