The government’s campaign to bring UK new car prices more into line with the rest of Europe has been achieved at some cost – not only to manufacturers and dealers, but also the consumer. Though the market remains confused, one thing seems certain. The current round of list price reductions will not be enough to bring an end to discounting. Report by Chris Phillips.

There’s no gain without pain, as the saying goes, and events over the past few months have shown that in turning the thumbscrew on new car prices the government has discomforted not only manufacturers, retailers and motor finance providers, but also the very people who were supposed to have benefited, the car buyers themselves.

No sooner had carmakers begun cutting list prices than headlines about rip-off Britain were followed by scare stories over negative equity on used car personal contract purchases, echoing the pain felt during the house price slump by those who found themselves with mortgages outstripping house values.

Grievances were not restricted to outstanding payments on motor finance, though. One car buyer expressed the disillusionment which must have been felt by other consumers who didn’t boycott the showrooms in anticipation of price cuts. Writing to consumer motoring magazine Auto Express, he claimed that, following the Mercedes’ price reductions, he’d been offered £8,000 less on an SLK 320K which he’d bought only six months earlier.

That was before the domino effect started by niche players such as Mercedes, Alfa Romeo, Lexus, Mitsubishi and Land Rover had rippled out to the volume producers. After weeks of denial, Ford was the first to bow to the inevitable, with the company’s UK chairman and managing director Ian McAllister saying that in reducing list prices by up to 13 per cent to replace its previous cashback discounts, Ford was doing its bit to bring “clarity and stability” to the marketplace.

But industry analyst Garel Rhys likened Ford’s move – and others like it – to a “a smoke and mirrors” exercise.

“Transaction prices would remain virtually unchanged”

Transaction prices – those actually paid by the consumer after the traditional bargaining and marketing promotions – would remain virtually unchanged, he said. Certainly, Ford was making no great sacrifice on the 11 per cent reduction on its best selling Focus 1.6. At £11,995, it was just £5 cheaper than the previous price of £13,500, less £1,500 under the cashback offer.

McAllister, meanwhile, was still dismissive about the whole rip-off Britain campaign. “It implies that we, as market leader, are making excessive profits at the expense of the consumer, yet Ford’s UK business lost £119m last year.” Vauxhall chairman Nick Reilly could have said much the same thing. On the day the company announced its price cuts of up to 12 per cent, parent company General Motors posted a £124m loss on its European operations for the third quarter of the year.

At least Ford and Vauxhall were making their concession from a position of strength compared with MG Rover which cut prices by up to 19 per cent in a bid to stop the inexorable sales slide. September sales showed an alarming drop of 44 per cent compared with the corresponding period in ’99. It further eroded the company’s market share to 3.68 per cent, and is now behind its former owner, BMW. In the run-up to the next general election, the government could ill-afford to see its price cuts campaign hammering in the last nail in the coffin of the only remaining British-owned volume car producer.

It was a dilemma taken up by Garel Rhys, professor of motor industry economics at Cardiff University Business School, who said the government order to carmakers to reduce list prices in the wake of the Competition Commission inquiry highlighted a conflict of interest between industry and the consumer. “The interests of the consumer have to be balanced against the economy in which the motor industry plays such a vital role. The last thing the government wants are price cuts to a level which would imperil UK car plants, particularly in the wake of Dagenham.”

Nick Reilly said Vauxhall’s cuts would have to be paid for by an “acceleration” in plant productivity gains, adding: “We are charged with making profits and it will be a challenge to offset that.”

But Alan Pulham, franchised dealer director of the RMI, maintained that cheaper cars could only be good for both the economy and the industry. “Any losses incurred by manufacturers in reducing list prices will be more than offset by an increase in volume,” he said.

That benefit has yet to be seen by the dealers themselves who are still feeling the backdraft of what they describe as “pricing uncertainties”. Ryland, whose Ford businesses account for around 30 per cent of group sales, has issued a profits warning for the second half of the financial year, and HR Owen reported a fall in pre tax profits in the first six months from £2.7m to £2.03m.

Owen’s prestige portfolio includes many of the marques, which featured in the first tranche of price cuts. The price issue was also blamed for a sharp fall in pre-tax profits at William Jacks, while the Sytner Group attributed the “customer focus on prices” for its modest 6 per cent rise in pre-tax profits, despite a 43 per cent boost in turnover following its acquisition of Ixion.

“cheaper cars could only be good for both the economy and the industry”

Such returns dispel any thoughts of dealers being the culprit of a rip-off, for as industry consultants Mintel report, many dealerships have been forced into receivership, despite achieving increases in turnover. Mintel says that the average net profit from car retailing as a percentage of sales has fallen from 1.5 per cent to 1 per cent since the mid-nineties.

Part of the struggle saw dealers having to contend with the proliferation of dotcom brokers whose websites lured customers with cut-price Continental imports. It was an opportunistic move, which could only flourish while UK prices were so out of kilter with the rest of mainland Europe, and with the realignment their days look numbered. Richard Palmer, chief executive of European Motor Holdings, reported that import sales were “starting to fade”, having earlier acknowledged that EMH’s business in the prestige sector of the market was particularly vulnerable to competition from personal imports.

Though trade and industry secretary Stephen Byers insisted that the price cuts represented a victory for consumers, valuation specialists like CAP Motor Research beg to disagree. When the price cutting was still in its early days, CAP argued that manufacturers were simply replacing discounts – a point subsequently borne out by Ford with its ending of cashback. However, another CAP report appeared to endorse the government’s efforts with the comment: “Clarity and transparency in pricing clearly appeals to customers more than temporary special offers – even where the transaction price remains the same as
before.”

What Garel Rhys describes as current confusion in the market place is reflected by other CAP reports. In one, it seems to follow the commonly held perception that reductions in new car prices are impacting on used cars with the comment: “The scramble to buy new cars following manufacturer price cuts on X reg vehicles is destroying the value of older models.” In another, following the Ford move, it says: “Cheaper new cars do not lead to cuts in used car values… CAP has repeatedly reassured the industry and public that their existing cars haven’t and will not lose value because of new car list price cuts.”

The RMI’s Alan Pulham also believes there is little or no correlation between new and used values, pointing out that used car prices “didn’t suddenly fall off a cliff” when manufacturers began cutting new car list prices but had started sliding long before then. “If a particular model is in short supply, it can fetch over book value, but if 10,000 ex-fleet Mondeos are dumped on the market, then residuals go through the floor,” he said.

Nevertheless, such subtleties in market mechanisms are lost on the private buyer. According to a recent survey by British Car Auctions on the used car market “nearly three quarters of car owners believe that the value of their car will go down when the full effects of the Competition Commission’s recommen-dations feed all the way through the car market”.

“there will always be those who expect to negotiate something off the list price”

The vexed issue of major fleet operators using their muscle to obtain the oft-quoted 30 per cent off list prices, thereby penalising the private buyer, was taken into account when the government issued its price cutting order. The actual wording of this part of the order – “that the total value of terms agreed (by a manufacturer) with a dealer should be broadly similar to the value of recent individual fleet supplies” – has been criticised for its vagueness by motor industry lawyer Peter Groves. Ford’s Ian McAllister expressed frustration and dismay when he commented on this at the press launch of the new Mondeo. “Manufacturers can’t discuss among themselves what interpretation they put on the order because we risk being accused of price fixing.” Ford has brought in consultants to provide a pricing benchmark and if this falls foul of government thinking, McAllister says the next step would be a High Court hearing.

With the dust still to settle over car prices, what’s the short-term outlook? The RMI’s Alan Pulham believes that trade will really begin to recover in the New Year and with it will come a hardening of residual values. “People want to buy new cars,” he said. “Even the most hard bitten cynic will be back in the marketplace.”

Ian McAllister said the pricing controversy had overshadowed the fact that year-end new car sales looked like reaching the 2.2m mark, which would be the fourth best performance ever. He, too, believed the market would show significant improvement in a couple of months or so, but said lower list prices would still not necessarily rule out lower transaction deals. “I don’t believe the no-hassle deal will ever be possible – there will always be those who expect to negotiate something off the list price.”

Garel Rhys described discounting as “part of the motor trade’s DNA”, and pointed out that Vauxhall was doing its dealers no favours in offering its entire range on its internet sales site at prices below the newly revised list prices. “The site will be used by buyers to establish a base price before they go and hit the dealer,” he commented.