The full year new car registration figures for 2016 painted a very healthy picture of the industry when they were released in early January 2017. After a year of quite remarkable world events and economic changes it was good news to see almost 2.7 million vehicles registered over the course of the year reflecting an increase of 2.3% over 2015.
Thus far 2017 has seen a further upturn in business which comes as little surprise as manufacturers seek homes for cars planned in production for the UK some months ago. However, the full year figure for 2017 is widely accepted to be lower than 2016 as trading becomes more challenging due to the exchange rate and expected drop in consumer confidence. Manufacturers will channel cars to other European markets where they can make more money than the UK.
The volume of new cars registered in recent years has been an important discussion topic for some time now as the trade have speculated on when the consequential volume of used cars would hit the market. Our last piece highlighted the positive residual value activity at the old end of the market for cars over 10 years old and it is clear that pre-registration has negatively impacted late plate residual values. This has squeezed values in the intervening years.
The chart below shows the impact of the success in new car registrations for the all-important fleet sector covering vehicles of between 2.6 and 4.4 years of age.
This clearly demonstrates the change in residual value for the Fleet Profile age of vehicle although this also now includes ex PCP product too. When considering the data in the chart it is key to remember that where the residual value in 2010 was low at 36.77%, this related to new vehicles sold predominantly in 2007 just before the economic crash when the market was strong at just over 2.4 million cars. As the residual value has increased this has reflected the significant drop in volume of new cars sold as the recession bit, culminating in the 2014 high point of 40.2% of original cost new exactly three years after the lowest level of registrations in a decade in 2011.
Consequently looking forward one must expect that where 2016 was the largest market for new cars in many years, the residual value of these units coming back as used vehicles in 3 years is likely to be markedly lower than experienced in recent times. Even the increase in retail demand from the growing number of drivers on the road will not accommodate the wave of cars due to come back to the market.
With the upsurge in vehicle supply beginning to bite, the question is what has been done by vendors to mitigate the inevitable drop in demand. In many cases there has been apathy at the thought of needing to make changes to remarketing patterns. In fact little planning seems to have taken place until recently although thought patterns have changed of late.
This has been evident by the requirement for market insight and intelligence, which has grown significantly in the last 6 months. Where businesses had historically been comfortable to review and work with their own data, the need for comparable insight against which they can benchmark has become vital. Investors and senior management teams are asking questions and seeking corroboration to support new defleet and remarketing strategies. These revised policies usually reflect a drop in profit levels and this is the revenue that has been increasing for many years as the trade has been short of cars, and to be honest some companies had begun to take this income for granted.
In summary the market is beginning to shift in both new and used car terms. A level of uncertainty is weaving itself into the trade, driven by the changing shape of the economy which has undoubtedly been as a result of Brexit. These changes are manageable and there is no need for any form of panic but there is a requirement for development of robust strategies set to take the industry into a more turbulent phase.
This article was originally written for and published in the March 2017 issue of Auto Retail Bulletin.