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The pandemic - two years in

Most MTA members are weathering the Covid-19 storm, sailing through with little or no damage. The new car market has been spectacularly buoyant – up almost 40 percent on last year and ahead of pre-pandemic 2019 sales.

However, there are some businesses that barely have their heads above water, and a few have pulled the plug.

MTA Chief Executive Craig Pomare says, “For Auckland and many Waikato members, the recent months of quarantine restrictions have been tough mentally as well as financially. We have been lucky that the New Zealand economy has remained relatively resilient - thanks largely to our strong agriculture sector and the unprecedented billions of dollars the Government has paid out to keep businesses afloat.”

He says economic forecasts for next year suggest the waters will be choppy. “We are expecting inflation, less discretionary spending as mortgages increase, and the introduction of the penalty fee for high CO2 emitting vehicles. All this is likely to have a noticeable effect on the new car market particularly. But all members are likely to face rising costs. We also expect many employers will need to increase the wages of staff they value the most as the skill shortage is likely to worsen once the borders open and people start heading off on their delayed OEs.”

Auckland doing it tough

Having recently spent over three months in lockdown, and more weeks under very restricted trading conditions, Auckland members are understandably a bit cranky.

Dipak Bagia’s Petrochem Group owns 16 Caltex service stations in the North Island, most in Auckland. He says it’s been tough sticking to his bubble and seeing only a limited number of people day in and day out.

Business has also been tough. Overall, his takings are down by 20 to 25 percent.

“It’s very area-specific. Our sites in Central Auckland and North Share are particularly hard hit.”

He’s cut costs where he can and approached all his landlords to ask for rent relief. “We’ve had a mixed response; some have agreed to reduce their rents by 30 percent. But there have been multiple sites where assistance was not given.”

Dipak says he wrote to his local MPs, including Prime Minister Jacinda Ardern, to flag the issue and ask for their help. The Prime Minister’s response was favourable and the Government has announced a new law that requires both parties to agree on a ‘fair proportion’ of rent reduction to reflect the commercial tenant’s drop in revenue.

“In our case that’s 30 percent.” He says he’ll be first in the queue to use the new law which is backdated to 28 September.

There’s been good support from his banks. “At the start of lockdown, we prepared for the worst and drew up a detailed cash flow projection for the next 12 weeks, which we update weekly. This helps the banks to understand our position and they have been helpful. I think that if you keep communicating with your banks, then they are likely to be more supportive.” His advice is for businesses to make sure they have good systems in place and seek help early. “And if you don’t end up needing all the overdraft facility then return it – that will help develop your relationship with the bank.”

Dipak is hopeful next year will be relatively ‘normal’. “We are assuming that what Government is doing will work. So, we are still going ahead with planned capital expenditure, like car wash upgrades, on some sites.”

Collision repair

Six weeks of not doing any repair work gave Auckland member Thomas Hohaia a good long
run of family time – which he loved. But it was pretty tough on his business, Hugh Munro Panelbeaters. “Overall, we will be about
18-20 percent down on turnover for the year.”

He’s counting his blessings. “We are really busy now and booked up almost to the end of the year and I have avenues for other work, not just insurance jobs. We also expanded earlier this year, so the site now has room for tow-ins.”

Parts supply

Many businesses, like All Euro Parts - which has branches in Snells Beach, North Shore and Christchurch - were prompted to improve some of their business processes during last year’s lockdowns. They were able to reap the rewards of that during this year’s restrictions.

Director Auric Mirfin says, “We did a lot of different things: cleaned up our database, looked at new product ranges, and made changes to our supply lines to keep up with demand and build up stock.” Opening a new branch in Sydenham, Christchurch in July this year also provided an opportunity to install new technology – like sophisticated bar coding.

He says last year the company was able to grow and he’s sure this year will pick up and work out the same as it did last year.

“We have seen good gains over the past few weeks and as soon as we get into the new traffic light system things will get even better. It seems some garages have been hit harder than others and it’s difficult to say why.”

Ahead of the game

Brent Buckmaster’s Mt Roskill Collision Repair Centre and his newly formed company Roskill Auto Mechanical are working well together, which he says has helped keep his numbers up.

“The last year has been very dynamic with work flows very up and down. I am not losing as much money as expected, but the figures have dropped significantly.”

He’s working with contactless processes, his staff are vaccinated, and he laminated everyone’s vaccine cards, so they were able to provide proof until the Government’s certificate rolled out.

“I started with just laminating my family’s cards, but it quickly grew to friends and their families then the team at the workshop.”

New car sales rocketing up

New car sales are up for the year by around
40 percent and used imports up by around 4 percent. It’s been a boom year, even for the Auckland and Waikato dealers hit by the lockdown and Level 3 restrictions.

Waiting lists are now being run by many dealers – Toyota reports a six-month wait for clients wanting a new ICE car, and 12 months for a hybrid.

Even under lockdown, cars were being sold, albeit at about half the usual number. Under level 3 restrictions, the showrooms opened up to an onslaught of customers.

As one dealer said, “We are selling cars faster than we can get them and once people know about the delays, they are quick to get their order down and get in the queue.”

The Government’s decision to push out the start of the next stage of the Clean Car Programme and its resulting feebates/penalties has had only a slight impact on forward orders. “Some people are going ahead with their orders for a January delivery, which means they will now miss out on a feebate, which isn’t set to come into effect until April now. Others have asked for delivery after April in order to gain the feebate.”

Car market changing

Over the past two years, new vehicle sales have been strong, and used imports solid but not spectacular. However, we’re heading into turbulent times.

The world’s production lines have been disrupted by Covid-19 and component shortages. Computer chip supply has affected most vehicle manufacturers this year. Some brands have had to change their vehicle features and specifications on the fly to keep production lines running. Now we hear magnesium supplies are low. This will hit the supply of castings for engines, transmissions, wheels and many other components.

These supply issues also affect the used import market. Japan’s new vehicle market is down and this has led to fewer trade-in vehicles available for used import buyers.

Worldwide shipping capacity is constrained and prices are climbing.

In New Zealand inflation is growing - an issue we haven’t had to contend with for almost a decade. We are also in the early stages of the Government’s roll out of its Clean Car Programme (with it’s ‘feebate’ and CO2 emission standards) – despite industry opposition. At the risk of oversimplifying the issue, the industry believes the annual reduction in CO2 target levels is way too aggressive and will be unachievable because of limited global production of low and zero emission vehicles.

This will mean ICE vehicles will continue to be imported and sold, despite the new significant financial penalties. Without the ability to accrue ‘credits’ earned by bringing in low carbon alternatives, importers will have no option but to pass on the net penalties. So ICE vehicles will progressively become more expensive. Importers will have to decide how to modify their mix of high and low emitting vehicles to ‘assign’ those additional costs.

Gradually, the price differences between EV and ICE will reduce, both naturally and artificially. But opportunity will rely on supply being able to meet the demand, which is unlikely.

Financing

The new finance laws came into effect on
1 December. This particularly affects those buyers who can’t prove adequate financial surplus to meet the payment obligations. And of course, those with poor credit profiles are even more likely to be shut out of the market.
If it lands like similar legislation did in Australia a few years ago, it will be harder for those people to upgrade their vehicles. Australia has seen the outcomes and is now winding back those new finance laws, while we are now bringing them into play. Hmmm.

In short, over the next year replacement vehicle options will be more expensive and finance will be more difficult to secure for those people who really need it. From an observer’s perspective, it looks like government policies are working against each other in this space.

Private motoring increasingly looks like an unachievable option for some people. But the alternative transport options contemplated under the Emissions Reduction Plan (better and more comprehensive public transport services) are unlikely to be in place for many years.

It looks like the winds of change are descending upon the vehicle dealer sector. The industry has always faced challenges and I am sure it will adapt and survive. But it might not look the same as it does today.

2021 - the same but different

We had great hopes that 2021 would be a lot better than 2020, and for the most part it was, until another round of lockdowns.

January through to March saw good workflows in the workshops and a steady start to the year.

With our international borders still closed, there was no hope of attracting skilled technicians from overseas. Many businesses have gone back to traditional apprenticeship training to foster new talent. This is something the industry has needed to do for a while now. Hopefully these apprentices stay around once international travel is on the cards again.

Parts ordering became a little problematic if you needed anything other than routine servicing parts. International shipping delays and electronic chip shortages caused lengthy delays for some. Unfortunately, these delays are something we are going to have to live with for the foreseeable future and may even get worse before they get better.

April saw the predicted ‘WoF trough’ hit the vehicle inspection sector. Although the trough wasn’t as deep as first feared, it still had a noticeable impact on the bottom line of businesses as it coincided with the Easter and ANZAC public holidays and school holidays.

May, June and July flew by as everyone got back to work; however, for members in Canterbury there were floods to deal with as well, something that would repeat itself in August for West Auckland members and November for Gisborne.

August saw the country plunge back into lockdown, hitting many small businesses hard as they simply hadn’t had time to build up their cash reserves since the previous lockdowns. For Auckland the situation was much worse as the lockdown stretched well into November.

Many businesses that were able to pay staff at 100 percent during the 2020 lockdown simply couldn’t afford it in 2021 and had to drop down to 80 percent pay rates.

Coming out of the 2021 lockdown was a little different with many customers cutting back on their discretionary spending. While most customers were happy to get their vehicles inspected, serviced or repaired - there was no demand for extras like mag wheels and more lights. Perhaps increases in mortgage interest rates have had an influence.

What is there to look forward to in 2022?

2022 is going to be another hard slog. Barring any further lockdowns, we will only see a slight dip in vehicle inspection numbers in April with another dip in August, but there should be a busy build up to the year end.

The new Matariki public holiday on 24 June and an additional five days’ sick leave for many employees will have to be included in budgets and planning.

The 2021 MTA Charge-out Rate and WoF Fee survey showed there were a number of members who haven’t reviewed their rates in the last 12 months. If this includes you, please take time over the holiday break to review your charge-out rates and inspection fees. A little pre-planning could save your business in the long term.

Confidence boost needed

Changes in the timing of the Government’s Covid-19 payments to businesses this year impacted on cashflow and business confidence, says motor trade accountant Peter Morton.

“Last year, the wage payments were made in one three-month installment, giving people the comfort of having a lump sum in the bank. This time round, the payment was made about every two weeks.”

“This change, combined with a poor bounce-back after the Level 4 lockdown, affected industry confidence. But people were grateful to be getting the payments so there weren’t too many complaints.”

Peter, who is a director of Herbert Morton Chartered Accountants, has clients in the motor trade across New Zealand, including many in Auckland.

“It’s been brutal in Auckland. Businesses were not making any money and living off their savings in a lot of cases.”

Many saw their incomes drop to about 60 percent of normal but are now clawing back their losses.

South of Auckland, most businesses are doing well – apart from those in Queenstown and tourist centres, he said.

Overall, he is confident the motor trade will continue to do much better than most through Covid and through the predicted inflation of 2022. “In the past, during a recession, our sector has done well - people still need to get around and need to keep their cars serviced and repaired.”

His advice for 2022 is for members to keep investing in equipment, tools, and systems that will improve their business. “You also need to keep cash flow liquid. If you can do both, you can survive the hard times. Make savings where you can, but don’t turn it off if you can’t turn it back on. Decide if you need something before you buy it or use it.”

He is unconcerned about any immediate impact as a result of moves to phase out fossil fuel reliance.

“In New Zealand 98 percent of cars have combustion engines, so they will still need to be filled up and fixed for a few years to come.