Selling cars has never been a better business

Some of the luxury cars on sale at Valley Road Motors in Nairobi that Kenya Revenue Authority officials are investigating for import duty evasion on May 16, 2016. KRA issued a public notice that included 124 cars it said had outstanding tax issues. PHOTO | SALATON NJAU | NATION

What you need to know:

  • Toyota has a commanding lead in Kenya, but the brand does not control the market, the dealers agree.
  • Toyota is the most popular make among the youth, with the Fielder and Axio models most commonly preferred for taxi business, Mr Wambua says.
  • He said that most big cars are bought in cash, while most small cars are acquired on loan.

When Moses Mutua, a businessman, wanted to upgrade his Toyota Harrier he opted for a big machine: a Lexus Land Cruiser worth about Sh6 million.

He is part of a trend that has more happy customers driving away, leaving contented dealers behind. Last year, Kenyans spent Sh117.6 billion on imported cars last year, according to data from the Kenya National Bureau of Statistics.

That was an increase of 15.6 per cent from Sh101.7 billion in 2014 and Sh83.4 billion a year earlier.

According to Knight Frank’s annual Wealth Report, some new 202 Kenyans defied the downcast economy – which saw a record number of listed companies issue profit warnings – to enter the elite group of dollar millionaires in 2015, which rose from 8,760 to 8,962.

Motor dealers have attributed this jump in car sales to a growing appetite among the expanding middle class for cars ranging between Sh600,000 and Sh1.5 million. Cars were the third-largest import item, behind industrial machinery (Sh211 billion) and petroleum products (Sh214 billion) which recorded a 26 per cent drop on lower oil prices.

Mr Frank Wambua, the chief operating officer at Insignia Motors, says that both young and old Kenyans are buying cars.  However, younger people, who buy cars costing less than Sh1million, are more frequent buyers, perhaps because of the pressure to stay afloat with the ever changing social trends, he says.

When it comes to payment methods, only 40 per cent of their clients pay with cash.

“Most of the young guys aged between 25 to 35 years are buying cars for business,” said Mr Wambua.

He said many youth are buying cars to invest in the tech-savvy taxi business, which has seen a recent upsurge.  “Of late, with issues like Uber, most youth do not want to be left behind and they are buying cars to enter in the business, which is a good thing as they are investing.”

SPLASHING THE CASH

Toyota is the most popular make among the youth, with the Fielder and Axio models most commonly preferred for taxi business, Mr Wambua says. Older people aged above 35 years are buying big luxury cars like Mercedes Benz, Toyota Prado, and Volkswagen.

“Toyotas generally are more popular than other brands, because of the availability of spare parts and the resale value. After using the car for like two years it sells faster, and still at a higher price than any other brand,” said Mr Wambua

“The German machines like the Mercs are in a class of their own,” said Mr Wambua. He says the brand is slowly becoming popular with the young, and attributes this to status.

“When you are seen driving a Merc you are perceived to have money and loaded. You make a statement when you pop in with a Merc when another guy chooses to make an entrance in a Toyota Probox.” Japanese vehicles like Nissan and, Mitsubishi, are also becoming popular, he said.

When it comes to payment methods, only 40 per cent of their clients pay with cash, while the remaining 60 per cent pay through bank components like loans, Mr Wambua says.

“Those who pay cash are loaded… they do not mind spending Sh2 to Sh8 million on a car because they have money to spend, compared to hustlers who want to make an extra coin using the money they have,” he said.

“Hustlers in business [who] say they want to buy a car worth Sh4 million would spend a half or a quarter of that and the rest is paid in installments, either by cash or by bank components. Mostly the latter.”

In a month Insignia Motors sells over 10 units cross-sectional. The purchasing power differs, meaning in a day they can have about 10 inquiries that do not all necessarily turn into sales.

FREQUENT TRADE-INS

Mr Wambua says Insignia Motors mostly import second hand cars from Japan. Kenyans, he says, flock for Japanese cars as they are more affordable than cars from Toyota Kenya. “They are more expensive than imported cars,” he says of those sold by local dealers. “A 2013 Prado from Toyota Kenya could cost a whopping Sh12 million after bargaining, while here, a one-year-older [car], same brand would go for about Sh8 million,” he said.

Since last December, the taxman has introduced a dumping fee of Sh200,000 for each imported vehicle, putting pressure on prices since last December. A three-year-old car that would cost Sh1 million now costs Sh1.2 million.

Mr Wambua says although trade-ins are accepted, most car dealers do not find this the better option, because sales from trade-ins are infrequent and difficult to predict.   “In a month we can do one trade-in. This is not as frequent as the car sales. If you find someone trying to trade in a car, it is normally one that has been run down. It becomes difficult when you try selling it as a dealer and it may tie your capital for some time,” he says.

Things are different for Mike Omondi, another car dealer at Prestige Bazaar on Ngong Road, Nairobi. They do frequent trade-ins, mostly for big car owners who “are changing cars frequently”.

Mr Omondi says they have to remain in business. At times they sell trade-ins at a higher price than original sales, if well maintained. They are mostly Toyotas, though there is not uniformity.

“We know how to deal. In a month we can trade-in between five and 10 big cars of over Sh2 million. Most of those who buy Range Rovers do it not because it is a fast car but because they just want change,” he said.

"I have been to the UK and people there drive badly. Someone would stay in a place like Nairobi and work in Nakuru and they would use their car daily for commuting to work."

For example someone with a Toyota VX 2008 to 2009 model would want to retain the same make but upgrade to the latest 2014 to 2015 version. Mr Omondi echoes that there are no newcomers in the car business – most new cars are acquired through trade-ins.

AVOIDING THE UK

“Most of our customers are repeat clients. Those who buy mostly already own a car or two. You can find one is adding another car to his or her fleet or someone just wants to change their social status by acquiring the latest model,” said Mr Omondi.

The irony is that while Kenyan youth are changing status from lower to upper, much older Kenyans are changing from upper to lower.

“Sometimes it gets complicated. Sometimes moneyed people do not like to show off so you may find they acquire smaller cars to hide status. Some big car owners come to buy small cars to take their kids to school, or for their wives and some also get cars for their girlfriends,” said Mr Omondi.

He said that most big cars are bought in cash, while most small cars are acquired on loan. In a month they would sell about 30 big cars like the Land Cruiser VX, double cabin and Range Rover. Those buying are usually aged 35 years or older and pay in cash.

"For every Toyota pickup sale, Isuzu sells two of them.”

Prestige Bazaar imports mostly from Thailand and Australia, avoiding the UK market due to its not-so-worthy conditions. “I have been to the UK and people there drive badly. Someone would stay in a place like Nairobi and work in Nakuru and they would use their car daily for commuting to work, so when we import from the UK our clients complain because of the low quality,” he said.

The highest price Prestige have sold a car for this year is Sh16 million, for a 2013-2014 Toyota Land Cruiser. “These guys thrive with the logo: if you do not have money don’t think others don’t have it. Getting someone buying a Toyota VX on loan is very difficult.”

The market for small cars is, however, still based on financing. There are institutions that have really nice systems of financing but the uptake is still slow, Mr Omondi says. Cash flow is the bone of contention.

"RIPPED OFF"

Peter Nyaga, however, bought his Toyota Avensis in cash.  Although other Kenyans buy cars to fit in, he says his was for convenience, resale value and availability of spare parts, which he says mean more harm than good for Toyota admirers.

He did not go for the number plate either. He went for a KBW series which not much different from the KCC series, and got to spend less than what he would have for the latter. “Those who look at number plates are prone to landing a raw deal since the quality of the car may not be as fresh as the number plate,” he said.

“I have a family of four and if we were to travel upcountry I would have to pay over Sh4,000, that’s a full fuel tank.”

Toyota has a commanding lead in Kenya, but the brand does not control the market, the dealers agree. Many prefer different brands for different types of vehicles. Among long-distance trucks, buses and pickups, Mercedes and Isuzu respectively command the market.

“Mercedes trucks are able to handle terrain but Toyota have a problem in that. [For] every Toyota pickup sale, Isuzu sells two of them,” he said.

Dealers however speculate that the higher excise duties that took effect from last December could hurt their business and stagger demand for imports. Imported vehicles of more than three years old now attract a tax of Sh200,000 while newer ones attract Sh150,000 — a departure from the previous duty of 20 per cent on a vehicle’s value.

“Buyers are feeling ripped off and we cannot figure why one has to pay Sh200,000 or Sh150,000 more for a car worth Sh1 million,” Mr Omondi says.