What's gone wrong in the UK car market?

From BBC - October 27, 2017

Until recently, new car sales in Britain were booming.In 2016, a record 2.7 million were registered. It was the fifth year in succession that the market had grown.

Now, things look very different.

In September, new registrations fell by 9% compared with the same period the year before, according to the Society for Motor Manufacturers and Traders (SMMT). It continued a downward trend that has been visible for the past six months.

And this week, Pendragon, one of the country's biggest car dealers, issued a surprise profits warning. It said waning demand for new cars and a consequent fall in the price of older vehicles would take a heavy toll on its earnings.

So what's gone wrong?

The first thing to say is that car sales are still pretty strong, by historical standards at least.You can see that from the graph below.

In fact, most analysts had expected sales to tail off this year, if not by the levels we have actually seen.

That's partly because the market is very cyclical. Once people have a car, they tend to keep it for a number of years, and rapid growth is difficult to sustain. But changes in the market have also had an impact.

One of the main factors driving the market has been the growth of so-called Personal Contract Purchase plans, or PCPs, for private buyers. These are essentially leasing agreements, with an option to buy at the end of the contract, typically after three years.

PCPs have proved very popular, in part because they allow buyers to obtain new cars while making lower monthly payments than would normally be required under traditional forms of financing, such as hire purchase. They also encourage people to get new cars more often - because at the end of one contract, many people simply take out another.

But now that growth is tailing off.

"It's running out of steam now," says David Leggett of industry analysts Just-auto.

"The industry has been very adept in getting people on to these schemes, driving them on to three-year replacement cycles. But now, most people who wanted to take out PCPs have done so.

"At the same time, interest rates are going to go up, inflation is rising and household budgets are being squeezed. So a drop-off is to be expected."


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