Inside The Industry
Coronavirus – What’s Next For The Industry?
Apologies but again this month there can only be one subject. The virus dominates life for all of us and every industry. As ever I’m writing on the 13th so much will have changed before some of you read this. Hopefully some things may have changed for the better. Everything depends on progress on arresting the spread of the virus, and on one day developing a vaccine or effective treatment, perhaps even both. Apart from stressing the bleeding obvious that these things are vital I’m not remotely qualified to comment, and I’m not sure anyone else is fully qualified currently.
I don’t want to appear selfish but I can only report on the effect on this industry – I don’t know anything about any other, apart from pubs of course where the situation is sadly all too clear. So for the motor industry what happens next is all about those two great economic rules, supply and demand. Let me look at those now.
New Vehicle Supply
All vehicle production plants in Europe and many beyond have been closed since late March. They are just starting to reopen now and in the main on very much reduced rates of production because of social distance regulations and other factors including component shortages. First past the post is Ferrari who restarted last week and now claim to be back to full production. That’s less than 200 cars a week though, Ferrari build slowly as I know having been privileged to visit the factory a while ago. Its much more difficult with a mass production factory. BMW have restarted “gradually”, Jaguar Land Rover will go back to work next week and Bentley last week. Nissan have said their Sunderland plant will remain idle throughout May at least. Aston Martin have begun a “phased return” to production at the St Athan plant that makes the new DBX SUV, vital for Aston who’ve just announced a £120M loss for the first quarter of this year.
Therefore the stock of unsold new cars and commercials is pretty well exactly what it was when the lockdown started in late March. Some of these are sold and I’m told cancellations are few. In our own little way we had 11 new vehicles that didn’t get out in time, all 11 customers are eager to get their new car or van and we’re working to get them delivered asap now the delivery systems are slowly restarting. With all showrooms closed and no deliveries possible April was about a zero score. In fact somehow 4000 new cars were registered. This gave the media the chance to run sensational headlines about “94% Drop In New Car Sales”. Had all the printing presses been switched off and all shops etc selling newspapers been closed I wonder if they would have run similar headlines about the drop in newspaper sales?
So all we currently have to go at the unsold stock that was there two months ago. Showrooms won’t open again until June 1st at the earliest but vehicles from the slowly reopening factories won’t arrive until July or August with rare exceptions. And the build up of that supply will be slow. So a factory order that used to mean a 12 week wait will be probably around twice that. A recent What Car survey showed that one third of buyers were willing to wait no more than four weeks for a factory order, and a further 25% wouldn’t wait more than 8 weeks. Those people will be sorely disappointed. It was always 12 weeks, and as I say will now be much longer. Today I was told the wait for a new electric Jaguar I-Pace could be nine months or longer. Dealers are only allowed to submit sold orders so there will be no unsold stock. Therefore the impatient will have to buy what is there or wait, it’s as brutal a choice as that. Supply may be increased by cancellations of rental company orders or decreased if a Scrappage Scheme is introduced. Both of these possibilities are discussed below.
Used Vehicle Supply
Again very little has been sold in the last two months so the dealer stock is what it was in late March. There will be more part exchanges coming in as the new cars sold for March which didn’t get delivered yet fight their way through the system. Then there are the end of lease vehicles that were due to be replaced in April and May, but can only be replaced if there is a suitable new vehicle available. Otherwise the lease will be extended. We’re advising our lease customers to do exactly this rather than take something they don’t find ideal and in fact we’ve done that already with my wife’s Evoque and my daughter in law’s Golf GTi.
All that says used vehicle supply may be tight but again the elephant in the room is the rental companies. As they influence both supply and demand and as we’re in the middle of both let’s look at them now.
My comments here cover cars rather than vans. Van rental business has remained strong through the crisis with support for emergency services and more work for those involved in deliveries to homes as remote shopping has increased. The car rental demand has collapsed. Customers come (or don’t currently) from the same sources as the airlines, business travellers and tourists. A high proportion of rentals are from airports. Business travellers and tourists are almost unknown. So the rental fleets sit idle. And there are a lot of them. Rental companies buy about 10% of the new cars sold in the UK and Europe every year. So for the UK say 250,000 cars a year. The time they keep them for varies but a rough guess is 6 months on average. Which means the rental fleet averages around 125,000 cars and as they had all just built up for the new registration plate and the Easter peak it was probably a good bit more than that in mid March. Now probably 90% of those cars are parked up, well over 100,000. Some are due to go back to manufacturers and dealers under “buy back” contracts. Some are “at risk” so down to the rental companies to sell. That doesn’t matter, they all have to be sold one day by somebody.
Rental companies have cancelled thousands of new car orders. So demand from this sector is tiny, which will help the volume of new cars available to other buyers. Manufacturers won’t mind because they make little money selling to rentals, discounts are vast. So if they are short of cars why do it? But the cars already in rental yards with no customers to hire them are the problem. All these are financed one way or another so monthly payments are due which is difficult with no rental income coming in! Hertz were saved from bankruptcy last week when their funders agreed to wait another month for their money. What chance do Hertz have of being richer this time next month and so able to meet the payments? Very little I’d say.
The great fear is that because the rental companies are desperate for cash a vast number of near new cars with very low miles (because they haven’t been rented recently) will be released into the market very quickly. Inevitably that will bring prices down. Great bargains for the customer who perhaps can’t get the new car they want but can now get a very low miles one for less money. Very bad for the dealers who are holding millions of pounds of similar cars bought a few months ago at higher prices. If the rental companies slow down the release of their unwanted cars onto the market that will benefit them as prices won’t drop so far, but can they afford to wait for the cash?
I have to declare an interest. One of the areas of our business specialises in remarketing ex rental vehicles to trade and business customers all over the UK. In the short term a glut of cars for sale would do us good, but I’m not sure of the long term. We want our trade customers to survive and that’s a risk just now, see below.
This is the difficult one. The availability of new and used vehicles is pretty well clear, so forecasting the supply side is easier. But the $64000 dollar question is how many people will actually want to buy a new or used car or van in the current situation. Many people have had their incomes reduced and their savings battered. Many are fearful for their jobs as furlough reduces and eventually ends. Many small business owners have had no income apart from Government grants and loans for two months now, and for some there are months more of the same to come.
Equally there are those who’s circumstances have improved, who’ve been working from home on full pay with reduced commuting costs, expensive holidays cancelled, no spend on entertainment and so on. There are certainly signs that there will be strong demand for cheaper used cars as people seek to avoid public transport. There are thousands of cars that have come to the end of their lease or PCP agreements where something has to be done, and thousands more will reach that stage in the next 3-4 months, September in particular.
What Car Magazine have surveyed potential buyers and almost 20%of those currently considering a new vehicle intend to buy just as soon as the dealers re-open with another 6% saying they will buy within 4 weeks. That should get dealers off to a flying start. Certainly in Germany and Austria dealership sales were quickly up to over 80% of the previous levels once dealers were allowed to open the doors. There is undoubtedly a level of pent up demand from people who want to change their car and have been unable to for almost two months now with at least another few weeks to go. However one has to wonder how strong the demand will be once these people have done their deal?
Van demand we expect to stay reasonably strong. The courier companies have remained very busy and will continue that as people seek to avoid going to physical shops. It seems likely that the Government will support the construction industry who are great van users, and many in that industry have work to catch up on from the enforced break.
Then of course there will be efforts to stimulate new car demand. The industry both in the UK and throughout Europe is calling for a Scrappage Scheme whereby owners of older and therefore higher polluting cars are given a grant of say £2000 to buy a new car. In fact this is a no cost deal for the Government because if the customer buys a new £12000 car £2000 of that goes back to the Government as the VAT content in the price. So they can help the industry and the environment at no cost which makes it a no brainer and I’m 99% certain it will happen in June.
The manufacturers all need to get cars and vans delivered quickly because frankly they need the money. One way of achieving this is pre-registration, when unsold vehicles are registered by dealers in exchange for a big discount. The advantage for the manufacturers is that the dealers pay in full on the day of registration, funded by their finance company providers. So long as the finance companies are prepared to do this and the discount is big enough to persuade the dealers to make the investment in uncertain times this can work for everyone, including the customer. How far the manufacturers will be prepared to go depends on their stock levels and their view of sales and how many cars they can make over the next few months. I think if the showrooms open in early June the manufacturers will wait until late June to assess the level of demand and then perhaps push the pre reg button.
Where Does all That Leave Manufacturers and Dealers?
Damaged in a word, severely damaged. Toyota announced yesterday they expected profits this year to be no more than 20% of last year if any profit at all. Toyota expect global sales of 8.9 million vehicles this year which is the lowest for 9 years and compares to 10.46 million last year. Some analysts have said that the combination of weak demand and slow production could bring global sales down by a third to under 7 million. At that level no manufacturer makes money. No doubt there will be job cuts and factory closures, costs have to be brought into line with reduced sales. Marketing budgets will be cut bringing motorsport spending into great danger.
For UK dealers forecasts are that new car sales will reduce from 2.25 million to about 1.6 million, which is a one third drop. That will be extremely painful for the dealers. One senior dealer group executive said this week that he expected a “Darwinian evolution” of the car retail sector. In other words survival of the fittest. He expects 25% - 30% of UK car dealers to go out of business or be taken over in the next two years. For those that remain staffing levels will be reduced particularly in the showrooms to come into line with reduced sales volumes. If you’re selling one third less cars you need one third less people to be brutally simple. Some large dealer groups have already started the legal consultation process over sales staff redundancies, some have declared redundancies already. This process may be slowed by the extension of furlough announced earlier this week, but I think that will only put off the evil day for many. We’re actually recruiting salespeople and have been INUNDATED with applications from people who expect to be redundant soon.
When I read over this I can’t be sure if I’ve been too pessimistic or too optimistic. That depends how the virus situation develops. If new cases and deaths continue to drop as we gradually unlock then I think things will go fairly close to what I’ve suggested. But if things go the other way and we get the dreaded second wave goodness only knows. All bets are off in that situation Paul Gilligan