New vehicle sales drop 17pc on high taxes, interest rates

 Eyre Motors

Motor vehicles at Eyre Motors yard in Mombasa County on July 5, 2021. 

Photo credit: Wachira Mwangi | Nation Media Group

Sales of new vehicles fell 17.66 percent in the first quarter of the year, marking the sharpest drop in seven years, largely on increased taxation, rising interest rates, and battered shilling.

New vehicle dealers and assemblers sold 2,271 units in the January–March 2024 period, compared with 2,758 units in the same period last year, data tracked by the Kenya Motor Industry Association shows.

The double-digit decline, amid weak corporate and household earnings, pushed orders for new motor vehicles to the lowest levels in a decade, based on analysis of available KMIA numbers dating back to 2015, when demand peaked.

Dealers, including Isuzu, CFAO, and Simba Corporation, have since last year complained of a tough operating environment.

They have cited climbing interest rates, which have depressed demand as most of the orders are financed by banks while accumulating pending bills yet to be settled by the government and private firms have exhausted cash flow positions.

“The market is still difficult, but thank God, the exchange rate is beginning to turn. It has been difficult to import vehicles and vehicle parts because we needed to buy dollars to get these materials from abroad.

“Aside from the bad [exchange] rate, it was also hard to get dollars,” said Rita Kavashe, managing director at Isuzu East Africa, in a March interview.

“Interest rates have been high, meaning most of our customers were not able to get funding. Today, it is between 18 and 25 percent. We have not seen such an interest rate in many years, and so, it is tough for our customers too.”

Under pressure

The shilling had crossed the Sh160 mark against the globally bullish US dollar, as per official rates, in January before starting to regain footing in mid-February.

However, most vehicle units [and their parts] sold in March had been ordered months earlier, when the Kenyan currency was under pressure.

Vehicles are, as a result, among the goods that have witnessed one of the biggest price increments in the past year, compounded by higher taxes.

The Kenya Revenue Authority increased duty on shipping cars into the country from 25 percent to 35 percent in July after the East African Community Council of Ministers approved Kenya’s application to levy a higher rate than 10 percent of the common external tariff for the seven-nation EAC bloc.

Importation of vehicles further attracts excise duty ranging from 25 percent to 35 percent depending on the size of the engine, in addition to the standard 16 value-added tax.

Excise tax is charged on the sum of the landed cost of the car and import duty, while VAT is applied to the resultant value [the sum of the landed cost, import tax, and excise duty].

The KMIA data shows Isuzu East Africa and CFAO Motors Kenya, which control about three-quarters of the new vehicle sales by volume on average, were among the dealers hardest hit in terms of sales.

CFAO, which had a year ago bucked the industry trend of flagging sales, posted a fall of 21.6 percent, the fastest year-on-year drop among the biggest automobile dealers in the review quarter. This was after the firm processed orders for 755 vehicles, compared to 963 units a year ago.

CFAO sells multiple brands, such as Toyota, Mercedes, Volkswagen, and Hino under one roof following the merger of Toyota Kenya and DT Dobie operations in May last year.

Market leader Isuzu East Africa’s sales contracted 12.3 percent to 1,030 units from 1,174 units in the prior year.

However, the market share of Isuzu, which sells pickups, buses, trucks, and sport utility vehicles (SUVs), increased to 45.4 percent in the quarter under review from 42.6 percent the year before.

Simba Corp, which holds multiple franchises, including Mitsubishi and Proton brands, bucked the trend after growing sales by a modest 2.8 percent to 255 units.

This helped raise Simba Corp’s share of the market to 11.2 percent in the review quarter from 9.0 percent the year before.

The falling demand for vehicles caught the eye of Treasury secretary Njuguna Ndung’u who listed them among key goods, including fuel and beer, whose flagging sales were being felt on government revenues.

“The shortfall in excise duty is explained by the decline in oil volumes, motor vehicle imports and deliveries of domestic excisable goods such as cosmetics, beer and spirits,” the Treasury officials wrote in the 2023 Budget Review and Outlook Paper for the current financial year ending June.