UK cars: the blows keep coming
Liseth Galvis-Corfe - 15 November 2018
From the diesel emissions scandal to the post-Brexit Sterling slump, to important vehicle tax changes and post-Brexit uncertainties, the UK auto sector is punch drunk. Just when it may have it seemed that things could only get better, at the end of the year a potentially damning Financial Conduct Authority report will be published on the use of Personal Contract Plans (PCPs), which have become the dominant form of new auto finance in the UK. Sagging residual values could send some auto finance companies to the wall and the demise of PCPs would deny many UK consumers access to affordable finance. The woes of the UK auto sector are far from over.
UK car registrations have already raised alarms about the challenges that the industry faces and a potential negative impact on the UK economy. According to the Society of Motor Manufacturers and Traders (SMMT) motor vehicle registrations decreased 20 per cent (year on year) in September 2018, although the underlying trend has moderated to an annual decline of about 3 per cent (figure 1).
Some 86 per cent of all car registrations use some form of finance, with PCPs featuring prominently. With PCP loans, individuals pay a deposit and monthly payments for using a car and at the end of the contract they have three options. First, to return it, second, to use its residual value as a deposit on a new car or third, to buy the car outright. However, there have been criticisms of this financing model and the FCA is investigating whether the finance companies are properly assessing the ability of customers with low credit scores to afford their desired car. There has also been increasing use of PCPs to purchase used cars, from zero to about 30 per cent. The monthly payments on a six-year-old car bought on a PCP can work out cheaper than for a 10-year-old vehicle bought using traditional hire purchase. PCP loans have also been affected by the increase in borrowing costs now that the Bank of England has started to increase interest rates.
The industry has also been severely affected by the decline in sales of diesel cars. According to SMMT, in October 2018 diesel sales decreased 30.7 per cent (year to date). The decline has accelerated in 2018 because of the introduction of new taxes established in the 2017 Budget. The government introduced up to £500 of additional charges on buyers of new diesel cars as a pollution reduction measure. The rejection of diesel vehicles has been dramatic, given its negative impact on public health, and aggravated by the Volkswagen (VW) diesel emission scandal. Between 2007 and 2015 VW sold more than 10m cars that had emissions-test-cheating software installed. In 2018 the company was found guilty and it faces fines from the European Union and the United States.
Many analysts expect new car sales to flatten or even decline in the coming years in the UK. Cars manufactured and assembled overseas have become more expensive because of the fall in Sterling in 2016. Carmakers’ operating margins are already thin, so it is unlikely that they can absorb all the currency impact themselves. The annual growth rate of passenger car imports by volume has decreased from 3 per cent to -8 per cent between June 2016 and July 2018 (figure 2). The SMMT has warned about the risks of a no-deal Brexit for the car industry. They estimate that the average cost of a car imported from an EU27 country could rise by £1,500, jeopardising the prospects of the 800,000-strong UK auto sector workforce.
While the specific challenges facing the auto sector may invalidate its traditional use as a leading indicator of wider UK economic activity, when a slowdown does arrive, we should expect auto sales and production to be disproportionately sensitive to weakness in consumer confidence.
Data source: CEIC
Data source: CEIC
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