Category Archives: Economics

Cars drive Brand UK around in a vicious circle

Clydebank-Used-Car-Sales-Finance-GlasgowIt’s often said that car sales are a barometer of the economic climate. But, in the UK at least, they’re not – the booming market of the last five years has been way sunnier than our overcast economic conditions.

However, with a turnover of more than £70bn the retail motor industry is unarguably an indicator of national sentiment – even of our character and values. It’s one of the core elements of UK plc. And in a post-referendum landscape where the nation is redefining itself that makes it important.

The car sales figures for the first half of year show the market at an all-time high. Registrations were a record for any six-month period, up 3.2% on the same period last year, the previous best. March was the biggest ever month since the introduction of the bi-annual plate change. Last year was the best ever. And even post-referendum the indications are that 2016 could still beat it.

If we’re doing these numbers we must be in a pretty good place as we prepare to head up the slip road and off the EU highway – right? Well, no.

The extraordinary, counter-economic motor retail success story is really about the way car companies make their money – and in particular the British attitude to credit.

In the first quarter of this year the growth rate of UK consumer credit stood at almost 10%, Borrow-Money-to-Investthe highest since the banking crisis. Car dealer finance is a big part of this, accounting for £28bn in 2015 – twice what it was just four years earlier. Four out of five new cars are bought using borrowing, and today the car companies are effectively banks which sell cars. Finance is a core profit centre, and the PCP loans which the majority of customers take out to gain usership – not ownership – a brilliant retention tool.

The ultra-low interest rates enjoyed by consumers since 2008 also mean that almost anybody has been able get behind the wheel of a nice new car. Forget the £30,000+ sticker price – £195+vat a month for a Mercedes C Class, anyone? How about a Nissan Micra for £85+vat a month? That’s what you’d spend in a five-minute shop at Waitrose on the way home from work.

With PCPs, customers are becoming used to the notion of cars as mobile phones – something you get on a pay-monthly contract and replace every couple of years or so. When you do that, the man in the dealership will strongly resist any efforts on the customer’s part to pay cash. Even if you take out finance for a 48-month term he’ll be on the phone after 24 months offering something better, with no cost of change.

Some analysts are forecasting that sales could fall by over 5% next year as the UK adjusts to its new economic realities. However, with the near-certainty of even lower interest rates in the coming months, the appetite for new cars in the UK is likely grow – probably most among those who can least afford it.

And if the referendum fallout creates a drop in demand in the second half of 2016 then expect incentives to kick in swiftly to clear stock which was ordered for a market in economic status quo, not shock. The car industry will distress-sell. And the vicious circle keeps turning.

So while we like to view the Eurozone as a basket case, it’s the UK which has raced headlong back to the very conditions which characterised the economy at the time of the 2008 crash, and will probably continue to do so.

Let’s compare ourselves with Germany. While UK car sales rose by 37% between 2011 and 2015, the German market grew by just 1%. The German economy is humming along nicely, but when it does, the Germans don’t reach for their credit cards.

companybannerThe difference between the UK and most European countries is that we’re a finance-driven economy and they’re not. What does that say about Brand UK, our character and values? That we’re a nation of borrowers. That we’re no longer creators but consumers (preferably of German cars – VW, Audi, Mercedes and BMW alone account for almost 30% of the market). That we support our financial services industry more than we do our domestic car industry. That we see our cars, like our homes, as a measure of our success, yet we usually own neither. We just own the debt.

If the UK is redefining itself, this should not be part of our DNA. The EU may not have a clearly defined brand, but the UK’s is in danger of being devalued. British business culture should contain an element of daring, even risk. But not a lack of self-awareness or foresight.

 

Davos? Next time take the car

Apparently trust and leadership were the buzzwords at Davos this year. A pity they were only talked about.

croppedimage780520-Davos-Schweiz-Winterlandschaft-Sunstar-Hotels-Davos2The much-quote figure of 1700 private flights bringing the world’s plutocrats into Davos for the World Economic Forum, where climate change was a headline topic, may be too good to be true. About half that number appears to be more likely. But it does highlight the fact that the annual Davos bonding session is, let’s say, something of a contradiction.

The clue’s in the name: it’s an economic forum. Growth may well be the key to reducing inequality, as many were saying last week, but it’s also handy for those more focused on improving their own quality of life. The place is summed up this year by the reported sighting of a monk checking his smart phone. And who knows if anyone saw the contradiction in Google’s choice of party entertainment, the singer Aloe Blacc (most famous song: I Need a Dollar)?

720x405-AP907210667509You couldn’t make it up. And you didn’t really need to. Given the fact that, after years of being pushed down the Davos agenda, climate change was back – and and launching the event with Al Gore/Pharrell Williams double act – what was the WEF (mission: Committed to Improving the State of the World) doing 5000ft up a mountain and 150km from the nearest airport and sizeable transport hub.

private-jet-over-snow-mountains-Pilots-Perspective-Travel-3Sixty-AirAsiaEven if the number of private jet movements was half that speculated, that’s rather inefficient in pilot-to-passenger ratios. And private jets burn more fuel in an hour than a car does in a year. That’s an inconvenient truth.

We know that these people need to move around quickly. We understand that having so many important people gathered together in a single place means we can interrogate their influence. We appreciate that the event focuses them and the outside world on the big issues. But.

Davos could look to an event like Editorial Intelligence’s Names Not Numbers, where some of today’s smartest and most influential people first got together (and still do) in the very real environment of a genteel British Victorian seaside town. It’s not parochial – it attracts an international audience, thinkers rather than figureheads, and the event has now spread to New York and Mumbai.

WEF’s Swiss venue and date early in the year make for an interesting comparison with the Geneva motor show (this year 2-15 Mar). It’s Europe’s major annual auto industry event, so leaders from all over the world fly in. But unlike Davos it’s held at sea level (or at least lake level), and is a 10-minute walk from a major airport and a five-minute train ride to the city centre.

20181_300Road transport contributes around 15% of the world’s CO2 emissions. But it’s one of mankind’s most important tools. Motor vehicles changed our lives. They mobilised us. They enable business. They transform the lives of people in rural communities. They offer humanitarian assistance. They help fight wars. We need them and they’re being reinvented for the modern world.

And Geneva highlights a car industry which achieves more than the lofty talking shop of Davos ever will. The carmakers have achieved minor miracles. In Europe the average CO2 emissions for all new cars will fall to 130g/km this year. The target for 2021 is 95g/km, which will be down 40% from as recently as 2007 – the year before the financial meltdown caused by the world’s political and business leaders, the same people who were at Davos 2015.

In the UK the emissions are down around 45% since 2000, because a buoyant market means that people are buying newer cars with cleaner tech. And all this is before mass adoption of ultra-low-emissions vehicles has even begun.

This year will see Al Gore’s Live Earth concerts, ahead of the UN-hosted intergovernmental climate conference in Paris – tried-and-tested formats for achieving little. Meantime 2015 will also see the first production hydrogen fuel-cell cars and the roll-out of zero-emissions autonomous vehicles. The auto industry is full of brilliant people who achieve results – fast.

What’s the betting that the next 12 months will also see another Davos World Economic Forum in which the same people will hear the same things said before listening to a pop star they haven’t heard of and climbing back into their Citations and Falcons with a diary note of the 2017 event?