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Driving success

28 January 2016

A change in buying habits has provided a boon to the British car industry.

The last quarter of 2015 was a dramatic one for the motor industry. German carmaker Volkswagen was rocked by an emissions scandal. And at home, a 43-month period of continuous growth in car registrations came to an abrupt end when October figures showed a monthly fall of 1.1%1.

Registrations for the first 10 months of 2015 were still up 6.4% year on year to 2.28 million, the best year-to-date figures on record1. And while the October fall provided food for thought, the Society of Motor Manufacturers and Traders (SMMT) remains upbeat.

‘The UK car market has gone through a period of unprecedented growth. As expected, demand has now begun to level off; but the sector is in a strong position, as low interest rates, consumer confidence and exciting new products combine to attract new car buyers,’ says SMMT Chief Executive, Mike Hawes.

As the trade body for the industry, the SMMT would be expected to put a rosy gloss on car data. But there is little doubt that the industry has picked up substantially since the dark days of the 1980s.

In 1972 the UK produced 1.92 million cars, an all-time record. But by 1982, production had more than halved to below 900, 0001. British Leyland disappeared as a car-manufacturing name and the UK industry was widely considered to be on its knees.

Yet in recent years, manufacturing has staged a significant recovery. In the first nine months of 2015, 1.17 million cars were made in this country, an increase of 3.3% on the corresponding period in 2014. In September alone, output rose 15.5% year on year to more than 158,000 vehicles. Moreover, the industry is leading the way in productivity, with individual employees contributing twice as much value to the economy as the national average1.

While impressive, these statistics mask a complex story. In 2014, car-manufacturing output amounted to just over 1.5 million vehicles – still significantly lower than the 1970s peak – while 80% of those were exported. Furthermore, most of the new cars being bought in this country are imported – almost 80% according to the SMMT1.

‘There is an intriguing dichotomy between the industry and the market. Car manufacturing is growing and new registrations are increasing, but there is little overlap between the two,’ says Professor Garel Rhys of Cardiff Business School, Cardiff University. In other words, manufacturing and consumption are growing in parallel, but without there being a direct link between the two.

The growth in new registrations has been driven by both economic recovery and a dramatic shift in how consumers buy vehicles. Today, three in every four cars are bought using personal contract purchase (PCP) plans2, by which motorists put down a deposit, pay a monthly amount and, at the end of a certain period, either buy the car outright with a balloon payment or swap it for a new one.

‘Ten to 20 years ago it was all about car ownership. People either took out unsecured loans to buy a car or used hire purchase to acquire their vehicle. It was the same with phones, TVs and other electronic equipment. But today, leasing is the dominant form of ownership,’ says Adrian Dally, Head of Motor Finance at the Finance and Leasing Association.

Annual figures highlight this trend. In the 12 months to September 2015, PCP loans amounted to £11.75 billion – 75% of the total new car finance market. Hire purchase accounted for 17%, while personal loans and leasing accounted for just 8% of the total1.

PCPs also encourage motorists to trade in their cars for a new model after around three years, which helps to drive new car volumes. Their popularity has been bolstered by several years of exceptionally low interest rates, which have kept costs low. But consumers have also benefited from trends dating back to the financial crisis.

‘After the recession, car volumes slumped. British-based manufacturers were able to take out capacity but continental European carmakers found it much harder because their labour laws are more rigid. Their cars needed to go somewhere so the [UK] market was flooded with European vehicles, often with very attractive finance packages,’ says Phil Harrold, Automotive Partner at consultancy PwC.

Nonetheless, even if most UK motorists are buying overseas models, British car manufacturing is thriving.

‘A healthy car industry is good for the economy – the sector employs almost 800,000 people1, including those in dealerships. Add in those employed in component manufacturing and that figure doubles to 1.6 million, according to the SMMT. But it is not entirely a home-grown success story, as most of the manufacturers are foreign-owned.

Three of them – Nissan, Honda and Toyota – are Japanese; General Motors is American; Jaguar Land Rover is owned by Tata of India; and Mini is part of the BMW portfolio3.

Historically, British brands such as Rolls-Royce, Aston Martin and McLaren are primarily at the super-luxury end. Looking ahead, most commentators believe that production will continue to rise, both at the premium end and among volume manufacturers.

‘Exports of Japanese marques are expected to grow as European economies recover. Even now, we are only seeing a return to prerecession levels so there’s plenty of room for growth,’ says Harrold.

Indeed, while Nissan and Jaguar Land Rover have seen volumes grow by 43% and 56% respectively since 2007 – such that the two marques now account for more than 60% of UK output – Mini, Honda, Toyota and General Motors are still well below pre-crisis levels3. However, investment patterns suggest that UK-based carmakers are optimistic.

‘Over the past two years, more than £8 billion has been invested in the UK car manufacturing industry,’ says Tamzen Isacsson, Director of Communications and International at the SMMT.

In one month alone (March 2015), more than £1 billion of investment was announced – £600 million from Jaguar Land Rover in its West Midlands plant, £200 million from Honda in Swindon and £250 million from Geely, the Chinese owner of the London Taxi Company.

There are high hopes that at least two million cars will be produced in the UK by 20204. Car production is rising, new models are set to come into production over the next few years and, encouragingly, manufacturers are increasingly keen to source UK-made components.5

Headwinds in China could curtail demand at the premium end, while economic conditions around the world remain highly unpredictable.

Whatever the outcome, there is little doubt that the UK car market is in a better shape than it has been for years. And with productivity growing on the manufacturing side and PCP plans keeping motorists keen at the consumption end, the mood is at least cautiously optimistic.

 

1  SMMT, November 2015

2 http://www.fla.org.uk/, November 2015

3 The Motor Industry in the UK – A Cool Shower of Reality, November 2014

4 The Future of UK Automotive Manufacturing in 2025 and Beyond, October 2015

5 http://www.automotivecouncil.co.uk/, March 2015

Petrol versus diesel

In 2005 UK sales of petrol cars outnumbered their diesel counterparts by almost two to one. By 2014, however, more than 1.24 million diesel cars were sold in this country versus 1.18 million petrol-fuelled vehicles6. The increase was largely attributed to diesel’s efficiency, particularly lower fuel costs and carbon dioxide emissions.

But diesel’s superiority was brutally called into question after it emerged that Volkswagen had installed ‘defeat devices’, which understate emissions during official tests, in more than 10 million vehicles7. The saga began with nitrogen oxide emissions but spread to carbon dioxide emissions, bringing in VW’s other marques, including Audi and Porsche, along the way.

The scandal prompted deep-seated concern about VW’s prospects, but also called into question demand for diesel cars more broadly. Registration data from industry body, the SMMT, for October, the first month after the VW scandal broke, showed a 2.1% decline in demand for diesel, compared to a decline of 0.9% for petrol. Looking at the first 10 months of the year in total, however, reveals a marked preference for petrol vehicles, with registrations up 8.7% compared to a 2.6% rise for diesel.

‘Even before the VW scandal, people were beginning to realise that diesel was not quite as good for the environment as they had thought. Diesel is also more expensive than petrol, even though you get more miles per gallon from it, so the economics are less compelling than they used to be for low-mileage drivers, especially as diesel cars cost more than their petrol equivalent,’ says Ian Henry, Director of automotive strategy consultancy, Auto Analysis.

In the long term, these economic factors may well prove more influential than environmental or moral concerns.

The impact on the UK car industry is nuanced. Dealers for diesel-heavy brands such as Renault, Peugeot, Citroen and VW itself may be left with stock that they can only sell at much reduced prices; but some UK-based manufacturers may actually benefit from Volkswagen’s misfortune.

‘Problems for VW should benefit Nissan, Vauxhall, Toyota, Mini and even Jaguar Land Rover, if Audi continues to be impacted. There’s a scenario which could even mean higher production volumes in the UK, if VW dives,’ says Henry.

6 SMMT, November 2015

7 http://www.bbc.co.uk/news/business-34324772, 10 December 2015

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