POSITIVE OUTLOOK FOR 2023, BUT SIGNIFICANT CHALLENGES REMAIN

Philip Nothard, Insight & Strategy Director for Cox Automotive, provides insight into what the year ahead could hold for UK automotive and reveals the company’s latest new and used forecasts.

As with any new year, our minds are drawn to the days and months ahead, and we find ourselves asking the same questions: What will 2023 have in store for the automotive industry? Will economic conditions improve? When will more new supply enter the market?

While those questions are more of an indication of the particular challenges we face today, as we all know, every new year brings a renewed sense of optimism.

Fortunately, this time round, there is cause for optimism. As set out in our latest issue of AutoFocus, the end of 2022 saw an improvement in new vehicle supply and the early signs are that this will only improve throughout the coming year, outstripping many forecasts. And while economic conditions are far from good, inflation levels are forecast to improve throughout the year, albeit still ahead of Bank of England targets. Could this mean an improvement in consumer and business confidence? Only time will tell.

The electrification of our vehicle parc also continues at pace. Last year saw the largest percentage of battery electric and plug-in hybrid vehicles sold to date in the UK and the biggest year-on-year growth in registrations. Consumer behaviours are shifting, and manufacturer and fleet operator strategies are following suit. There have been casualties along the way, particularly in the small hatchback segment where once popular models are being discontinued, most notably the Ford Fiesta. Where established manufacturers leave, we’re seeing new Chinese brands begin to fill their space and find a footing in the European market.

Optimism As New Car Production Improves

More new cars rolling off manufacturer production lines can only be a good thing and is needed to reduce volatility in the market, but that it’s finally happening just as the cost-of-living crisis takes hold is less than ideal. While inflation levels are predicted to improve this year, they will likely remain above the Bank of

England 2% target until 2025, meaning a prolonged period of reduced consumer appetite.

We still have some way to go until production volumes are what could be considered normal. The latest Global Light Vehicle Production Summary from S&P Global indicates that it will be 2025 before global production volumes surpass 90 million again. For Europe, it’ll be at least 2028 before we will exceed 18 million again. We mustn’t forget that approximately 46 million fewer new cars have been produced globally in the last three years, resulting in a loss of more than 10 million registrations across the big five European markets. The UK alone has lost 2.6 million registrations. These are vehicles the used market will never see, whatever progress manufacturers make in increasing volumes.

Amidst this backdrop, the standout performer in terms of registrations in 2022 was clearly the electric vehicle sector, with more than one-fifth of all registrations in the UK being plug-in vehicles. This performance demonstrates manufacturers’ continual investment and determination to prioritise low and zero-emission vehicles following government legislation, as well as the public’s shifting attitudes towards cleaner motoring.

A side effect of the transition to hybrid and EV is that manufacturers are increasingly culling the number of models and derivatives, reducing customer choice further still.

We are also now clearly seeing an appetite from Chinese brands to enter both the UK and European markets. In the past, consumers have been open-minded about adopting new operators as they’ve entered the market, so there’s no reason to believe the same won’t be true of Chinese car brands. The timing couldn’t be better for them as established OEMs step away from affordable but ultimately unprofitable legacy models. Ford’s decision to cease production of its long-term best-selling Fiesta model may be the highest profile casualty but it’s just one example. This will leave a void to fill as people still need small, cheaper cars.

New Car Registration Forecasts

Cox Automotive has once again adjusted its new car registration forecasts in line with the market factors described in this article. Our forecasts are broken up into three scenarios – upside, baseline, and downside.

The forecast predicts an improvement in registrations throughout the year, but it relies on a continual increase in new vehicle production throughout 2023 as well as inflation levels falling further.

More And More Consumers Are Switching To Used Vehicles

For a variety of reasons, more consumers than ever are choosing to switch to a used vehicle from new. Some will be motivated by cost, and others will be put off by long lead times or restricted choice. However, which used vehicle that will be in terms of affordability, driver requirements and zoning access needs are yet to be understood. It stands to reason that the dominant influence today is the cost-of-living and energy crisis, and this will likely impact the EV market the most. Despite EVs now becoming a common sight on our roads it remains the case that EVs are more expensive than their petrol or diesel counterparts. For many potential buyers, there are genuine concerns about the true cost of running an EV now energy prices have risen.

Meanwhile, increased demand from both consumers and fleets, together with the need to progress towards long-term production targets, means most manufacturers have shifted their focus to EVs, so we’re seeing fewer new ICE vehicles available to buy and therefore registered. As a result, there will be an inevitable impact on the used market in time.

There is, of course, now a greater proportion of EVs entering the used market, and we’re starting to build a picture on appetite from dealers and consumers and residual values. What is already clear, however, is there’s significant work needed from all operators within the sector, including governments, not just on infrastructure but to increase the levels of confidence, education, and appetite for ownership of pre-owned electric vehicles.

Used Car Values Dropping

There is increasing caution around residual values of EVs, resulting in above-market depreciation movements on those models and derivatives either in significant oversupply compared to market demand or not on a buyer shopping list. As a result, dealers are wary of the risk of stocking vehicles that may take a while to sell.

As some leasing companies review strategies for their EV fleets, others may choose to delay that transition due to uncertainty. But, as we have observed over the decades with combustion engines, given time, the supply, demand, and residual value uncertainties will settle and find their place in the market.

What is clear is that the price acceleration and heights experienced throughout 2021 and early 2022 have begun to ease and in some cases, show significant signs of depreciation.

2022 closed with a -9.4% movement in values at 3yr/60k, and 2023 begins with a further -1.5% downward movement at 3yr/60k, marginally ahead of the seasonal average of -0.9% and the 5-year average of -1.2%. Although December could be described as a typical seasonal finish, the general feedback from across the sector is mixed, and it felt more challenging than November.

However, the focus is clearly on Q1 and what’s in store regarding optimism and the subdued economic outlook. With consumer confidence and demand under pressure, there are signs of weakness in margins appearing as overage product starts to appear. But overall, retail prices are holding as supply volumes remain constrained. In addition, there are signs that new vehicle supplies are increasing, albeit coming at a time when order banks and demand are easing, which is resulting in tactical registration activities and discounts appearing.

Used Car Transaction Forecast

Building on recent used car figures, the market factors described in this article, and in line with previous forecasts, Cox Automotive has also adjusted its used car registration forecasts.

More Insight From Cox Automotive

At Cox Automotive, we are firm believers that businesses must be well informed of the market dynamics in order to make the best decisions for the future. That’s why we’re committed to bringing you the insight you need to make better business decisions through the likes of our annual Insight Report and our quarterly AutoFocus

To keep up to date with the latest Cox Automotive insight, visit coxautoinc.eu/content