Outlook for the automotive industry
Friday April 28, 2023
Optimism in the UK automotive industry: but bumps in the road remain
The UK automotive industry continues to face a myriad of significant changes, which bring both challenges and opportunities for operators across the sector.
While the sector is still being constrained by ongoing and widely publicised supply chain issues, the mood music is becoming increasingly positive. Dealerships which can secure stock are typically selling new vehicles quickly and easily to private customers, with very little discounting required. Added to this, the new car market in the UK has experienced six consecutive months of growth, with March registrations rising more than 18 per cent on the year before as more than 280,000 new cars reached the UK’s roads, according to figures by the Society of Motor Manufacturers and Traders (SMMT). In recent weeks, the new ‘23’ number plates hit the roads, which will undoubtedly prompt an uptick in sales across the UK.
Despite the reasons to be cheerful for some operators in the sector, challenges are emerging in other areas – including for the electric vehicle (EV) sector. While one in five new cars that were registered in March came with an electric charging plug, some motorists’ plans to switch to electric vehicles may have cooled, as speculation around major flaws in charging infrastructure gathered pace in the media.
Currently, there are just over 42,000 EV charging points in the UK, meaning that monthly installations will need to increase by nearly 300 per cent to meet the government’s target of installing 300,000 publicly-available charge points by 2030. This has prompted the Department of Transport to announce that sixteen more local authority areas will receive funding to improve infrastructure, in an attempt to prevent the rollout from stalling.
It is a big challenge to overcome, and although EVs are proven to cost less to refuel than their petrol or diesel counterparts, with most EV drivers opting to recharge at home, the lack of publicly available charging points and expensive plug-in costs could serve to hinder appetite for greener vehicles.
But it’s not all bad news. While EV owners will have to pay car tax from 2025 in a bid to offset falling revenues from the reduction in petrol and diesel vehicles, they will continue to benefit from generous tax treatment under company car schemes. These tax incentives on EV ownership will be tapered and increase by 1 percentage point a year between 2025 and 2028.
Driving into the future
With sales of new internal combustion engine vehicles set to end by 2030, it’s inevitable that more and more motorists will make the transition to EVs. But that doesn’t mean it’ll be a smooth ride for everyone.
Buying a new EV is still too expensive for many drivers, and the ongoing cost of living crisis means that many people could be excluded from this market for some time. However, this lack of affordability for new vehicles could push consumers towards leasing and finance deals, whilst also helping to energise the second-hand EV market.
As more people start to sell EVs, this will help to turbocharge the UK automotive industry’s transition to a more sustainable future. But for this to come to fruition, the industry and the government still need to address some of the challenges that come with second-hand EVs, such as residual values and battery life.
Take residual values for example. There is currently uncertainty around the expected residual values on used EVs, as it is a developing market without much data available on battery life or prevailing demand. However, as the EV market grows, more used vehicles and more data will become available. This will be great news for leasing companies as they will be better able to refine their residual value assumptions, hopefully helping to bring down the monthly cost for consumers.
Of course, it’s a rapidly changing landscape and the entire automotive industry is watching with anticipation, eager to learn how this new market will evolve and transform the sector in the future.
Adapting business models to stay in pole position
It goes without saying that the automotive industry needs to be prepared for bumps in the road ahead as more EVs take to our roads.
Car servicing as we know it will change significantly, as EVs simply do not need the same in-depth maintenance that is required by petrol or diesel fuelled vehicles. But this will then amplify the benefits of investing in and developing out service offerings that will remain in high demand, such as tyres and brakes which may wear more quickly in EVs.
Car dealership showrooms are also among the least energy-efficient workplaces, with high lighting, heating, and air conditioning costs. These costs must be met, regardless of sales, meaning some businesses will struggle to survive in the current climate. Against this backdrop, there’s likely to be further consolidation in the market, as higher volumes of smaller independent dealers look to exit or consolidate to benefit from scale.
When faced with these challenges dealerships should review and assess their business strategy. Diversification and reducing reliance on manufacturer bonuses to underpin profitability are key. Options include growing a used car offering, exploring day-hire, leasing, commercial vehicles, extended warranties, GAP insurance and upselling other margin accretive products including tyre and fabric protection.
And finally, many dealers own considerable freehold real estate. The value of these property assets can be significant particularly when located in an area where demand for residential development is high. Reviewing the real estate portfolio, measuring the returns from each site and understanding how much capital is potentially tied up in each location is a key process to ensure the business is delivering the best possible returns for its shareholders.
As the automotive landscape in the UK continues to evolve rapidly, those operators that choose to adapt their dealership models will continue to stay ahead of the curve.
First published in April 2023 in the official NFDA magazine, The Voice.
The UK automotive industry continues to face a myriad of significant changes, which bring both challenges and opportunities for operators across the sector.Greg Cox Corporate Finance