Presentation to The Rotary Club of South East Nassau, May 6, 2015
When Past President Frank e-mailed me (with follow up from Mr. Afton Moxey) to give this talk he suggested the content should be something like "The auto industry, VAT, the current state and challenges". Well I've taken the liberty of amending that slightly to The Bahamas New Vehicle Industry. Past, Present and Future. But first a little bit about our industry.
The Bahamas Motor Dealers Association, as we are known today, was formed in 1972 in response to the government’s decision to mandate price controls on a luxury item like the automobile and spare parts. Those price controls remain in place today by the way and leaves us in such illustrious company as Venezuela.
Back then the association was primarily made up of new vehicle retailers. Today, membership includes after market parts and service providers as well, including, in alphabetical order: Albury's Supply Company, Automotive & Industrial Distributors, Bay Street Garage, Bahamas Bus & Truck, Cartwright's Garage, Elite Motors, Executive Motors, Friendly Ford, Multi-Auto Parts and Accessories, Nassau Motor Company, Omega Motors, Quality Auto Sales, Sanpin Motors, Tess Trucks & Equipment (Bahamas Mack) , Tyreflex Star Motors and Whim Automotive.
Our industry has a Code of Ethics. It’s a bit long to read here, but, "As a condition of membership of the BMDA, members undertake to enforce this Code and to use their best endeavours to ensure that its provisions are observed:
Operate our businesses in accord with the highest standards of ethical conduct
Meet the transportation needs of our customers by providing vehicle sales, service and parts in a knowledgeable and professional manner
Provide knowledgeable and trained personnel in all departments to ensure efficient, quality customer service
Advertise our products in a positive, factual and informative manner
Provide knowledgeable trained personnel in all departments so that customers can fully understand work performed or goods purchased
Upon request, provide written estimates of any work to be performed and/or goods to be purchased
Detail charges so that customers can fully understand work performed or goods purchased
Resolve misunderstandings with customers in a prompt and courteous manner
Obey and uphold all laws and regulations concerning our industry
Put our promises in writing and stand behind them
Training
Over the years our member firms, both individually, and as a group, have assisted with the development of apprenticeship training in our shops and with the Industrial Training Centre (ITC), now known as the Bahamas Vocational & Technical Institute (BTVI), as we view this as an important part of anyone becoming a serious technician today. Note I said technician, not mechanic. The computer age has forced many industries to change for the better. Ours is no different.
We’ve donated tools, engines and even cars for use in training to high schools, both private and public and BTVI.
We take students in on day release programmes, summer training, and more.
However, one of the best things to develop out of the computer age is Internet based training from our suppliers. Heck, even NMC’s management team are presently taking General Motors sponsored Harvard Business courses online.
After taking online courses tech’s are afforded the opportunity to visit the manufacturers training centres for hands on certification and to reinforce the theoretical training they’ve completed here at home.
In fact our service department was recently awarded the Honda Goldstar Distributor Technical Certification. We are very proud of our team for this major accomplishment. Many of our service associates worked very hard to attain that status.
At Nassau Motor, we developed our own in-house apprentice programme, utilizing the talents of our senior technicians, quite a number of years ago, so the online universities as they’re known from Honda and Chevrolet are great tools for us with ongoing training.
While I’ve concentrated on our service department, similar training is available for our vehicle sales and parts consultants.
Automobiles are changing dramatically as a result of technology so ongoing training is very important. Not unlike the regular computer upgrades we all face with our IT departments.
Historical Sales
So now if you might prop your eyes open, it’s time for some statistics.
These date back to 2003 so I’ll run through them quickly. I have a spreadsheet here if you would like to see the specifics after.
2003 to 2007 were record years for new car sales going from 2,948 units to an industry record in 2007 of 4,165 units.
Then along came 2008 and the bottom fell out. Sales declined to 2,893 units in 2008 and a low of 1,778 units in 2009. There have been slight upticks. 2010 – 1,836 units. 2011 – 2,040 units. 2012 – 2,396 units.
Unfortunately there was another dip to 2,204 units in 2013.
By the way, over the past twelve years passenger cars averaged a 40.3% share. SUV’s commanded a 39.2% share and Commercial vehicles took 20.5%.
We’ll get more into the effects of taxation a little later, but commercial vehicles used to hold near enough 30% of the market until the government, in it’s infinite wisdom, raised import taxes on them from 60% to 85%. Commercial units sales dropped from 1,077 units in 2006 and have been on a steady decline ever since. Bottoming out at 254 units in 2013.
Import taxes on commercial vehicles were reduced to 65% with the 2013 budget if I remember correctly and 2014 rebounded a bit to 357 units.
Current situation – Impact of VAT
2014 was most interesting and VAT is proving to be both a savior and a curse.
Sales in the first quarter of 2014 were up 17.9% or 79 units over 2013.
2014 Second quarter sales slumped by 76 units from 2013.
Third quarter sales of 2014 increased 45 units over the third quarter of 2013.
And now comes the kicker.
Sales in the fourth quarter of 2014 increased 282 units over the same period of 2013 and this is the VAT savior for 2014 as unit sales increased to 2,534 units.
It’s important to remember VAT was coming January 1, 2015 so most of these sales came in December 2014 and sales were triple those of December over the last several years. And that’s where VAT was the savior for 2014.
Then the first quarter of 2015 arrived and to a large extent, we’re witnessing the curse of VAT.
First quarter sales over the years mentioned have averaged between 400 and 500 units. For 2015 these amounted to 351 units in the first quarter.
We’re hopeful the annual car show last month (April), will boost sales for the second quarter, but what we are finding is the consumer is losing yet again with VAT because whatever discount they might receive is eaten up with more taxes. This of course impacts clients ability to meet down payment requirements, and the higher loan payments that result.
More on Taxation
Over the years our association (BMDA) has made numerous proposals to the government, whether it’s been how reducing tax rates on targeted new imports could increase government revenue, to environmental issues, to a proper titling system, and more recently the anticipated impact of a Value Added Tax.
Reviewing our “predictions” to date, it seems our crystal ball worked. But to be honest, it’s not rocket science. All we did was call our friends in the auto industry throughout the region where VAT was previously introduced and we found their sales dropped up to 30% for a sustained period.
Bearing in mind our industry sales initially dropped some 60% from record 2007 levels and have not recovered to date, losing another 30% in sales for a sustained period, could have serious repercussions.
Even More on Taxation
It would appear that successive governments think the automotive industry is fertile ground for continually increasing taxes for a couple decades now.
Business License Taxes
There is no getting around the auto industry has a very high turnover with very low profit margins. If we net 3% of sales we are very lucky. Particularly in our high cost and low sales environment.
In other words, net profits of 3% of gross sales have been rare for most of our member firms. But this has not prevented successive governments raising Business License Taxes from 0.50% in 2010 to a high of 1.25% today.
Yup, some of our member firms are taxed more than we make in net profit and that does not help with staying in business as you can appreciate.
As an aside, I have a fondness for economics, particularly what’s known as the Austrian School with professors like the famous Ludwig von Mises and F. A. Hayek, and I would suggest that an economic model of taxing business more than it earns in net profit is not very practical for the future of the business or a government that requires taxation to fulfill its mandate.
Import Taxes
As most of you here would know, vehicles are not cheap when we consider import taxes of 65% 75% and 85%, and when these rates are changed without notice to the industry this impacts us for a long time.
For example, if rates are raised, current inventory is less expensive so it sells much faster, causing inventory shortages.
When the rates are dropped again, we have very high priced inventory in stock which many times has to be sold at a loss.
With order lead times of up to 7 months in some cases, it would help if the industry was consulted by the government before they make these changes. At least we might be able to adjust our orders.
Another draw back of excessive import taxes is many people are inclined to import older vehicles.
One point to bear in mind on import taxes, is we pay it all in advance, immediately upon import.
Most other countries have bonded facilities and import taxes are paid upon the sale of the vehicle. We’ve requested consideration for this and await government feedback.
Price Control
Price Control remains in place for our industry. 25% on new vehicle imports. 15% on used vehicle imports and 75% on parts.
While cash discounts apply, beside reducing gross margins for auto companies, customers lose the benefit of the cash discounts by higher taxation as alluded to earlier.
But what does that have to do with price control you ask?
Well mark ups on product are based on landed costs. These landed costs are reduced slightly as import taxes are no longer charged on freight and insurance. So profit dollars or more specifically, gross profit is reduced.
To hammer this point a little more, if we could mark parts and vehicles up just 1% more, while remaining competitive with new car and part imports, this could make a tremendous difference to sustainability of the auto industry.
Hence, the BMDA has asked for the removal of price controls or an increase in the allowed mark up ranges to compensate.
Restating the Issues
To summarise:
- VAT is, well, … a curse. Not to mention the time it takes to manage it when we can be focused on trying to improve our businesses.
- Price Control needs to be amended or repealed.
- Business License Taxes need to be restored to levels in previous years – 0.50% would be preferable.
- Automotive retailers should have bonded facilities like the rest of the region.
- Import Taxes on new automobiles should be reduced by at least 7.5%, if not more, as VAT is now in place.
- The cost of doing business here is very high as we know, and coupled with the regulations we face, with more being contemplated and added each year, it will not be easier on the automotive industry.
As you can see, beside the obvious impact of the world-wide economic recession, most of the issues our industry faces have come from changes to government policies. It’s almost as if the auto industry’s sole purpose is seen as serving the governments interest. Regretfully then, we are left to beg government for amendments to their policies to alleviate their unintended consequences. Of course these changes don’t come easy to an ever growing government that is strapped for cash.
The Future
Of course, we have to remain optimistic about the future. After all, our industry employs over 400 people, many of whom have families to support. Not to mention the importance of shareholder returns – i.e. profit.
Predictions
Scott Adams, the American Cartoonist is quoted as saying:
“There are many methods for predicting the future. For example, you can read horoscopes, tea leaves, tarot cards, or crystal balls. Collectively, these methods are known as "nutty methods." Or you can put well-researched facts into sophisticated computer models, more commonly referred to as "a complete waste of time."
In other words, anyone’s guess is as good as mine, but since I have the floor and I’ve been asked to predict something, here goes.
- We might see some consolidation/mergers. The market, with the present economic climate is not large enough to support the current number of brands/automotive retailers for a reasonable return on investment.
- Automotive retailers will look to diversify their business. For example, along with leasing automobiles, we’re now selling FG Wilson generators. The Auto Mall Group (Quality/Executive/Omega) have recently ventured into the tyre business. Sanpin Motors, Bahamas Bus & Truck and the Auto Mall group sell used cars from Japan. (As an aside, many of us wonder about the merits of importing 7 to 12 year old vehicles that are cast aside after a few short years, inflicting more damage to the environment).
- Maybe there will be a closure or two who knows?
The more dramatic predictions enunciated do not appear on the near or even mid term horizon as far as I can tell, but if there are no changes to government policies and the economic climate remains stagnant, as outlined above, a shakeout will most likely occur at some point.
Having said that, and to end on a happier note, automobiles are better than they’ve ever been. More fuel efficient and better on the environment, both with emissions and manufacturing processes. Manufacturer warranties are now three years for the most part and with regular, routine maintenance, vehicles are lasting longer than ever even though we have some of the harsher driving conditions in the world.
In addition, with normal attrition and the lack of bicycle lanes and a more reliable bus transportation system, Bahamians will need automobiles to get around for a while yet.
In other words, you’ll have car salesmen to kick around a little longer.
Thank you!
