Daily News Egypt held a roundtable discussion to talk about the latest developments in the automotive market on several fronts, including the mechanism of car pricing.
It also discussed the impact of interest rate cuts, in addition to expectations of the volume of car sales after the first seven months of this year, and the expert expectations for the sales of the fourth quarter (Q4) of the year, especially after the postponement of the Automech Formula.
The seminar was attended by Chairperson of the Egyptian Automobile Dealers Association, Osama Abou El Magd, and a member of the Automobile Dealers Association, Montaser Zeitoun, and Gamal Askar, an automotive expert.
Implications of interest rate reduction:
Zeitoun said that the Central Bank of Egypt’s decision to lower the interest rate on savings certificates and all savings vessels including deposits and savings accounts, would revive the sales of cars in Egypt, pointing out that what actually prevents the increase in demand for car loans is the 35% requirement imposed by banks.
He explained that banks require that the monthly instalments of a car represent 35% of the applicant’s income, proven within the application of the loan, which is an obstacle for those who want to buy a car and have other sources of income from non-governmental bodies, which are difficult to prove through paperwork. He stressed that there is a need to review this requirement since a recovery in sales will not be limited to a rate cut.
Furthermore, Zeitoun pointed out that many of those who want to buy cars resort to the system of “direct instalment” through the dealer despite the high interest rate of up to 25%, as the dealer does not inquire about the customer’s income and does not deliver the car to the customer before the payment is completely finalised. He also demands some special guarantees from the customer, in addition to other measures that secure the trader’s right.
In the same context, advisor Osama Abou El Magd, head of the Association of Traders at the car market, said that the direct instalment system is more difficult than the system of indirect instalment, because the former imposes on the consumer many loans, including depriving him of the car until the paying of the instalments is completed, which can take a long time, in addition to other restrictions on the customer.
Abou El Magd pointed out that car sales were revitalised thanks to the interest rate declining by 1.5%, mentioning that the Egyptian market achieved real car sales after the spread of instalments. Citibank was a pioneer in launching the car price instalment system, which was a major reason for the spread of new cars as the market had previously been limited to old cars.
He praised the decision to lower the interest rate, which significantly contributes to the increase in demand for cars, expecting further interest rate declines in the coming period. He also explained that the high interest rate is harmful to the public interest and the national economy, as it prompts many investors to stop their commercial activities and let go of a large numbers of workers as well as leave their capital in banks to take advantage of the high interest rate.
Moreover, he pointed out that the bank requirement of a car loan’s monthly instalment representing 35% of the income of the individual did not represent a hindrance in the past when the price of the car was EGP 90,000 and the income per person was equal to EGP 10,000. However, this has become more difficult at present after the liberalisation of the exchange rate.
The price of the same car became EGP 210,000 with the stability of the value of per capita income, which made the condition of the 35% difficult to achieve, and in turn led to the decline in demand for car loans. He stressed the need to take into account banking facilities, which are an important part of the car sector and sales.
Car pricing mechanism:
Zeitoun said that the pricing crisis could be solved by the return of the parallel ‘grey market.’ The minister of industry and trade then demanded from dealers to amend the prices, yet they did not implement the decision. So, he decided to open the door for the import of cars from their countries of origin, which made any dealer import cars with new specifications which did not exist before, and that, in turn, increased the efficiency of cars and the number of displayed cars, forcing agents to reduce prices as a logical result of the competition.
He explained that the volume of imports from the grey market fell by 95% due to the assumptions which curtailed the activities of traders, which was in the interest of agents and significantly contributed to the increase in prices. He rules out the possibility of any randomness in the process of importing cars in the grey market, especially since cars came with high quality and special specifications. Moreover, importers received warranty seals that allow for the maintenance of cars at authorised service centres.
For his part, Abou El Magd stressed that agents are legally responsible for the pricing of cars as it is a free market not subject to specific mechanisms. Additionally, the pricing committee will not be able to control prices. He pointed out that the profit margin of traders is determined by several factors outside its control, such as market mechanisms, in addition to the gross profit margin on the vehicle specified by the dealer.
He explained that the distributor is the main controller in the ‘overpricing’ process. If the dealer set the basic price of a car at EGP 210,000, for example, and set the profit margin according to the plan set in advance, and the distributor applies the overprice to sell the car to the dealer at EGP 220,000, the trader adds EGP 2,000-3,000 to the car’s prices, based on supply and demand.
Abou El Magd demanded controls to be applied to service centres whose profits reach millions and give exaggerated salaries to their employees, because they are unfair to consumers.
On the other hand, Askar, a car expert, demanded that the price of cars be fair to consumers and pointed out the need for a balance by providing a car with a distinctive quality and high safety. He explained that consumer safety is a joint responsibility between the government and the agent. The role of the dealer is to provide a vehicle with high safety specifications at a reasonable price, in addition to after-sales service by providing spare parts at fair prices and spreading service centres in different regions.
Moreover, Askar pointed out that the agent’s interest in the after-sales service sector reflects a good image, and pointed out that many agents offer some privileges and incentives that drive the customer to go to the authorised service centres when maintaining the car instead of resorting to random workshops on the street. These privileges include extending warranty periods for regular customers in the maintenance period, and inspection of their vehicles within the agency, in addition to providing some discounts on maintenance and spare parts.
The auto expert shed light on the impact of the famous ‘Let it Rust’ campaign on car sales throughout the current year. The volume of car sales in the first seven months of this year amounted to 66,000 units, compared to 175,000 last year, which shows a significant decline. In 2010, sales exceeded 300,000 units, falling to 265,000 cars in 2011, and then reaching 130,000 cars. Sales rebounded last year to 175,000 cars, then set back again this year. He added that the Egyptian market can accommodate more cars.
Expectations of the volume of car sales this year and explaining the sales map:
Abou El Magd stressed that the car market map had completely changed this year, which witnessed the application of three tranches of trade cooperation agreements between Egypt and other countries, the most important of which was the full implementation of the Egyptian-European Partnership Agreement. The agreement allows for a full customs exemption on cars of European origin. Many consumers have gained interest in European cars due to declining prices, which left an impact on car sales. He explained that European car sales rose compared to last year, while Korean car sales fell by about 39%, and sales for American cars fell by 13.5%, and Japanese cars saw a decline in sales by 16.5%. He pointed out that the sales of cars during the first seven months of this year reached 90,000 cars, a decline of 6.5% compared to the same period last year, when sales reached 96,000 cars.
The car market has gone through four stages during this year, Abou El Magd pointed out, as the first phase (January to March) saw a state of chaos and randomness due to the emergence of campaigns to brutally boycott car purchases, and the second phase that appeared in the Q2 of the year saw a state of anticipation by consumers as car sales significantly rebounded. The Q3 of this year witnessed a clear boom in car sales, as sales are expected to reach 170,000 by the end of the year.
The head of the Automobile Dealers Association stated that dealers were transparent and honest about car prices, as they launched some discounts and promotions after the fall of the foreign currency by 140 piasters, which reflects the absence of manipulation of prices, helping greatly in the recovery of car sales in Egypt. He called on the state to pay attention to traders in Egypt through licenses for traders’ activities because they have commercial records in the activity of auto trade.