IMI Magazine

IMI Magazine

Cover Story - The year the wheels fell off

The slide in UK new car sales during 2005 was more of a disappointment than a shock. No graph – except possibly that of global warming – can keep going up indefinitely and after 10 years of growth (apart from a blip in 1999), carmakers and their franchised dealers are now having to adapt to the downside of cyclical demand. It was a bit of a fool’s paradise, anyway. “Borrow against the increasing value of your house,” exhorted the High Street lenders. “Treat yourself to the holiday of a lifetime, a new car….”.

It took a slide in property prices, a hike in utility bills, the prospect of another inflation busting round of council tax rises and persistent reports of a ‘black hole’ in the economy to persuade consumers to start applying the brakes. By July, private sales – dealers’ bread and butter business – had fallen from 250,000 to 180,000.

Of the major dealer PLCs, Lookers was arguably the most weatherproofed against the return of rainy days. It reduced its dependence on new car sales by focusing more on used cars and aftersales, buying FPS and Apec – two wholesale parts distributors – and used car supermarkets the Bristol Trade Centre and Ian Shipton Cars, based at Burton-on-Trent. By September Lookers had posted a 21 per cent increase in profits on a 12 per cent rise in turnover. “New car sales are certainly not where we make our money,” said finance director David Dyson. Fred Maguire, Lookers' chairman, added: “It’s a foolish trader who relies on new car sales.”

The point was underscored by a report from Castrol Business Services which said that aftersales had the potential to contribute up to 60 per cent of a dealer’s profits, with margins on car parts of around five per cent.

Inchcape Retail, with more than 80 sites representing 16 franchises, also bucked the downward shift, its half year trading profit rising from £11.3m to £13.8m. With fleet and small business accounting for nearly half its sales, Inchcape was better protected against the  slump in the retail segment.

Pendragon began the year with a bang – pre-tax profits rocketing by 47 per cent to £65m as it reaped the benefits of its takeover of CD Bramall a year earlier. But come the summer, even Britain’s biggest dealer group was feeling the pinch, with half-year pre-tax profits down £2.8m to £35.3m. That jolt seemed to whet its appetite for another acquisition, this time for Reg Vardy, another big fish to get caught on the choppy water. Vardy’s profits warning came in March and by July its pre-tax profits had dipped from £45.6m to £43.8m, despite a 6.8 per cent rise in turnover. The group’s prominence in the small car market made it particularly vulnerable to the fall in private sales.

HR Owen’s opening of a new £7.5m BMW and Mini site in west London in March gave chief executive Nick Lancaster an opportunity to highlight another aspect of tough trading conditions. He called for more backing from manufacturer partners to ease costs of operating in the London area. It was an issue close to his heart: in a 30-month period, the company  acquired 30 outlets, mainly within M25 territory. BMW boss Jim O’Donnell also took up the cause, commenting: “There is a real danger that the cost of operating in London will become prohibitive.” Lancaster again cited London operating expenses, coupled with low economic confidence, when HR Owen issued a profits warning, followed by a half-year loss of £7.3m. The company has since put all five of its BMW dealerships in London up for sale.

Whatever the make up of their portfolios, most dealers found themselves in a lose-lose situation because the drop in new car sales prompted manufacturers to rein back on price rises – 0.3 per cent in Jan compared with 0.8 for the same month in ’04 – which had the knock-on effect of reducing margins. As Glass’s Market Intelligence Service put it: “Dealers are caught between a rock and a hard place. Retained margins of one per cent or less are the order of the day and new car profitability is still in decline.” PricewaterhouseCooper went a stage further, confirming what was common knowledge when it commented: “Many dealerships are selling new cars at a loss before manufacturer bonuses.”William Jacks was one of the beneficiaries of a VAT refund, but it was not enough to mask the company’s problems as it reported: “Recovery in new car volumes is critical to achieving successful performance this year.” As it turned out, half year losses were worse than feared - £25,000 more than the £800,000 prediction. Jacks, like Reg Vardy, had to count the cost of the dive in private sales which accounted for around two thirds of its customer base.

For another dealership group, Gateshead-based Priory, it was time to quit, with managing director Bill Oliver saying that even with massive investment companies the size of his could not compete with the major PLCs. One of those, Reg Vardy, stepped in to buy five of 11 Priory sites in the north east prior to Priory quitting the business.

Vardy was again among the players – along with Pendragon and Arnold Clark – in taking on 12 Kia sites, bringing the marque’s total outlets to 164. This despite grumbles from existing dealers that Kia’s sales targets were over optimistic: 45,000 cars for ’05, 12,000 more than ’04, and rising to 100,000 by the end of the decade.

European Motor Holdings followed up its intention of expanding through “complementary acquisitions” with the purchase of privately owned  Smith Knight Fay (with 18 franchises in the north west) for almost £30m, while the biggest privately owned group, JCT600, continued its £27m investment over the three previous years with a new Chrysler and Jeep dealership in Wakefield and acquisition of sites in Leeds and Bradford for Porsche and Peugeot.

Meanwhile, Sytner opened a £19m BMW site in High Wycombe, Bucks, following the opening of other BMW ‘super sites’ in Gloucestershire and London’s Docklands; Marshall Motor Group expanded its Peterborough operation, spending £5m on its Jaguar, Land Rover and Volvo franchises; Sunwin Motor Group unveiled a £3.7m scheme for its Midlands-based dealerships acquired from the Ilkeston Co-op Group involving around 13 dealerships; and Pendragon added five Cadillac and Corvette locations to its network at a cost of £30m.

To have Pendragon come on board for Cadillac’s second stab at the UK market – the first having ended so ignominiously – gave credibility to General Motors’ puzzling decision to promote the Caddie as its premier badge rather than Saab. But fewer than 200 registrations (a mix of demonstrators and actual sales) of both Cadillac and Corvette by the autumn fell far short of the 500 sales target for ’05.

Rather than throw in the towel, like Priory, in January a collection of Davids took on the Goliaths with the launch of the Retail Automotive Alliance. It comprised 20 groups operating 155 sites with a combined turnover of more than £2bn.

Those behind the joint venture were at pains to point out that its purpose was not to go head to head with the likes of Ford (its core members are Blue Oval dealers) over vehicle pricing. Rather, its main purpose was to share the benefits of collective buying on consumables and, longer term, car rental.

Collectives like the RAA will need an extra dose of steroids if they really hope to muscle in on the retail agenda set by manufacturers. Block exemption reforms were intended to address the imbalance between carmakers and their franchised network and the independent sector. But developments during ‘05 still pointed to the piper calling the tune. The blunt message from vehicle manufacturers was: If you want to be part of our franchise, here’s what it will cost. And for those with aspirations to become an  ‘approved repairer’, that much vaunted part of block exemption intended to give independent garages a share of warranty work, the message was the same.

One of the RMI’s Dealer Satisfaction studies concluded that manufacturers were exerting even more control than ever. Brain Spratt, chief executive of the Automotive Distribution Federation, commented: “Markets generally buck the attempts of others to regulate them.”

Market forces also decreed that Birmingham’s NEC was never going to cut the mustard as the UK’s motor show venue and, after a 30 year absence, the SMMT decided to move it back to London - not at the down-at-heel Earl’s Court but in the swankier setting of Docklands. The date has changed too, from May to July.

Coming and goings

Vauxhall chairman and MD Kevin Wale left the UK to head GM’s China operation. Jonathan Browning took over as chairman of Vauxhall, in addition to roles at GM Europe, with Bill Parfitt taking on dual roles as MD and sales director.

Giulio Salomone arrived from Turin to become MD of Fiat Auto UK.

Roger Putnam retired as chairman of Ford of Britain and took over as SMMT president from Tod Evans, former UK chairman of Peugeot Citroen. Stephen Odell filled Putnam’s place at Ford from Mazda.

Former Euro Disney boss Andre Lacroix became chief executive of Inchcape, succeeding Peter Johnson, who took on the role of non-executive chairman.

Xavier Duchemin was appointed MD of Citroen UK, replacing Alain Favey who moved to Italy.

RMI franchised dealer director Alan Pulham retired after 15 years, replaced by external affairs head Sue Robinson.

Rover: the story so far

Anyone with the remotest interest in motor industry affairs must be wearily familiar with the background to the collapse of MG Rover in ’05. How four businessmen invested £240,000 in return for a £lbn ‘dowry’ from BMW. How the so-called Phoenix Four spent that cash – and more – to keep the company afloat, while benefiting to the tune of £40m in pension, pay and other benefits.   Along the way, there were abortive joint venture talks with Proton and China Brilliance and a minor collaboration with Tata, which produced the disastrous City Rover. Then, with losses over four years amounting to more than £600m, the company turned to another Chinese carmaker, Shanghai Automotive Industry Corporation, to bail it out. SAIC cherry picked its way to the intellectual property rights for Rover cars, worth £67m, and then No. 2 on the Chinese menu of bidders, Nanjing Automotive, secured a deal for £50m,which saw it stripping out MG Rover's Longbridge factory for shipment to its home base.

What remains of the company’s UK’s operation is still in the melting wok, and a government inquiry into the saga – including the DTI’s 11th-hour involvement – is awaited. One beneficiary is administrator PricewaterhouseCooper whose bill so far comes to £5.6m. Losers - apart from the workforce – are dealerships which had MG Rover franchises. They include Pendragon (£3m), Reg Vardy (£2.8m) and Caffyns (£2.1m).    

As for the legacy of the Phoenix Four, Professor Chris Brady of the Sir John Cass Business School said: “They kept 6,000 people in work for five years and gave time for the suppliers in the area to diversify and not to be so reliant on Rover.”

Quotable quotes

“It’s a foolish trader who relies on new car sales”  - Lookers’ chairman Fred Maguire

“There is a real danger that the cost of operating in London will become prohibitive” - BMW boss Jim O’Donnell.

“Dealers are caught between a rock and a hard place” - Glass’s Market Intelligence Service.

“Markets generally buck the attempts of others to regulate them” - Brain Spratt, chief executive of the Automotive Distribution Federation.

“Despite the fact that many sectors, including the retail motor industry, are suffering from a skills shortage, the government still does not fully commit to the concept of vocational training being equal to an academic course” - Stephen Ramsay, MD of training provider ReMIT.

“They kept 6,000 people in work for five years and gave time for the suppliers in the area to diversify and not to be so reliant on Rover” - Professor Chris Brady of the Sir John Cass Business School on the legacy of the Phoenix Four.

Record year for car launches

‘Spoilt for choice’ took on an extra dimension for consumers as 2005 saw an unprecedented total of 76 all-new models launched in the UK – 55 per cent up on the previous year. The sheer range of models and their variants – estimated by EurotaxGlass’s to number more than 6,000 – prompted the company to point out that dealers face an “unenviable task” in selecting products for showroom display.

Other highlights

GM and Fiat decided to split after a four-year partnership. It cost GM more than £1bn to buy its way out of a commitment to take over Fiat. Ford and Fiat announced a ‘co-operation’ deal to produce replacements for Ka and Cinquecento.

Ford stopped production of Jaguars at Browns Lane.Norwich Union bought the RAC for £1.1bn to secure an extra foothold for car insurance, loans and roadside assistance cover.

Introduction of Financial Services Authority regulations governing the sale of insurance and warranty products.

CVC Capital, the private equity company that bought Kwik-Fit from Ford for £350m in 2002, sold it to another private equity group, PAI Partners, for £800m.Roll-out of MoT computerisation to more than 19,000 test stations. As with most computer projects, there were problems, with the RMI reporting delays among its members in getting through to the helpline.

Daewoo disappeared as GM brought it within the Chevrolet brand

Fallen giants

It must have been a grave-turning moment for Henry Ford when the company he founded and which went on to become an icon of corporate America was reduced to junk bond status. Ford was not the only behemoth which fell to the iconoclasts – General Motors went the same route, while Toyota stormed to a third successive year of record profits, giving it a ‘triple A’ loans rating.

GM and Ford’s plight prompted a hitherto incredible question: Could these two companies actually go bust? It’s still not too improbable. Delphi, GM’s one-time parts division and still its main supplier, was driven into bankruptcy along with a series of other suppliers because of  relentless pressure from paymasters to reduce component costs.  In desperation, GM intends to shed 30,000 jobs and close five assembly plants, and is trying to sell the family silver, its GMAC loans business which generates more profits than vehicle sales. GM and Ford have also reverted to discounting, despite stated intentions to move away from price-cutting their way out of trouble. GM reduced ‘incentives’ by nearly nine per cent in the autumn and for its efforts saw its share of the US car and light truck market slide to a record low of 22.1 per cent, with share prices at their lowest for 13 years.

In October, average discounts on GM products were $3,062, compared with Ford ($2,820) and Chrysler ($3,075). Price cutting only served to reinforce the message being sent out by American consumers that its nation’s Big Three still haven’t got an answer to overseas competition: Asian carmakers offered discounts of only $1,247 per vehicle in October.

Adding to GM’s burden are pension and healthcare liabilities, not only covering its own employees but those on Delphi’s books when it offloaded the parts supplier in 1999.

Ford, too, is saddled with employee-related liabilities, a lacklustre performance by its Premier Automotive Group and sliding sales of its volume business. Like GM, Ford spun off its parts operation – Visteon – but took it back into the fold after five years rather than see it head the way of Delphi. Chrysler, at one time the weakest of the Big Three, meanwhile showed that recovery can be achieved through tough doctoring. It was carried out by Dieter Zetsche who has now turned his attention to Mercedes-Benz after taking over as head of DaimlerChrysler.

Standards still below par

Talk about skills shortages has become as commonplace as moans about the weather, and  ‘initiatives’ to overcome them are as thick on the ground as autumn leaves, along with complaints about shoddy workshop standards. The latest report came from Trading Standards which examined 88 cars after they’d been worked on by a variety of garages (most of them members of the RMI and SMTA) and pronounced that 77 of them were below par.

This was shortly followed by the launch of Automotive Technician Accreditation to benchmark the skills and competence of individuals. It was no knee-jerk reaction to damning findings from the likes of Trading Standards and the Consumers’ Association, but the culmination of three years’ development work – mainly led by the IMI which is now responsible for governing the scheme. Industry organisations, under the auspices of the sector skills body for the retail motor industry, Automotive Skills, are now working to extend the ATA programme to other jobs, including those in aftersales.

While applauding the introduction of ATA, one correspondent to Motor Industry Magazine said its success would depend on “a culture change” to provide those in the workshop with equal status and rewards to those of salespeople.

Culture change was a theme taken up by Stephen Ramsay, MD of training provider ReMIT, but this time directed at government. He was critical of the continuing drive to get more people into university, claiming it would harm efforts to attract young people into vocational education. “Despite the fact that many sectors, including the retail motor industry, are suffering from a skills shortage, the government still does not fully commit to the concept of vocational training being equal to an academic course,” said Ramsay.

Elsewhere on the training front, Thatcham opened a new apprentice training centre, prompted by research which found that only one third of bodyshops take on apprentices, and the British Standards Institute introduced its Kitemark scheme for garage standards. This followed the RMI’s abandonment of another standards programme, CarWise, which was turned down at the second stage of its development by the Office of Fair Trading. The bodyshop sector was more successful, with OFT approval for standards drawn up by the Vehicle Builders and Repairers’ Association.

Failure of Carwise cost the RMI £500,000, a bill it could ill afford given an ‘04 operating loss of £1.5m, a six per cent fall in membership subscriptions, and a £5.6m shortfall in its pension fund. Heart searching led to the redundancies of three divisional heads, the appointment of a director of sales and marketing, and a pledge from new president Keith Sayfritz to make the organisation “more dynamic, cost effective and vocal”.