ANALYSIS: A note on the UK car market

The UK’s car market does stand out in Europe as the only one of the big four national markets to see growth in 2013. So, what’s been going on? Why has the UK apparently bucked the regional trend?

Several factors are at work.

The UK economy and recovering consumer confidence. The UK economy may not be functioning at full speed, but unempolyment has stayed relatively low in Britain and the sense of crisis concerning the eurozone has, naturally, been felt much more acutely inside the eurozone where the economic uncertainties have been greater. It’s not just people in the bailout countries faced with severe austerity budgets that get spooked. Fiscally responsible Germans have also been worried about the future of the shared currency and who, ultimately, pays for the bailouts. While what happens to the eurozone does greatly impact the British economy, it perhaps feels less immediate to many in a country that operates on its own currency and where political debate has shifted to whether EU membership should continue and on what basis.
Households in Britain have also benefited from some UK-specific gains. Compensation for widely mis-sold Payment Protection Insurance (PPI) is one example. Windfall payments have been ideal for funding deposits on new cars. House prices have also been rising, adding to a sense of capital gain for many households.
The UK car market is highly fragmented and that has kept it very competitive historically. Ford leads the car market with a share of just 13.7% and there is a long tail of brands (and models) active in the UK marketplace. That competitive element and a very well developed consumer finance infrastructure has helped to boost volume (and compress replacement cycles) over time. Many private buyers in the UK – the vast majority – purchase cars on fixed-term (typically three year) Personal Contract Purchase (PCP) packages. When the term nears its end, the consumer can often be persuaded to trade-in for the latest model. PCPs are much more prevalent in UK than elsewhere in Europe. Some car brands in the UK have told just-auto that as much as 80% of their retail business is now conducted through PCP arrangements. The highly competitive state of the market means there are some big discounts available on new car list prices. Looked at in another way, car prices aren’t necessarily discounted, but your money goes further now than it did three years ago. “Better car, fresh warranty, lower running costs and my monthly repayment stays the same? Where do I sign?”
Dealer “pre-registrations”. This practice is notoriously difficult to get reliable data on, but most manufacturers admit that it is present at times and inflates the new car market as new registrations are made by the dealer, the cars then subsequently sold on. It’s one way to massage the flow from factory to “sale” (especially with continental Europe so depressed). The daily hire firms can also perform a similar outlet service if the cars are piling up. Pre-registrations can also suddenly figure for import brands and models if currencies (especially euro-sterling) make repatriated revenues larger. In combination with volume incentives, they can also be viewed as a form of short-term dealer support. Nobody ever wants to admit to massaging the market like this, but conversations with sources in the retail sector point to it being more widespread in recent years than previously. In the long run, over-supply to the nearly new market decimates residuals.
Continuing very low interest rates mean that monthly repayments on PCP deals are very low, adding to their attractiveness. Low interest rates also mean that possible alternative destinations for capital windfalls such as savings accounts are relatively unattractive. In addition, lending by the major banks remains generally very tight, but new car finance from the car companies is readily available. “Let’s forget the new conservatory for now; might as well replace the car.”

Overall market volume (referred to in the business as ‘Total Industry Volume’ – TIV) is important, of course. UK car company MDs are acutely aware of how much worse things have been for some of their counterparts elsewhere in Europe in recent years. However, the UK car market is not without its hidden issues. Profitability in such a competitive market is not a given!

UK: 2013 car sales top SMMT forecast