IMI Magazine

IMI Magazine

News Analysis - By Arthur Way

Bargain basement bluesThe latest What Car? price index high-lights a golden era for car buyers. It shows that new car prices have fallen by an average of 10% since June 1998 compared with an 18% inflation rate over the same period. Given a strong economy and with cars so affordable, it is hardly surprising that demand has been buoyant, with new record levels of sales during the three-year period 2001-03.

These sparkling conditions, though, have not translated into unbridled prosperity for the industry’s providers.

What all the industry evidence serves to reinforce is that the UK motor market remains decisively out of balance. Gross overcapacity in European car manufacturing, allied to high levels of imports from countries outside the region, have led to excess supply over demand and hence a downward pressure on showroom prices. Incentives to ‘move the metal’ have had a withering impact on profitability as a review of vehicle manufacturers’ financial statements will show. The worry now is that intensified discounting to combat falling demand comes at a time when manufacturing costs are rising due largely to higher raw material and energy bills. Certainly, the ability to squeeze more costs out of component prices has reached breaking point, as the item overpage on Visteon illustrates. The result of all this must surely be further plant closures.

F1’s reputation at risk, but not Michelin’sWith just six cars making up the grid for the start of the US Grand Prix, the F1 circus has dealt itself a serious – perhaps mortal – blow to its future prospects in North America. The failure to put on a show was all the more sur-prising in view of the sport’s love affair with money.

The finger of blame has been pointed in all directions including, naturally enough, Michelin whose failure to provide suitable tyres was the root cause of the fiasco. Undeniably, the episode has been deeply embarrassing for the French company, but surely it deserves credit for the honesty of its actions and the overriding concern for safety.

And any thoughts that the episode will affect Michelin’s position in the world tyre market are way off the mark. Vehicle manufacturers will continue to award tyre contracts according to a pre-determined list of technical and commercial criteria with an emphasis on performance, durability, price and delivery.

Similarly, it is improbable that the average motorist’s attitude towards Michelin will have changed simply because the company’s tyres were not up to the job of allowing an F1 car to negotiate a banked corner.

Quit, rationalise, or pursue the web routeRecent announcements from Priory Motor Group, HR Owen and Hartwell provide powerful pointers over the future of vehicle distribution.

The most extreme concerns Priory which is selling its 11 dealerships and leaving the motor industry. This move accords with the growing trend whereby mid-sized groups are being absorbed by larger operations. Owners and managements in the second division of vehicle distributors are realising that there are better means of employing capital and other resources than trying to compete with the developing breed of mega groups in a sector where the manufacturers themselves are also becoming increasingly dominant.

HR Owen, too, is experiencing trying conditions and has signalled an intention to rationalise its network in the south east, and especially within the M25 area, by closing down unprofitable sites. For the future the company is expected to concentrate its efforts on specialist brands and lessen its exposure to volume brands. The inference here is that land values around London, along with business rates and other costs, are becoming prohibitive for car retailing, particularly with the mass marques.

More positively, Hartwell has announced the launch of which aims to propel the company into the position of the UK’s leading online car retailer. The hope is that the blend of online car prices and full dealer facilities will prove highly attractive to consumers.

The combination of dealer closures and web-based outlets of the type offered by Hartwell means that more and more consumers will necessarily be forced to employ the internet as a means of locating their vehicle of choice. As a result, private buyers will increasingly trawl the country for the best deals rather than limiting their scope to a restricted radius. This could provide a strong competitive advantage for the larger dealer groups who are able to offer nationwide sourcing and local service.

Fine in theory, but…The government’s decision to put road pricing on its transport agenda could be another exercise in digging a hole and not knowing when to stop. If the plan to introduce identity cards holds out the likelihood of spiralling costs for questionable benefits, it will be nothing compared with pay-as-you-travel motoring.

Superficially, road pricing may make sense. After all, London’s congestion charging scheme has made a notable difference to congestion in the capital after an initial barrage of protest from motorists.

However, as with all government initiatives over road transport and vehicle use, it would be wise to anticipate sneaky revenue raising manoeuvres and botched implementation. It would also be rash to assume that the effects of road pricing would have a neutral impact on the vehicle market. Just as the government’s policy to reduce carbon emissions has influenced the pattern of demand among company car drivers, the introduction of road pricing has the potential to cause significant changes in motoring habits. 

From the motor industry’s standpoint it is crucial that the sector is fully involved in the development and application of the technology, and also that it speaks with a single voice. In this regard, the SMMT’s call for a “rigorous and open debate” and its offer to work with government “to ensure a fair and workable system” represents an important contribution. Already, though, there are indications of serious shortcomings with hints that small fuel efficient cars and hybrids will suffer the same charges as fuel guzzling SUVs. Is this the way forward for a green future?

Lunacy over OE component pricingFive years after floating its in-house components manufacturing operations into a separate company called Visteon, Ford has been forced to buy it back. Cost of the rescue has been put at $3bn over the next five years. This sum is close to Visteon’s accumulated losses since becoming an independent company and provides a clue to the current lunacy surrounding original equipment component pricing. No wonder Delphi and other parts of the American components industry are bogged down in such a morass. 

The 24 facilities to be taken under Ford’s wing represent the most unattractive and least profitable North American-based businesses which nevertheless are vital for the manufacturer’s continued vehicle output. The incident demonstrates that vehicle manufacturers can go only so far in extracting price concessions from their suppliers and also that they cannot allow major sources to collapse.  The bailout is excellent news for Visteon which, in slimmed down form, now has a clear chance to establish financial viability. Some analysts predict that the group will achieve a profit for the first time in 2006, and there is a strong chance of securing substantial growth in the more promising markets of Europe and Asia on the back of technically advanced products.