IMI Magazine

IMI Magazine

News Analysis

What’s happening to ‘live now, pay later’?

Findings by Close Motor Finance that just over 50% of new and used car buyers are using cash rather than a point-of-sale financing package or personal loan suggest that the ‘consume now, pay later’ habit,  which has been a crucial factor in the new car market’s buoyancy, is on the wane.

A 16% fall in new cars sales during February – a month which also saw 23% fewer private buyers enter the market compared with the corresponding month of 2004 – represented the third successive month of faltering demand. It would be comforting to believe that this slump could be explained by consumers paying off their Christmas bills and awaiting the arrival of the ‘05’ plate in March, but the widespread fear and expectation is that further market weakness will characterise the rest of the year.

No-one in the retail motor trade should be too taken aback by the speed or scale of this reversal. After all, look at the adverse factors: a continual rise in interest rates since November 2003, growing uncertainty over economic and employment prospects after the general election, and a rising level of consumer debt which is unprecedented and, probably, unsustainable.

There is only so much that the motor industry itself can do to address the problem, but the likelihood of sales incentives becoming more generous than ever in an effort to kick-start the market must be high.

Now it’s the RAC’s turn for ‘cross selling’

The agreed £1.1bn takeover of the RAC by Aviva, the UK’s largest insurance group which trades as Norwich Union, corresponds to the financial sector’s growing interest in the motor industry.

It is also the latest in a series of mergers and acquisitions which have been based on the premise that the opportunities for cross-selling and streamlining operations have the potential to boost sales and reduce costs.

Aviva’s intention is to sell motor and other insurance packages to the RAC’s customers and, in the opposite direction, introduce the RAC range of services to its own customer base. Effectively, therefore, Aviva/RAC will evolve into a one-stop financial shop offering car loans, insurance, breakdown cover and other aspects of everyday motoring requirements.

In formulating its strategy, Aviva’s management has been impressed by the example of Tesco and some other retailers who have ramped up their sales through offering new and widening product ranges such as clothes and electrical goods. Insurance, though, could be very different, especially as surfing the internet assumes a growing role in people’s choice of financial services.

Moreover, what should be made of Centrica’s disposal of the AA where the promise of similar synergies was flagged as a prime benefit of the combined group?(See also Talking Points, page 6).

Ford bail out for ‘special case’ supplier

Ford’s decision to provide financial support for Visteon (its former in-house components and systems group) through a mixture of accelerated payments for parts and the funding of new manufacturing equipment provides a vital lifeline for the world’s third largest automotive supplier as it attempts once more to put its operations on a viable footing.

This assistance, though, ensures short-term survival rather than long-term prosperity, and there remains an urgent need for Visteon to revisit its strategy and restructure its operations, including the disposal of loss-making operations. Since gaining its independence in 2000, the group has failed to achieve consistent profitability and, even after Ford’s intervention, breakeven is the best that can be expected for the current year.

In the event Ford had little choice than to ride to the rescue. Despite the best efforts of both companies to lessen their dependence on each other, latest estimates indicate that Ford still accounts for 70% of Visteon’s sales; hence the relationship between the two qualifies as a ‘special case’ which would not necessarily apply to a less significant supplier.

Even so, there is perhaps a wider lesson. With distress evident throughout the global automotive components sector generally, it should be obvious that there’s a limit to vehicle manufacturers’  demands for constant price reductions and other onerous supply conditions.

Suppliers need to earn an adequate return in order to fund future investment and reward their shareholders, and in the absence of these conditions there is a real chance that significant chunks of the supply base will wither. Meanwhile, with vehicle manufacturers, notably in the US, implementing production cutbacks to accommodate slacker sales, the immediate outlook is far from rosy and further failures should be anticipated.

Another blow for Saab

General Motors’ decision to build Saab’s next generation 9-3 (scheduled for launch in 2008) alongside its sister Vectra model at Opel’s Russellsheim plant in Germany is a serious blow to the marque’s long term chances of maintaining an assembly presence in its native Sweden.

Saab’s Trollhattan facility put in a strong bid to secure a part in the future of GM’s mid-range European line-up but to no avail, and soothing words concerning the continuing role that Sweden will play in GM’s European assembly network provides limited comfort. No wonder that the response of Peter Augustsson, Saab’s chairman and chief executive, on hearing the verdict was to quit.

GM’s involvement with Saab – which started in 1990 through a 50% stake and culminated in 2000 with a full takeover – is one of the more perplexing in the history of vehicle manufacturing consolidation and will provide plenty of material for motor industry case studies.

On the positive side, GM provided critical support at a time when Saab desperately needed to plug into the design, development, procurement, manufacturing and marketing economies of scale of a larger company. In the manner of Jaguar which owes its continued existence to Ford’s largesse, Saab’s survival has been dependent on its membership of the GM family.

However, it is difficult to avoid the conclusion that GM has failed to exploit the potential of its purchase. With foresight and imagination it was surely possible that Saab could have assumed a role in GM similar to that enjoyed by Audi in the VW group. Instead, latest developments – including the use of Saab as a badge of convenience for the products of other GM affiliates and the use of Trollhattan as the assembly point for Cadillac – suggest that there are considerable doubts over Saab’s ability to retain its ethos and integrity.

Ominous moves on fuel tax

With a general election confidently predicted for early May, the chances of Gordon Brown’s (last?) budget causing offence were slim at best, and on the surface there was little for the motor industry to get steamed up about. The SMMT’s response was broadly positive, not least over plans to introduce guidelines over the implementation of new EU regulations, the freeze on company car taxation and the climate change levy, and the deferment of fuel duty increases until September.

However, changes to vehicle taxation have highlighted a couple of issues which are likely to have an increasingly important impact on the future market. For a start, there can be no doubt that government policy is moving strongly towards encouraging the use of small fuel efficient cars based on a reduction of CO2 emissions. This much is clear from the proposal to freeze VED on the four less polluting CO2 categories but to levy a £5 increase on the two highest polluting categories, and also from the proposal to move to a CO2 basis for the taxation of the private use of road fuel bought by VAT-registered companies.

More ominously, the chancellor announced that the duty differential between LPG and petrol would be narrowed by 1p a year for the next three years. Presumably this is in line with the growing prevalence of LPG-fuelled vehicles and provides a clear signal that motorists will be unable to escape long term the advantages currently enjoyed by less polluting fuels. In other words, when everyone is using pollution-free hydrogen-powered vehicles, the Treasury’s take from fuel duty will be at least as great as today’s. No surprise there, then.