Tag Archives: Eurozone

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.

 

Sales not the key to European recovery

eu-flag1When European car sales figures for the first half the year were released recently they were met with positive noises that after a massive slide the market had bottomed out. The Eurozone crisis has gone quiet, stability beckons and next year will see the recovery start, so the story goes.  Now there’s the news that the Eurozone’s economy moved out of recession in the second quarter, and year-on-year Western Europe car sales were up in July, with signs of life in France and Spain. Meanwhile UK sales have actually grown by over 10% this year, with private purchases up by over 16%. Good news all round then.

But look more closely, and one of the key things analysts have attributed the UK success to in 2013 has been PPI windfalls. You know you’re not necessarily looking at a sustainable economic trend when that’s cited as a major factor.

And in Europe even Europe’s economic and automotive powerhouse, Germany, has been hit hard, down over 8% in the first half of the year. That’s more than the 6.6% for the EU as a whole and sends out a tough message to everyone including the UK. The fall European sales since 2007 has been catastrophic – three million units a year have been wiped from the spreadsheets. That’s over 20% of the market.  The Club Med basket cases like Greece and Portugal are minor car markets but three of the big five markets in Europe – Italy, Spain and France – have nosedived during the downturn. No-one on the inside is really expecting Europe to bounce back properly for a long time, and despite the positive signs the forecasts are still for a contraction of over 3% for the year.

But the point is this. Things may be about to start improving, slowly. But the car industry should not be trying simply to recover on the basis of having hit the bottom. It has huge structural and cultural problems – massive overcapacity, market saturation, a squeezed mid-market, changing consumer dynamics, a reliance on an old fashioned retail model, and the dominance of China. Now is the time to change. To reduce capacity. To recognise when a brand is unviable. To drop models in declining market segments. To invest in outstanding new product people actually want. To focus on design. To develop distribution models which are right for different markets. To embrace digital retailing.

The car industry is brilliant at smoke-and-mirrors and at reinventing itself. If it concentrates on the latter over the next five years it may emerge from the downturn stronger and more fit-for-purpose.