IMI Magazine

IMI Magazine

News Analysis

Spectre of higher taxes looms over new car market

It's a reflection of the UK new car market's sparkling success in recent years that the failure last year to achieve a new sales record by only a whisker was met with tinges of disappointment among manufacturers and retailers. Even so, a market size of 2.57m represents an excellent outturn after a period of prolonged growth and is indicative of the continuing vigour of demand.

The critical issue now, of course, is the market's future direction. Given the industry's traditional cyclical pattern, has it reached a plateau, or was 2004 a pause for breath before the market moves to a new high? How will the industry's own actions influence market size and, maybe more to the point, what is its potential for manoeuvre, bearing in mind wafer thin or non-existent margins? With a May general election looking a certainty, the prospect of higher taxes later in the year in the event of a Labour win looks high and may prove the straw that finally breaks the retail consumer's back. Personal debt has mushroomed to an alarming scale with the result that setbacks like falling personal disposable incomes, higher interest rates and rising unemployment would have a particularly adverse reaction.

On another issue, it is widely anticipated that manufacturing costs will increase in line with higher energy and commodity prices. Steel prices have jumped strongly and further increases may stick during the coming year, leading perhaps to a general rise in new car prices. To what extent, though, will vehicle manufacturers be able to pass these higher costs on to consumers? Some commentators believe that competition is too great for any marked increase in car prices to be possible, while others contend that margins are already so wafer thin or non-existent that prices will necessarily advance. Whatever the outcome, component suppliers should anticipate further demands from their customers for lower prices, while any move on the part of consumers to resist price rises could be followed by attractive discounts and other incentives to rekindle demand.

In any event the mood of consumers is likely to be conditioned heavily by the trend in residual values which, at present, does not look good. According to Glass's, used car prices are continuing to decline due to falling demand and high used car stocks.

On a happier note, manufacturers and dealers will be cheered by the findings of recent research by Black Horse Motor Finance which points to 50% of car consumers trading up to better and/or bigger vehicles, compared with just 6% who downsize to cheaper models. This implies that even if volumes go down, values may rise. Maybe the tendency for manufacturers to boost the size and specification of a model range during a revamp is based on sounder marketing evidence than was generally supposed.

Bentley prospects now looking more bullish

Latest news on the Bentley front must come as a relief to the marque's owners, Volkswagen. It seems to indicate that vehicle companies which succumb to the temptation of adding prestige marques to their portfolios do not always get it wrong. 

After a long hard slog, Bentley last year achieved profitability for the first time since entering the German group's fold in 1998.

On an equally encouraging note, the company reports the likelihood of 'strong' profits for the current year thanks to brisk demand for the Continental GT coupé - whose sales expanded sixfold in 2004 to over 6,000 units - together with the launch of a four-door version later in the year.

As others in the super luxury category struggle to meet sales targets, it appears that Bentley has pitched its products, pricing and image just right to appeal to an appreciative worldwide audience.

More ominously, however, there are clear signals that Bentleys will begin to be assembled offshore in an attempt to ease capacity limitations at Crewe and satisfy burgeoning demand. If so, the location will be VW's Dresden plant where the less than successful Phaeton model is manufactured. While the desire to exploit market potential is understandable and the chances of quality being compromised through German assembly would be negligible, there are two clear dangers from such a move. First, a loss of Britishness, which surely is implicit with the Bentley brand. And secondly, a diminution of exclusivity.

Mini points the way with more 'tlc'

As some of the more dynamic members of the independent garage trade take advantage of new freedoms under the block exemption revisions, it is inevitable that vehicle manufacturers will do everything they can to keep profitable servicing and repair work within their franchised networks. This will be achieved by locking their customers as far as possible into attractive servicing deals which strike a balance between maintaining a high level of aftermarket profitability and encouraging brand loyalty. In particular, the roll-out of extended servicing packages is likely to provide a strong incentive for consumers to remain 'faithful' to franchised dealers.

An indication of likely developments comes from Volvo which offers private buyers of S40 and V50 models during the first half of the year the option of purchasing a three-year/36,000 mile servicing package for £100, compared with the true cost of around £800. Fleets benefit from an even more generous three-year/60,000 package.

However, Mini is undoubtedly the pathfinder through its 'tlc' option which, for a mere £150, provides customers with a five-year/50,000 mile transferable servicing package covering all labour and parts including lubricants.

Unsurprisingly the company reports a skyhigh take-up of 98%. And now Mini has upped the stakes through the option of an additional three-year agreement for £300 to cover years six to eight. Again this is transferable and, indeed, may be purchased by subsequent owners at any time before the expiry of the initial five-year cover.

More and more, the relationships between vehicle manufacturers and their customers are moving from the traditional supply of a consumer durable to the provision of personal motorised transport. Manufacturers and dealers who secure a competitive advantage in the future marketplace will almost certainly come from the ranks of those who move towards offering consumers a package which embraces all aspects of vehicle sourcing, running and ultimate disposal under a fixed time contract.

MG Rover to separate ‘funky’ from ‘fogey’

MG Rover's efforts to provide the MG and Rover brands with clearer and more distinct identities and to promote each on an individual basis at the dealer level make  considerable sense.

Notwithstanding a more or less common model range, the evidence to hand suggests that the two marques appeal to consumers with different aspirations: MG to those who are younger and more sporty, and Rover to those who are more conservative and traditionalist.

Under these circumstances it appears that MG has the potential to effect a more rapid and sustained recovery for the group as a whole than Rover. Whereas the latter brand's unit sales plummeted by 24% last year, MG's fell by a more modest 14%.

For MG Rover's hard-pressed UK franchised network, anything which offers the chance of stemming the decline and, hopefully, regaining lost market share, will be welcomed. At the same time there is an imperative to ensure that the additional costs implied by separating the marques are more than recouped through greater business. Otherwise, the temptation for some to jump ship and pursue other marques may become irresistible.

Meanwhile, the case for marketing and showroom separation would be even more compelling if models in the current MG range (the MGF aside) were not makeovers of existing and rapidly ageing Rover models. As MG Rover's new model development programme picks up speed under the SAIC joint venture with China, the ideal would be for a distinctly recognisable MG genus to be developed rather than persevere with badge engineering which has led to devalued marques.

And while on the subject of devaluation, why not rebrand the CityRover and future entry level and low cost models as Austins, and allow Rover to regain its traditional upmarket image?