Opinion: UK consumers paying too much for our cars for too long
Mike Porritt is Managing Director and principal shareholder of discount car supermarket chain CarShock, described as one of Britain's fastest growing businesses. He believes we've been paying far too much for our cars in the UK for far too long and argues the case for fairer prices.
The catalytic event that triggered the Phoenix consortium's takeover of Rover two years ago was, according to press reports, the arrival of a routine order for several thousand square metres of military camouflage netting.
It was needed to cover an entire disused airfield full of unsold new cars.
This desperate subterfuge was in reality an act of corporate self-deception of some magnitude but typical for an industry where the conventional correlation between supply and demand has somehow lost its significance.
Trying to disguise the existence of literally tens-upon-tens of thousands of unsold cars around the world is an everyday headache for all the world's major motor manufacturers. Most would claim that they have very little choice in the matter.
Since Henry Ford's day, manufacturers have measured their performance in terms of the efficiency of their volume production methods in a constantly expanding market. The industry suffers from chronic over-capacity. Its commitment to monumentally expensive, highly automated mass-production facilities means that their investors' expectations are perpetually high. The difficulty is exacerbated by political expectations of sustained growth and full employment.
When Fiat attempted to implement a reasoned and businesslike decision to reduce production capacity recently, an avalanche of condemnation spread from the press and the labour unions to the Government.
Cut the workforce? Close a factory? Unthinkable! Sell more cars instead.
But even working a few extra shifts to placate the workforce can result in another acre or two of excess production.
There are huge stockpiles of surplus newly built cars dotted around the world. Moss is growing on literally hundreds of millions of pounds worth of vehicles that have been mothballed straight from the production line.
UK manufacturers routinely predict the annual number of new registrations that will take place. Collectively, they assume that there will be massive further growth in a market that has, in fact, levelled-off at around 2.4 million units a year and shows signs of saturation or even contraction. This year they jointly projected sales of 4.32 million units, a laughable 80% more than the actual figure. To justify this absurdly optimistic and hypothetical upsurge, individual dealers are given totally unrealistic and unachievable targets, which they are somehow supposed to reach at the expense of their local competitors.
There are trends and modest shifts in market share, of course, perhaps sparked by the introduction of a new or face-lifted model but these have no impact whatsoever on the overall size of the UK market.
Virtually every qualified person in the UK population already has access to or owns and drives at least one car. Natural wastage compensates for new drivers joining the market. So where is this growth supposed to come from?
This self-deception has taken root in another widespread practice. Tied dealers are incentivised to reach overblown targets with 'bonuses'. Absurdly, these outweigh the margin on stock they fail to sell.
By way of example, let's assume that a dealer's target is to sell one hundred cars. His on target bonus is £250 per car. If he only sells eighty cars, a shortfall of twenty, he loses his entire £25,000 bonus. Clearly, it is in his interest to take a loss of, say, £600 per unit on the unsold twenty cars (£12,000) rather than lose the bonus. Most dealers are prepared to cut their losses in this way by selling unsold new stock to independent operators like CarShock.
Unfortunately, the eighty motorists who've walked though the front door of the glitzy salesroom are subsidising the surplus stock being sold at a knockdown price at the back.
A quick glance at the price of identical right-hand drive cars being sold around the world confirms that the UK is one of the most expensive places on earth to acquire a new car. Even within Europe, inconsistencies in taxation can produce a differential of 15% in the cars' retail price. With VAT this can amount to £1,762.50 difference on a car costing £10,000 in the UK.
By buying stock from Europe, car supermarkets like CarShock can pass on a significant price benefit to their customers. (By law, such imports must carry a full two-years manufacturers warranty).
There's another way of sidestepping the manufacturers contractual stranglehold. People drive on the left in Thailand, Australia, South Africa and Cyprus, among other places. Shipping cars around the planet on bulk-carrying ships is not particularly expensive these days. Cars that have been built in or shipped to these countries can be shipped to the UK and landed much cheaper than identical cars delivered straight to a main-dealer at an inflated UK 'list' price.
Manufacturers claim that factors like low pay, poor standards of living and favourable exchange rates contribute to the low cost of these cars in overseas markets. Whatever the economic reasons, the fact remains that you can buy cars, identical to those in British dealers showrooms, much more cheaply abroad.
This gives the clearest indication of the artificiality of the recommended UK retail price. Importers and brokers are bringing thousands of such right-hand drive cars into Britain each year and are capable of bringing many thousands more. What an absurdly wasteful scenario.
Machines on four wheels
Years of intensive advertising and marketing (and a host of other factors too numerous to touch on here) have convinced us that cars are somehow more than just mass-produced machines. To some they are embodiments of status, to others they are fashion statements. Cars are extensions of our personality - indispensable, convenient, immensely useful and enjoyable possessions.
To their owners cars are not just machines, worth whatever they cost to produce plus a fair margin. Their perceived value is what counts and the British are prepared to pay a higher premium than most for their perceptions.
Winners and losers
Of course there are winners and losers in the manufacturers' marketing stakes.
As the losers become increasingly desperate to move their over-production mountains, especially their mature, face-lifted and 'run-out to new model' stocks, opportunities for discounting increase. Some of the weaker Asian brands produce perfectly sound, serviceable and attractive cars but have a constant battle to make further inroads into mature, saturated markets like the UK. They've been among the first to reach the negotiating table.
Car supermarkets make their living by turning the manufacturers volume argument on its head. They acquire cars because of the industry's anachronistic and unrealistic bonus practices and this, with the import routes, gives them a clear price advantage over the manufacturers' own tied dealers.
Provided they run a tight ship and keep overheads low, car supermarkets can offer the public an unbeatable deal. Of course, the luxury car market's infatuation with shining status symbols is unlikely to change. Price has never been the determining issue in this sector of the market and the boys will continue to want their expensive toys.
In the mass market for practical, everyday workhorses, however, things are changing.
New European law about exclusive dealerships and the pressure that develops from having millions of pounds worth of unsold products sitting at the factory gates is gradually forcing the manufacturers to reappraise their traditional attitudes.
Too much, for too long
It is inconceivable that in the next ten or so years, the economies of the world will converge. The national self-interest of car manufacturing countries will not decline. Universal levels of taxation and economic parity will simply not occur. Car prices will not become internationally uniform.
That being the case, there will always be cars available in the UK at prices much lower than the manufacturers' tied dealers can offer and discounters who are willing to satisfy that market. The CarShocks of this world occupy the one corner of the UK automotive market where rapid shifts are taking place and even more rapid growth is happening.
If not exactly beating a path to the discount dealers' door, even the biggest manufacturers are listening more carefully to the voice of the marketplace. Ultimately, the weight of their investment burden will force them to co-operate with volume selling independents. The 'no-frills' discount new car retail market is with us - and it's here to stay.
The apparently irreversible follies of over-capacity and over-production mean manufacturers are already facing a stark choice. Pay to destroy and dump rotting stocks of thousands of ageing but completely unused cars (there have already been some mutterings about deep sea dumping) or engage in serious talks with independent volume discount retailers about recouping some of their potentially massive losses.
Some manufacturers are already talking to people like CarShock.
Perhaps more importantly, British motorists are finally waking up to the realisation that they've been paying far too much for their new cars - for far too long.