The UK car market has continued to show an ostensibly strong volume performance in 2000, although there are growing doubts about how long this can continue. In the first seven months of the year, the market is up 1.1% over the same period of year.

Many auto industry forecasters are revising their full-year market projections upwards to 2.2 million units (the official SMMT forecast now stands at 2.225 million units) which is virtually flat on 1999 - itself a strong year. The buoyant market is confounding the views of many industry experts - expressed strongly at the beginning of the year - that the market was due a cyclical downturn in 2000.

The strong market is being underpinned by a number of factors. Certainly, the economy is in relatively good shape. The ominous rumblings and complaints from the manufacturing sector about the problems of the sterling-euro exchange rate have yet to detract from the combined effects of buoyant consumption, rising house prices, a strong stock market and low interest rates. The economic environment has been largely positive. Another important stimulant is the availability of good deals for the consumer. Interest rates are low and the UK car market is extremely competitive. Amongst the large national markets of Western Europe, it is the most fragmented (Spain excepted) as there is no longer a major 'domestic' manufacturer platform. Rover's share of the market is just 5% and market leader Ford has seen steady erosion too - under 17% now.

As new entrants - notably the Koreans - have entered the market in force in recent years, it has become increasingly competitive. More importantly, one of the effects of the sterling-euro exchange rate development has been that it has enabled exporters from the euro-zone to the UK to be more aggressive on pricing. After initial reluctance, they have picked up on this opportunity in a big way - there are some great deals to be had for UK consumers right now (see Fiat ,esp. Alfa), Renault, PSA and Ford for example). The increasing visibility of the online retailers is raising the competitive ante still further.

New car prices in the UK are declining at an estimated rate of 10-15% per annum. Some consumers may well be holding off in the hope of getting a better deal a few months from now. However, this element appears to have been over-hyped by the media: consumers are generally not prepared to hold off too long. There is also a degree of (well-placed) scepticism about the scale of price reductions. The government's Monopolies Commission report did not produce the 'big-bang' price reductions that some hoped for. The industry's response has been pretty muted and unflustered. Indeed, the government may well ease off now: the automakers are noisily complaining about the manufacturing problems that the sterling-euro exchange rate is creating. When the exchange rate goes the other way - as surely it must do eventually - UK car prices will not seem so out of line with those on the European continent.

Why are UK car prices so high, historically?

This is a question that is often overlooked in the debate over prices. In fact, the explanation has a lot to do with the structure of the UK car market. Since the 1970s, 'company' car purchases - i.e. all non-private individual - have accounted for around half of the annual market total. They have their origins in the need for employers to circumvent controls on pay rises in those inflationary times. ("No pay rise mate, but there's a nice new company car to soften the blow.")

The car manufacturers also have a long tradition of offering huge discounts to bulk buyers - something that the Monopolies Commission opposes. The list prices are therefore high to start with and on that high base, attractive discounts can be offered. The car rental companies operate businesses that rely on huge discounts for bulk orders and selling on cars after as little as 3 months to make a profit. Little wonder that depreciation rates in year one are so high in the UK for the volume makes. For the individual too, it has long been an open secret that the list price is there to be bartered down - often through a particularly attractive trade-in. A look at this year's new registration statistics illustrates the continuing importance of the business market.

Table 1

New Car registrations by customer type

July 2000
Private
Fleet
Business
Registrations
67,711
73,527
15,350
Market Share
43.2%
47.0%
9.8%
% Change
-14.4%
-4.2%
33.3%
Year to Date
Private
Fleet
Business
Registrations
587,601
640,330
145,102
Market Share
42.8%
46.6%
10.6%
% Change
-5.7%
2.5%
30.7%

Source: SMMT

Replacement demand is higher now

The more cars you have, the more cars you need to replace. The UK car market is also being driven higher by growing underlying replacement demand. As the stock of vehicles grows, the absolute numbers requiring to be replaced - assuming a reasonably constant age distribution is maintained - will be rising. If we assume a natural replacement rate of about 8% then that means that a 15 million-unit car parc sees 1.2 million units replaced in a normal year (on top of that is 'new' demand, reflecting rising motorisation). If the parc has grown to 25 million units and the replacement rate is the same, then this replacement element has risen to 2 million units. Therefore, as the UK car parc grows, the need to replace more vehicles exiting the parc leads to growing annual sales of new cars. That is a little simplistic, as the rate of replacement will be changing, but it seems reasonable to assume that this factor is - net - adding to the annual demand for new cars in the UK. There should be little surprise therefore that the market now appears to be able to settle at a natural rate considerably in excess of 2 million units. But this gain is 'underlying replacement' and as described below, 'cyclical replacement' can exact a strong influence on the cyclical outlook.

It's been late coming - but a replacement-led downturn is imminent

The cyclical nature of the car market is clear from a cursory glance at a long annual series. The car market is sensitive to economic conditions and that has created periods of 'boom' and 'bust'. Although the market is now not subject to the adverse effects of an economic recession, the 'echo of past purchases' effect means that the replacement demand in particular age cohorts will vary according to their size - itself affected by the sales trend when the car was new. Thus the dip in sales of the early 1990s - caused by recession and deferred sales then - looks set to lead to lower numbers of cars, newly registered then, leaving the parc over the next few years. The replacement requirement will therefore be lower and that ought to mean that car demand dips - assuming that 'new' demand is not increasing. Our forecast for 2001 sees the car market declining to around 2.1 million units - a drop of about 4.5%. That still leaves the market at a historically very respectable level.

Chart 1

UK Passenger Car Market 1980-2001

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Table 2

UK Passenger Car Sales by Make - Jan - July 2000

Manufacturer
Jan-July
%CHANGE
2000
%
1999
%
ALFA ROMEO
5,311
0.39
6,193
0.46
-14.24
AUDI
25,414
1.85
22,528
1.66
12.81
BENTLEY
236
0.02
233
0.02
1.29
BMW
40,997
2.99
42,801
3.15
-4.21
CHRYSLER JEEP
9,706
0.71
9,031
0.66
7.47
CITROEN
47,157
3.43
47,662
3.51
-1.06
DAEWOO
22,134
1.61
18,185
1.34
21.72
FIAT
60,321
4.39
50,748
3.74
18.86
FORD
229,015
16.68
241,487
17.77
-5.16
GENERAL MOTORS
186,991
13.62
181,975
13.39
2.76
CADILLAC
43
0.00
124
0.01
-65.32
CHEVROLET
178
0.01
275
0.02
-35.27
VAUXHALL
186,770
13.60
181,576
13.36
2.86
HONDA
45,200
3.29
40,415
2.97
11.84
HYUNDAI
16,549
1.21
16,012
1.18
3.35
I.M. GROUP
9,560
0.70
15,542
1.14
-38.49
DAIHATSU
2,347
0.17
6,361
0.47
-63.10
ISUZU
1,226
0.09
1,844
0.14
-33.51
SSANGYONG
7
0.00
151
0.01
-95.36
SUBARU
5,980
0.44
7,186
0.53
-16.78
JAGUAR / DAIMLER
9,262
0.67
8,630
0.64
7.32
KIA
7,721
0.56
1,894
0.14
307.66
LAND ROVER
20,773
1.51
20,128
1.48
3.20
LEXUS
5,044
0.37
3,059
0.23
64.89
LOTUS
1,055
0.08
1,430
0.11
-26.22
MAZDA
13,410
0.98
15,709
1.16
-14.63
MERCEDES BENZ
37,941
2.76
39,004
2.87
-2.73
MITSUBISHI
10,154
0.74
12,203
0.90
-16.79
NISSAN
53,934
3.93
56,926
4.19
-5.26
PERODUA
647
0.05
579
0.04
11.74
PEUGEOT
114,996
8.38
109,437
8.05
5.08
PORSCHE
2,733
0.20
2,876
0.21
-4.97
PROTON
2,145
0.16
4,608
0.34
-53.45
RENAULT
102,116
7.44
104,928
7.72
-2.68
ROLLS ROYCE
53
0.00
59
0.00
-10.17
ROVER CARS
70,256
5.12
64,901
4.78
8.25
SAAB
10,106
0.74
10,435
0.77
-3.15
SEAT
11,745
0.86
9,726
0.72
20.76
SKODA
16,935
1.23
14,498
1.07
16.81
SUZUKI
14,387
1.05
14,158
1.04
1.62
TOYOTA
51,876
3.78
47,653
3.51
8.86
VOLKSWAGEN
92,362
6.73
99,014
7.29
-6.72
VOLVO
22,339
1.63
22,202
1.63
0.62
OTHER BRITISH
1,334
0.10
1,403
0.10
-4.92
OTHER IMPORTS
1,118
0.08
381
0.03
193.44
TOTAL
1,373,033
100.00
1,358,653
100.00
1.06

Source: SMMT

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