The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamian new auto industry will eventually suffer “a shakeout” unless the business environment improves, one dealer yesterday warning: “You can’t keep fighting City Hall forever.”

Rick Lowe, Nassau Motor Company’s (NMC) director/operations manager, told Tribune Business that industry consolidations and mergers were likely to occur unless the economy recovered and the Government changed its taxation policies.

Speaking after giving a presentation on the sector to the Rotary Club of South-East Nassau, Mr Lowe said the Government seemed to believe the auto industry was “there for its beck and call”, and represented an abundant, ever-present source of tax revenue.

“We can’t go on forever like this,” he told Tribune Business. “We can’t keep fighting City Hall is what it amounts to.

“Because of the situation they’re [the Government] in, they’re taking a decision to target certain industries. But if the investors can’t get a return, how long does that last?

“I don’t think they consider the unintended consequences. I think they look at you as if you’re selling cars, you must be making a mint. They don’t grasp the true reality of the situation.”

Mr Lowe implied that Value-Added Tax (VAT) was merely the latest imposition for a Bahamian new vehicle industry, already grappling with a Business Licence fee increase from 0.5 per cent to 1.25 per cent, to contend with.

He added that frequent changes in Government tax policy, and rates, towards the sector - which occurred without any consultation or warning - made it extremely difficult for dealers to manage their cash flows and inventories, and determine ordering patterns.

Mr Lowe cited commercial vehicles to support his argument, noting that their share of the new vehicle market had declined from near 30 per cent to a 20.5 per cent average over the past 12 years, after the Government raised their import duties from 65 per cent to 85 per cent.

That increase was reversed by the Christie administration, but Mr Lowe indicated the damage had been done, and only now where commercial auto sales on the rebound.

“Commercial unit sales dropped from 1,077 units in 2006 and have been on a steady decline ever since, bottoming out at 254 units in 2013,” he explained.

“Import taxes on commercial vehicles were reduced to 65 per cent with the 2013 Budget, if I remember correctly, and 2014 rebounded a bit to 357 units.”

As for VAT, Mr Lowe said it had delivered a ‘double whammy’ for consumers by effectively “eating up” any discounts they might receive from auto dealers.

“It impacts them twice,” he told Tribune Business. “It raises the cost of the vehicle to them, so the down payment and loan increase, and the discounts provided by retailers are eaten up by VAT, so the consumer loses the benefit they enjoy.”

Emphasising that the sector was another high turnover, low margin industry that was disproportionately impacted by Business Licence fees levied on revenues, Mr Lowe added that it also suffered from price controls.

These prevented it from increasing margins to respond to both VAT and the change in import duty structure. Marks-ups are based on landed costs, which have reduced as a result of them no longer including freight and insurance.

This, Mr Lowe said, would only reduce dealers’ gross profits and margins further.

“To hammer this point a little more, if we could mark parts and vehicles up just 1 per cent more, while remaining competitive with new car and part imports, this could make a tremendous difference to sustainability of the auto industry,” he added.

“There is no getting around that the auto industry has a very high turnover with very low profit margins. If we net 3 per cent of sales we are very lucky. Particularly in our high cost and low sales environment.

“In other words, net profits of 3 per cent 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 per cent in 2010 to a high of 1.25 per cent today.

“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.”

Mr Lowe said the Bahamas Motor Dealers Association (BMDA) had frequently suggested targeted tax rate reductions to the Government as a means of both stimulating business and the latter’s revenues, plus other reforms such as a vehicle titling system.

The majority of these recommendations have not been acted on, and the BMDA continues to press for the removal of price controls; a return to 0.5 per cent Business Licence fees; and for dealers to have ‘bonded facilities’ so that taxes are paid upon a vehicle’s sale and not at the border.

“The Government seems to think the auto industry is there for its beck and call,” Mr Lowe told Tribune business. “On the one hand, you’re trying to do what is right and comply with the law, and on the other they’re hammering you.

“It would appear that successive governments think the automotive industry is fertile ground for continually increasing taxes for a couple decades now.

“It’s almost as if the auto industry’s sole purpose is seen as serving the Government’s 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.”

Mr Lowe said it was difficult to predict the future of an industry that supports 400 jobs, but he suggested that current trends increased the likelihood of consolidation through mergers and acquisitions.

“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,” he added.

“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 a shakeout will most likely occur at some point.”

He added that Bahamian auto dealers would also seek to diversify, pointing to how NMC was now selling FG Wilson generators. The Auto Mall has moved into the tyre business, while both it and Sanpin were selling used cars from Japan.