No way back for car industry

NO WAY BACK… CAR INDUSTRY FACES A VERY DIFFERENT FUTURE

Manufacturers have discovered that volume isn’t everything when it comes to the chase for profit.

The pandemic, supply issues and spiralling inflation are set to change the shape of the car industry with no return to the pre-Covid ‘normal’ of oversupply, heavy discounting and easy availability of new cars.

Industry experts and manufacturers themselves have warned that the immediate availability of new cars may never return, while restricted supply will mean fewer discounts at retail and manufacturerto-dealer level in the future, as the entire industry is forced to reshape.

Philip Nothard, chairman of the Vehicle Remarketing Association, said the period between March 2020 and today had taught manufacturers that there were greater profits to be made by reducing supply and keeping new vehicle prices high – profits that carmakers need to achieve in order to redress massive losses incurred by the pandemic and the lack of availability thereafter, thanks to the global semiconductor crisis.

He said: ‘For decades, car manufacturing has been a volume business, not just for mainstream manufacturers but for prestige and even luxury brands, too. Building more [cars] was seen as the best way to make money.

‘However, when supply was cut substantially during the pandemic, many car makers found that they were able to make equivalent or greater profits despite selling fewer units. Reduced volumes meant that they could keep prices higher.

‘For some, this is becoming a future strategy. While they do not want to strangle supply to current levels, with waiting lists of 12 months or longer for a new car, they also do not want to return to the kinds of production levels seen pre-Covid.’

The lack of new car supply has seen used prices soar by 41.5 per cent since 2019, according to the Auto Trader Used Car Price Index, and Nothard doesn’t believe it will return to its previous ‘normal’.

He said: ‘We’re in a position where reduced numbers of cars in the market have pushed up prices and values, but there has been an assumption that the situation will ease over time and return to some kind of normality.

‘[But] it’s looking less and less likely that this will happen. Production will certainly rise but probably only to a level where the average new car delivery time is six months. A return to anything resembling pre-pandemic volumes seems unlikely. It’s going to be an interesting few years.’

New car sales slipped by nine per cent in July after the worst June on record since 1996, and the Bank of England increasing interest rates to 1.75 per cent has put further pressure on consumer confidence, not to mention disposable income and availability of finance.

SMMT chief executive Mike Hawes said: ‘The automotive sector has had another tough month and is drawing on its fundamental resilience during a third consecutive challenging year as the squeeze on supply bedevils deliveries. The next prime minister must create the conditions for economic growth, restore consumer confidence and support the transition to zero-emission mobility.’

John Wilmot, chief executive of car leasing comparison website LeaseLoco, added: ‘Now the market is facing a new problem in the form of weakening buyer demand, as the cost-ofliving crisis begins to bite.’ Philip Nothard

WARNING

BMW gloom as its earnings tumble

BMW is the first manufacturer to acknowledge that falling consumer confidence and rising inflation will hamper future sales.

Its shares fell as its worries about the global economy outweighed a posting of earnings exceeding market expectations in the most recent quarter.

BMW reported earnings before interest and tax of €3.4bn in the three months to the end of June – a 32 per cent drop on the same period last year, when orders rebounded sharply after pandemic lockdowns, but higher than most analysts’ predictions.

But the premium brand warned that ‘ongoing inflation and interest rate hikes will continue to shape the macroeconomic environment in the coming months and impact demand’.

BMW boss Oliver Zipse said: ‘New orders received are somewhat reduced. [But] at the same time, there is an order backlog, especially when it comes to e-vehicles, which is at an alltime high.’

Daniel Röska, an analyst at Bernstein, said: ‘The important message is the timing: investors have mainly been expecting growing weakness in 2023.

‘Given the length of current order books, a warning for yearend ’22 likely implies that BMW is already seeing weakening consumer sentiment today — likely led by flagging European demand.’ Car sales across the EU were down 14 per cent to 4.6m in the first half of 2022, versus 11.9 per cent to 802,079 in the UK.