UK Car Lending

the automotive industry’s Long Covid

As we move forward into July, we can look back on the first half of 2022 to review what happened in the new car market and assess the state of play, as well as predict what to expect for the second half.

It’s been another chaotic year for new car sales – the third in a row, all thanks to Covid. The auto industry is certainly suffering from its own version of Long Covid as the ripple effects of the global pandemic continue to wreak havoc on both supply and demand for new cars. Then, of course, just when it looked like things were starting to look up, Vladimir Putin decided to flatten Ukraine with catastrophic results for Ukrainians and wider consequences for the whole world.

How many new cars have been sold?

Just over 800,000 new cars hit UK streets in the first six months of this year. The first half is generally stronger than the second half, and the Society of Motor Manufacturers and Traders (SMMT) currently forecasts the annual total to reach around 1.7 million – although this could be revised downwards next month as the market is underperforming against this outlook.

By comparison, last year almost a million cars had been registered at the end of June, but the market collapsed in the second half to reach a final total of just over 1.6 million at the end of the year. end of the year.

Year-over-year comparisons are difficult because the past two years have been absolutely chaotic due to shutdowns and supply shortages, so there’s no need to worry about specific percentages of increases and decreases each month. But to give you an idea of ​​how difficult the industry is, the average new car registrations from January to June over the past decade (2010 to 2019) was over 1.2 million, or about 50% of more than this year’s performance.

What does this mean for consumers?

The current problem for car buyers is a serious lack of supply of new cars. Many of the most popular new models have very long waiting lists – in some cases, more than a year. In some cases, car manufacturers are not even taking orders for certain models because the waiting list is already too long. The most publicized example of this is Ford, which is currently not accepting orders for the Fiesta or Focus, two of its best-selling models.

This obviously makes planning your next new car purchase or lease very difficult, as most car buyers have a PCP or PCH agreement with an end date when they will need to switch cars. As a result, buyers chose the models that were available on time or switched to a used car.

It also pushes up the prices of new and used cars. With few cars for sale, automakers don’t need to offer deep discounts to attract customers. They also prioritize consumer sales over fleet sales, as fleets typically expect discounts of up to 40% in exchange for ordering hundreds (or even thousands) of cars.

Despite low production numbers, many automakers are actually making more money than they’ve had in years because they’re able to sell their cars at premium. So while it makes cars more expensive for buyers, it creates a more sustainable auto industry. This obviously won’t last, and they will resume their price wars as soon as production increases again…

Customers are getting smaller, greener and cheaper

As we have pointed out a few times over the past few months, some clear trends are emerging in the new car market.

Electric car continue to find more and more accommodation, the biggest limitation being supply. Despite concerns about public charging infrastructure and the cost of new electric vehicles, the switch to electric is well and truly underway.

Interestingly, consumer desire seems to be for fully electric cars rather than plug-in hybrids, which are not developing at the same pace. Supply issues may affect this, but it’s certainly true that automakers are putting most of their effort into pure EVs rather than part-time EVs.

Economy brands are doing very well, with Dacia and MG enjoying huge sales growth in a market down 12% since the start of the year. It’s not just a 2022 story either, as both brands have been growing steadily for several years.

We’ve also discussed this before, but cars have been getting more and more expensive for years, while customer buying power is pretty static. As a result, car buyers tend to opt for cheaper models at the end of their PCP or PCH contract, in order to keep their monthly payments manageable.

We saw a similar thing happen during the financial crisis more than a decade ago, when budget brands Hyundai and Kia started to make major inroads into the UK new car market. If MG and Dacia can replicate the success of the Korean siblings over the next decade, their future looks very bright indeed.

Small cars continue to dominate the UK new car market. The Vauxhall Corsa is gradually extending its lead in the 2022 sales race, looking well to defend its 2021 crown. The Mini hatch is also continuing to sell strongly despite its end of life, with a new model set to debut next year. next.

Meanwhile, Ford might not be able to deliver new Fiestas, but the small Puma SUV (based on the Fiesta) is making big hits. The mini SUV market is one of the hottest in the new car industry, with almost every automaker having something to offer buyers.

Winners and losers in 2022 so far

At mid-year, the overall market is down about 12% from the same point last year. But overall, some automakers are doing better than average while others are struggling.

So far, good news for Alfa Romeo, Alpine, Bentley, Cupra, Dacia, DS Automobiles, Fiat, Honda, Hyundai, Kia, Maserati, MG, Mini, Polestar, Porsche, Smart and SsangYong. All of these brands outperformed the market by at least 10% – and in some cases did much better.

The year didn’t start so well for Abarth, Jaguar, Jeep, Land Rover, Lexus, Mercedes-Benz, SEAT, Skoda, Subaru, Volkswagen and Volvo. All of these brands underperformed the overall market by at least 10%.

Overall, Ford is back in the lead in terms of new car registrations for the year to date, after dropping to fourth place last year. Kia is second, ahead of Volkswagen, Audi, BMW, Toyota, Vauxhall, Mercedes-Benz, Hyundai and Peugeot.

How does this affect the used car market?

We have now had over two years of new car production drastically reduced thanks to Covid shutdowns and then supply shortages. With automakers trying to deliver every available set of wheels to paying customers, that means fewer demo vehicles, service loaner vehicles, press vehicles, corporate office management vehicles, and more. Many of these cars end up being sold as almost new used cars, so the supply of these vehicles has largely disappeared.

With thousands of customers looking to swap out their cars at the end of PCP contracts every month, that meant many of them bought used cars instead of new ones, gobbling up the limited supply of nearly new cars and pushing prices up significantly. .

This in turn has a ripple effect on slightly older used cars, when it affects even older cars, and so on up to decade-old and even older vehicles. And that will keep used car prices high until new car production starts to return to more normal levels.

What can we expect for the rest of this year?

In short, more of the same. Some automakers have reportedly begun to regain control of their supply chains and hope to ramp up production in the coming months, but realistically new car waiting lists aren’t going to magically disappear anytime soon.

The good news is that – unless Putin really loses his marbles and attacks NATO – we are unlikely to see the kind of acute shortage of production that we saw at the end of last year, so hopefully we’ll have a less chaotic Christmas sales period in 2022.

For the used car market, we’re going to see high prices for at least another year. The industry can’t suddenly replace two years of new car production, so in 2023 and 2024 there will be far fewer three-year-old cars on the used-car market, which will keep prices inflated – not in as far as we see prices have gone up right now, but still higher than normal.

The bad news is that mounting cost-of-living pressures will put thousands of households under real financial pressure, which could dramatically increase auto finance defaults. We saw a similar pattern start at the start of the Covid pandemic, when millions of workers were suddenly laid off.

To help prevent widespread payment defaults and a potential car finance slump during Covid, the Financial Conduct Authority (FCA) has established provisions allowing customers to take a three month ‘payment holiday’ in 2020. It is possible that the FCA should keep a similar option in reserve if needed later this year, but hopefully the situation will not become so precarious.