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Time to wake up – new car market over the worst days?

After three years of struggle, during which new car sales dropped by 70%, Hungarian car importers finally see light at the end of the tunnel. How did the crisis rearrange the market and what long-lasting trends have evolved?

Since the breakout of the crisis in 2008, car sellers have not had many reasons for optimism. Not only did new car sales drop from 150,000 a year to 45,000 by 2011, but the unpredictable economic environment and increasing fuel prices might suggest that people will continue to think twice before investing in a new car in the immediate future. However, 2012 might be the first year that brings a change. Based on their January-May data, importers predict a slow upturn from now on.

Fiat Magyarország, for example, welcomed a 10% increase in new cars sales in the first five months of 2012, which might suggest that the worst days are over. “We have probably reached the bottom of the hole already and now there is only one way, up,” managing director László Stekl told the Budapest Business Journal, before cautioning that the real upswing is not likely to cheer the market earlier than in two or three years’ time.

Porsche Hungária shares this slight optimism. As the 18,350 vehicles it sold in 2011 was 5% more than in 2010, communications director Dr. Sándor Vérten hopes that “the decline has come to an end”, although he does not predict full recovery to take place until 2015.  

New trends

In parallel with a decline in new car registrations, consumer habits have also changed. While previously only 30% of new cars were paid in cash and the rest were bought on credit, in 2011, as a recent study conducted by consultancy PwC shows, only 9% of purchases were financed by credit. This tendency is probably due not only to the stricter requirements buyers have to meet when applying for a loan but also to the precaution that evolved in people witnessing the struggles of hundreds of thousands of troubled borrowers.

As a result of the crisis, there is still one emerging trend that is clearly positive: buyers have become more conscious and circumspect, and try to gain more information about models when considering which one to buy. This consumer approach is highly welcomed by Magyar Suzuki. “People usually have negative visions about Suzuki cars and underestimate our current models,” marketing manager János Hársfalvi told the BBJ. “But when they try one of our cars, they soon realize that this Suzuki is no longer the one they might have deprecated years ago.”

The hard times have rearranged the popularity list of the cars as well. While before 2008, passenger vehicles accounted for 70% of new car sales and the proportion of fleet vehicles was only 30%, those positions are now reversed, with company purchases propelling the market and providing 70% of the sales. As fleet cars are usually more impressive models, this also means that category C cars are the most in demand nowadays. According to the head of Hungarian Vehicle Importers Association (MGE) Péter Erdélyi, most business purchases involve middle-class models like the Volkswagen Passat, the Ford Mondeo or the Toyota Avensis, but lower-middle-class models such as the Opel Astra, the Volkswagen Golf, the Ford Focus and the Toyota Corolla also sell well to companies.

The growing popularity of fleet cars at the expense of passenger cars has hit Magyar Suzuki particularly hard, as the company reached its market leading position by focusing on sales of passenger cars and putting less emphasis on fleet vehicles. No surprise then that they have been recently dethroned. Aiming to get back on top, Suzuki will soon renew its brand image, and plans to triple its 2011 sales this year.

Low consumption rules

Reduced spending power is not the only driver behind the decline in car sales. High petrol prices, currently around HUF 425 per liter, mean people tend to use their cars less and, as such, the amortization time also decreases.

At the same time, increased petrol prices might slowly change the trend of big cars being preferred. Magyar Suzuki’s most popular models are already feature low consumption, such as the Swift or the SX4. Porsche Hungária, importer of five brands from Audi to Seat, also reported that Volkswagen’s BlueMotion technology, which puts low consumption into focus, or Skoda and Volkswagen models with 1.4 TSI and 1.6 CR TDI engines, are of increasing popularity nowadays.

The sales data of Fiat Magyarország also supports this notion. In the first five months of 2012, the demand for cars in category A and B finally increased after years of decline. While the two categories provided a combined 19% of purchases in 2011, in January-May 2012 this figure was up to 25%.

Sustainability too expensive

“In general, it is true that compared to average salaries, new cars are much cheaper now than 10 or 20 years ago,” MGE’s Erdélyi pointed out. In addition, as importers had already priced in the crisis years ago, car prices have shown no significant changes in the past 12 months and are not likely to do so in the coming months, either. Still, as most importers try not to burden customers with the extra costs of currency rate changes and of the VAT hike (the tax rate increased from 25% to 27% on January 1, which was only slightly compensated by the reduction of registration costs), the budget of these businesses has become more unpredictable.

From a buyer’s point of view, cost can obviously be saved in the long run driving a car with a lower consumption, although all the importers surveyed by the BBJ agree that environmental consciousness in itself is, unfortunately, not yet appreciated by buyers as an individual value. "Cost efficiency and finding solutions for everyday problems are the priorities for Hungarian people at the moment,” Suzuki’s Hársfalvi pointed out.

“Vehicles powered by alternative sources such as electricity or hybrid solutions are far more expensive at the moment,” Erdélyi added. Porsche’s Vérten concurs: “The prices of these cars cannot compete with those of regular ones.” Most of the importers agree that global sustainability makes it necessary for carmakers to open up to alternative power sources in the long run, but to make such solutions more widespread, state or EU subsidies would be essential.

According to Fiat Magyarország’s Stekl, natural gas-powered cars might be the solution in the short- and medium-term as this technology is already much more well-established and these vehicles use a “clean material” while also being able to lower fuel costs. The number of conversions of petrol-run cars into gas-powered ones, which at Fiat costs around HUF 230,000 and does not void warranty, has quadrupled in the past 18 months.