SPECIAL REPORT: How healthy is the UK automotive sector?

NEW car registrations passed the one million mark in June, growing 10% in the first half of 2013 to 1,163,623 units. So how healthy is the automotive sector and is the positive trend seen in the UK domestic market during the first six months merely a bubble or a sign of better things to come – Duncan Tift looks at the situation.

These are halcyon days for most UK-based vehicle manufacturers. After struggling during recession, the automotive industry is helping to spearhead growth in a still-sluggish economy. Manufacturers like Jaguar Land Rover are investing massively and helping to create thousands of new jobs, while component suppliers cling to their shirt tails looking to feast on the scraps from the rich man’s table.

Nevertheless, the automotive supply chain is still playing a vital role in helping to fuel the growth of the OEMs and Government recognition of its purpose is reflected in initiatives such as the £125m Advanced Manufacturing Supply Chain Initiative, managed out of Birmingham.

However, concerns remain over whether the UK market can sustain the growth as the industry keeps one eye on the situation in the Eurozone, which shows little sign of improving.

Looking at the domestic OEMs, Jaguar is up more than 21% compared with the first half of 2012, with 8,658 vehicles registered this year (2012: 7,107) and with the new F-Type now with dealers it remains optimistic.

Land Rover continued its strong rise during the first six months, registering 30,120 vehicles, an increase on 2012 of 15.5% (26,075). With the new Range Rover Sport set to enter the market shortly and with the flagship Range Rover and Evoque still proving popular, the company is sharing its stablemate’s outlook.

In the luxury sector, Aston Martin is enjoying a happy centenary, fuelled by new foreign investment and a series of mouth-watering new product launches. It is up 10% during the first half with 530 cars registered (H1 2012: 482).

However, the performance of German-owned Bentley is less impressive. It is down over 10% during the same period, although last month was more positive for the business with a 10.5% increase in the number of cars registered.

The German triumvirate of Audi, BMW and Mercedes Benz remain in positive territory; up by 11.5%, 1% and 14.3% respectively during the first half. BMW’s Mini struggled in June, dipping 16.7% but for the year-to-date is up 2.9%.

In the volume sector, Ford remains well ahead of the pack – growing 32% last month and by a more modest 8.66% for the first six months. Nevertheless, its market share of 14% puts it well ahead of nearest rival Vauxhall which while seeing new registrations increase by 14.4% in the year-to-date still only commands a market share of 11.4%.

The Society of Motor Manufacturers and Traders said June’s figures were very encouraging; the month saw the 16th successive monthly rise in the number of vehicles registered, growing 13.4% to 214,957 units.

Private, fleet and business sectors all grew during H1 but private demand increased the most over the first half of the year, up 17.1%, after a 21.3% rise in June.

Mike Baunton, SMMT Interim Chief Executive, said: “Boosted by consistently strong private demand and further growth in June, half-year new car registrations have topped the one million mark.

“June secured the 16th month of consecutive growth, a clear indicator that manufacturers and dealers are delivering desirable new products with tangible cost savings from the latest fuel-efficient technology coupled to a wide variety of competitive finance offers. While there are still potential challenges ahead, recent robust growth suggests that the market is on course to perform well ahead of 2012 levels.”

So what do the analysts make of the situation?

John Leech, UK Head of Automotive, KPMG  John Leech, left, Birmingham-based UK head of automotive at KPMG, said: “The UK new car market continues to significantly outperform the rest of the UK retail sector and European car markets.  Meanwhile, new car sales continue to spiral downwards across Europe, including the stronger economies such as Germany, which fell 5% in June 2013, giving a first half fall of 8%.  France also saw sales fall by 8%, while Italy saw sales fall by 6% in June.
 
“The UK car market’s resilience reflects specific local conditions, especially consumers spending their PPI compensation claim windfalls, record customer discounts such as 0% finance and the release of demand pent-up during the recession. In addition, car manufacturers have responded to consumers concerns over the high price of petrol with the average consumer gaining over £10/week saving on fuel on trade-in.
 
“The figures also reveal that for the first time in several years consumers are switching away from buying used cars back towards buying new cars.”

He said it was unlikely these factors would change anytime soon and as a result, the sector was likely to see a healthy second half.

Associate Professor of Strategic Management at Warwick Business School, Christian Stadler said that during the financial crisis many people had been put off buying a new car, but with growing consumer confidence in the UK they were now going ahead with these purchases.

He said that as a consequence of car production dropping during the economic downturn there were now fewer used car available, strengthening the new car market.

“The rise in UK new car sales shows a growing consumer confidence in the UK reflecting a better job market and a more stable housing market,” he said.

Peter Gallimore, Midlands' manufacturing leader, DeloittePeter Gallimore, manufacturing partner at Deloitte in Birmingham said: “With reports of manufacturing production levels at a two year high and the 16th consecutive month of new car sales growth, July has got off to a good start.

“In continental Europe, car manufacturers are looking for indicators that the painful market contraction is lessening and with Germany, Italy and France all reporting lower rates of decline when compared with last month, there is the suggestion that the bottom may have been reached.
 
“The challenge going forward is that the budget end of the market remains the growth area for the European mainland with pressure remaining on manufacturers’ profit margins.”
 
He said the growth is domestic sales had been supported by competitive financing deals being offered to buyers.

“The need to compete by providing the low finance rates highlights the increasing importance within Europe of the UK market as the level of sales in Germany, France, Italy and Spain continues to contract,” he added.

“With base rates remaining at historically low levels, there is no immediate end in sight for the availability of relatively cheap financing options for the UK car buyer.
 
“It will be interesting to see how the introduction of government incentives in European markets affects the level of new car sales over the second half of 2013.  With Spain having implemented a rebate scheme for private buyers who trade in old cars for new and the French government looking to allow private-sector workers to tap into corporate employee-savings plans to help fund significant purchases such as cars, there are definite steps being taken to help the automotive industry to turn the corner in these markets.”

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