IMI Magazine

News analysis

Things can only get better, can’t they?
Shock horror coverage in the mass media concerning the lowest level of August new car sales since 1966 conveniently ignored the fact that from 1967 until the introduction of the bi-annual plate change in 1999 the month always marked the demand peak. And although the 19% slump this year was especially deep, a more accurate guide to the market’s condition will be provided by the September/October figures.

Given the current economic chaos, it’s not surprising that the immediate outlook is depressing. Buying intentions (according to a Sainsbury’s finance survey) are reported to be at a three-year low as consumers feel the pinch from a broad raft of rising costs. To make matters worse, the grim state of the used car sector and continuing decline in values has led to many dealers alienating potential new car consumers by offering derisory trade-in values.

Just as we’re seeing seismic shifts taking place in global banking and finance, it’s probable that the automotive sector’s landscape will change in a number of significant ways.

Even before the ‘winds of change’ gusted in with hurricane force, dealer groups were buckling under the strain. Experian reports that motor trade insolvencies have reached a seven-year high – up 31% in the second quarter compared with the previous year – and this at a time when the vehicle market was still holding up reasonably well. Meanwhile, both of the UK’s leading vehicle distributors – Pendragon and Lookers – have reported falling profits in their latest financial statements.

On a wider front, consumer belt-tightening should provide some good news for manufacturers lucky, or farsighted, enough to have caught the public mood for smaller cars. BMW’s Mini is the fastest growing marque in the US, while Fiat is boosting output of its 500 model to an annual 200,000 and expects to sell 60% more in Europe this year than originally anticipated. This augurs well for Ford’s upcoming Ka and Fiesta.

Franchise fight -back on labour
Independent garages seeking to maintain and extend their share of aftermarket repair and servicing work have received a strong boost from Warranty Direct’s latest research findings. These show that the national average labour charge in garages currently amounts to a shade over £75 – an inflation-busting 11.3% increase since 2006. However, whereas the average in franchised dealerships amounts to £94.70, the corresponding figure in independent garages is 41% lower at £55.63.

The magnitude of this differential provides the independent sector with a compelling competitive advantage, which will surely be exploited increasingly by car owners under pressure from falling real incomes.

Already, though, some parts of the franchised sector are staging a fight back through the introduction of low-cost servicing plans of the type recently introduced by Citroen and Kia as part of their campaigns to boost sales at the start of the ‘58’ year. Others, like Audi and BMW whose dealers in central London are charging more like £200 per hour, may need to reappraise their aftermarket operations or suffer serious erosion to the independents.

Now it’s the Big Three in line for a bail-out
After committing rather more than $300bn towards the rescue of financial groups AIG, Bear Stearns, Fannie Mae and Freddie Mac, the US government is on the verge of providing financial assistance to the country’s Big Three vehicle manufacturers.

The US Congress is preparing to fund a $25bn loan programme – possibly rising to $50bn – to enable Chrysler, Ford and GM to develop a generation of fuel efficient models and retool their factories to produce them.

This is regarded as essential if the Big Three are to meet the challenge of foreign competition and accommodate the changing preferences of American consumers who, in the light of rising fuel prices, are shunning big MPVs, SUVs and pickups in favour of smaller models from foreign manufacturers. It will also be essential in the absence of a rapid recovery of the US vehicle market and if one or more of the Big Three is to avoid triggering Chapter 11 bankruptcy protection.

For, with much of the ‘family silver’ already sold or in hock, the options for Ford and GM are beginning to narrow as the deterioration in their finances reaches alarming proportions.

GM has suffered losses of $51bn over the past three years and is expected to record a cash burn of $10bn between July of this year and the end of 2009. At this rate the corporation will need to secure external financing within the next year or so.

Despite the worst quarterly results in the company’s history with losses of $8.7bn in the second quarter, Ford appears to be more comfortably placed with almost $27bn of cash at its disposal, enough to last three years at the current depletion rate. The position is less clear in the case of Chrysler, owned by private-equity group Cerberus and therefore not required to publish detailed accounts.

More action, fewer words please
Anyone with the desire and stamina to wade through a 64-page report of platitudes and statements of the obvious should obtain a copy of ‘Manufacturing: New Challenges, New Opportunities’ from the Department for Business, Enterprise and Regulatory Reform.

It highlights the government’s view of what manufacturers require for long term success, such as supporting skills and realising overseas opportunities, improving the perceptions and understanding of manufacturing and, not least, seizing the opportunities presented by the move towards a low carbon economy.

But surely what manufacturing industry – and others involved in the business and commercial affairs of the nation – requires is a more benign and uncomplicated tax regime, along with a reduction in the mountain of bureaucracy, red tape and regulation which has added hugely to costs in recent years.

Motor lending down to one big player?
And then there was one. Following GE Money’s divestment last April of its motor finance unit, the UK point-of-sale sector was reduced to just two major players – LloydsTSB’s Black Horse Motor & Leisure and HBOS’s Bank of Scotland Dealer Finance – along with several smaller players like Carlyle Finance and Close Motor Finance.

LloydsTSB’s takeover of HBOS will reduce the field to a single big player, since the chances of both networks surviving the merger seem slim in the extreme. Already there are murmurings of significant cost savings of around £1bn through combining the networks and back offices of Lloyds TSB and HBOS.

Of the two, Edinburgh-based Black Horse Motor & Leisure looks the favourite to come out on top as the declared management focus for the combined group is to keep jobs in Scotland.

Arthur Way