Analysis: could there be a positive to falling car sales?

“The UK new-car market is so oversupplied and overinvested that it’s extremely difficult to make decent money. Just how profitable it can become will be almost totally dependent on right-sizing – by which I mean somewhere south of two million registrations a year.”

Those are thunderous words, given the registrations peak of 2.69m new cars recorded in 2016, prophetically spoken not over the tumultuous past few months but more than a year ago by the ever-straight-talking Vauxhall boss Stephen Norman when he was asked to assess the state of the market.

Now, of course, it has been reset, albeit via a cliff-edge global pandemic rather than sound economic planning, with registrations of around 1.5m predicted for 2020. Tellingly, though, even with the prospect of massive unemployment and potential Brexit complications to ripple the start of next year, the last forecast (set in October by predictions from manufacturer representatives) was for about 2.0m registrations in 2021 – bang on Norman’s target.

The question now being asked is whether Norman’s view – whispered by bosses of other mass-market brands but not spoken as loudly – was on the money and whether the circumstances that have led to the precipitous collapse are suitable for profitable trading.

Certainly a glance at the quarterly results from some of the large dealer groups in recent weeks suggests there has been money to be made. The slew of better-than-expected results caught the headlines, albeit with new car profits combined with those for booming used car sales and cash from aftersales divisions feasting on pent-up demand after the famine of lockdown.

While there was highly profitable business being done, the risk is that these were recorded not in the ‘new normal’ but rather in what may well come to be regarded as a golden period between the first and second lockdowns, as pent-up demand was unleashed and so-called revenge buying – people rewarding themselves for the hardships they had endured – was prevalent.

Even so, what’s clear is that the positive results were achieved by selling fewer cars at greater profit margins – more profit for less effort, in very crude terms.

But not everyone sees it as a positive. Society of Motor Manufacturers and Traders chief Mike Hawes continues to caution that the impact of low sales volumes will inevitably impact on the financial health of manufacturers and in turn impact on the million or so people employed directly and indirectly across the UK’s automotive industry.

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“There’s nothing like a crisis to allow you to look at the business in a slowed-down motion”, Druce explained. “But these changes will only work if they’re fundamental, long-lasting shifts in the way we do business. It’s a strategy our business needs today to thrive tomorrow.”

This is a logical approach, and it’s no coincidence that both Druce and Norman head parts of the PSA Group, whose chief executive, Carlos Tavares, has always famously had a close eye on matching supply and demand, no matter how painful the decisions on costs that need to be made to achieve it. The question now is whether they can hold their nerve when normality returns.

“You know what happened after the last recession,” said Bill Berman, who became chief executive of the Pendragon retail chain that includes Evans Halshaw, Stratstone, Car Store, Quickco and Pinewood in February. “They all said they would hold their nerve, then one needed to shift some stock, launched nationwide discounting and everyone else had to follow suit. Maybe it will be different this time, but it only takes one to lose their nerve and they all have to start their counter-moves.”