UK car sales fell almost -10% in 2017 while investment slumped by more than a third, new, figures reveal. Some of sales collapse is blamed on Brexit anxiety, some on flailing diesel car demand. Overall 1,671,166 cars were built in the UK in 2017, compared to 1,722,698 in 2016.
At the start of 2017 the Society of Motor Manufacturers and Traders (SMMT) predicted a -2.6% slowdown in UK car registrations for the year. Professor David Bailey, an expert in economic restructuring and industrial policy at Aston University, says this estimate was way too optimistic.
“I’d foreseen,” he told Capital, “a 5-10% fall in 2017 on the back of economic slowdown linked to Brexit uncertainty, rising import prices on the back of a fall in the pound, the turn against diesel in the wake of ‘dieselgate’ and a big question mark over how far the PCP-fuelled car buying boom could go.”
Bailey thought the market was over-trading. “As it turned out, domestic sales were down by over -9% in 2017. What’s more, none of the factors acting as a drag on car sales have gone away.”
Trouble further down the road?
More than 80% of new car sales in the UK are funded by credit – personal contract purchase loans – according to the Finance & Leasing Association. In other words, the vast majority of all new metal on UK roads is driven by consumers who normally could not afford to be behind the wheel.
In 2017 Morgan Stanley estimated the UK car industry was underpinned by a £41bn credit bubble. While the car market is a fraction of the UK’s housing market, the risk principle is similar: PCP deals are built around valuations – specifically the Guaranteed Future Value (GFV) calculation. If this slips then the whole chain – finance lease company, driver – suffers.
PCP – a 15-sec explainer
- PCP spreads the cost of a car across monthly payments plus an optional final payment
- It essentially funds depreciation costs – what the initial price is and what the car is worth when returned after a set period
- But it’s the driver who has “equity” in his PCP vehicle who shoulders the ultimate devaluation risk
- Some deals start from less than £100 a month for a brand-new, fully warrantied car. No MOT or expensive servicing to worry about
More automotive weakness in 2018
The UK’s PCP market is now very close to absorbing several large waves of decent quality – ease of PCP credit has encouraged many to trade up to the class above – used vehicles, thereby exerting pressure on existing values. This might be manageable when the economy is doing okay. But what if it tanks?
Professor Bailey says the new car market in the UK must contract further. “I can see another contraction of the order of -5-10% for the year,” he told Capital. “Even after a fall in 2017 and a further drop in the -5-10% range in 2018, the market will still be operating at historically high levels.”
This isn’t a ‘crash’ but rather a slowdown linked to economic factors and a market correction he thinks. But quite what the ‘new normal’ will be in terms of UK car registrations isn’t clear.
The long shadow of Brexit
For the moment motor finance companies are putting on a robust face on 2018 prospects. Close Brothers Motor Finance says a fifth of their dealers consider Brexit the greatest threat. A majority found 57% of dealers are – still – “very confident” about 2018. Which leaves a significant 43% chunk more ambivalent.
Eddie Shaw, managing director at Go Green Leasing, told Capital that while new vehicle registrations in 2017 dropped substantially from previous years, it was still the sixth highest number of vehicles registered in a single year. “In addition to this the drop of nearly -6% in new vehicle registrations was much less in fleet registrations which only dropped around -1% from the previous year.”
Shaw admits diesel registrations continue to dip due to negative press and increased taxation “so the marques that are doing well are those that offer decent petrol engine alternatives to cars as well as electric models will continue to steal market share from predominantly diesel model ranges”.
Running a car isn’t cheap, particularly for ‘millennials’
Meanwhile in the background lurks (likely) higher borrowing Bank of England interest rates and therefore likely higher car finance costs. Servicing, insurance, tax, fuel costs… The expenses add up, particularly for millennials (those born between 1983 - 2000) struggling with chronic job 21st century job insecurity and housing costs.
Freddy Macnamara, CEO of Cuvva, a Scottish fintech insurance player, says car insurance inflation has risen three times faster than wages in the last twenty years. He told Capital that the cost of running a car now devours 20% of the annual take-home pay for someone aged 17-22.
“I anticipate that we’ll see a rise in disruptive, tech companies offering better options for drivers. This is already happening in the insurance market with the growing popularity of the pay-as-go model.”
Inflexion point reached?
There’s one more variable. It’s isn’t related to running costs, the environment or vehicle performance. And it’s having a huge sway on how cars are sold – connectivity. “I believe that we are at an inflexion point,” Michael Mauser, exec vice president of lifestyle division at Harman, told Capital in an emailed statement.
“I think we’ve hit a juncture in the industry’s timeline when in-car passenger experience is just as important to consumers as the vehicle´s performance and speed. These factors have typically been most influential in the buying stakes but that’s no longer the case.”