KUALA LUMPUR: RAM Rating Services Bhd expects vehicle sales to decline up to 10% in 2016 due to weak consumer sentiment as due to the uncertain economic environment.
It said on Tuesday the contraction in the total automotive industry volume (TIV) follows a 17.6% on-year plunge in vehicle sales to 218,101 units in January-May.
“Poor consumer sentiment, compounded by the frontloading of sales last year, had resulted in the severe downtrend in TIV, the extent of which was deeper than we had initially expected,” said RAM’s head of consumer and industrial ratings Kevin Lim.
He said consumer confidence is expected to remain weak this year owing to the uncertain economic environment, the rising cost of living and tighter credit conditions.
“These challenges will pose a severe drag on automotive sales, although a slight uptick is anticipated in 2H, in view of the introduction of significant new models.
“At the same time, most industry players face slimmer margins from a higher cost structure and intense competition. As such, RAM has maintained its negative outlook on the sector, premised on continued tough operating conditions,” Lim said.
Growth in TIV in 2015 was flat at 666,674 units (2014: 666,465 units), despite the support of popular new models and sales-inducing events.
Significant sales of new models such as Perodua’s Axia and Honda’s Jazz and HR-V supported the TIV.
Lim added this factor, together with the frontloading of purchases by consumers in 1Q and 4Q 2015 (consumers bought ahead of the implementation of the GST in April 2015 and impending price increase of popular models in January 2016) had just offset overall dampened automotive sales.
Meanwhile, the severe devaluation of the ringgit last year had impacted the sector, given the higher costs of imported completely-knocked-down vehicle kits and automotive parts.
These costs had mostly been absorbed by the manufacturers in view of intense competition amidst an environment of weaker demand which had necessitated promotions and discounts.
Many large local automotive players had seen an up to 10-percentage point deterioration in pre-tax profit margins.
“While the extensive deterioration of the ringgit has since largely stabilised, we expect the value of the currency to remain weak against the US dollar this year, likely in the range of between RM4 and RM4.25 (2015 average: RM3.91).
“As such, the majority of automotive players may see their margins slide further. We note that most manufacturers have embarked on aggressive cost-cutting exercises and price adjustments, which are anticipated to cushion margin contraction,” he said.
Lim cautioned that the worst may not be over for some players in the sector, due to the continued tough operating environment this year.
“Nonetheless, we do not expect persistent and substantial deterioration in performance, given the relative stability of the ringgit compared to last year.
“We foresee a gradual recovery next year, in line with our anticipation of a measured retracement in the value of the ringgit over the medium term. Furthermore, sales of vehicles usually rebound after a period of contraction,” he added.
