Insight: UK used car demand solid, despite ongoing Brexit uncertainty
February 13, 2017
The UK’s decision to leave the EU has had a minimal impact on the used car market to date, despite the automotive industry being the sector that has ‘made most use’ of the single market, the SMMT has said.
OEMs operating in the UK have taken maximum advantage of free movement of goods to source parts, build components and assemble vehicles in locations across the EU. With the exception of the UK financial services sector, the industry consequently considers it has the most to lose from the UK’s exit from the community.
Commenting on the outlook for the UK automotive industry for 2017, SMMT chief executive Mike Hawes took a ‘degree of encouragement’ from UK Prime Minister Theresa May’s confirmation that in leaving the single market, the UK would seek a bespoke customs agreement with the EU. The Prime Minister’s announcement clearly acknowledged that existing deals between the EU and other states, such as Norway and Switzerland, were not right for the UK. Instead, she would be seeking a distinct agreement that incorporated elements of the single market arrangements in certain areas, such as on the export of cars and trucks.
Hawes said that a reversion to World Trade Organization rules would be the worst possible scenario for the industry, despite May’s assertions that no deal with the EU is better than a bad deal. He urged the UK government to ensure that there were interim arrangements for 2019-21, if it proved impossible to reach a final deal during the two years following the triggering of Article 50. These arrangements should replicate current trading conditions as closely as possible, according to the SMMT.
The UK government is likely to enact Article 50 within weeks, following a vote by the UK parliament to formally invest the government with the power to initiate the exit process.
Hawes stressed the need for the industry to guard against any challenges to trade. The UK automotive industry enjoyed a solid 2016, but could easily slip backwards in 2017. The SMMT is predicting a 5-6% drop in new car registrations in 2017. Hawes commented that demand in the fleet sector is stable, but private sales are likely to drop. A recent flurry of price rises introduced to compensate for a weakening pound are beginning to have an impact and mean that some consumers question the need to purchase a new car at this point. Consumer confidence is holding up, as are many other economic fundamentals, but the SMMT is keeping a close eye on interest rates. Access to cheap financing deals is critical to maintaining new car demand.
The used car market has been unaffected by the results of the UK’s decision to leave the EU in the first six months following the vote.
Autovista Intelligence’s analysis of market observation data shows a steady increase in the average number of days a used car was in stock between June and the end of August 2016, before a steep decline in September. Volumes then rose again towards the end of the year.
Autovista Intelligence has looked at the number of used cars being advertised on two of the most important online vehicle sales portals and the length of time between when they were first advertised and their ultimate sale date. This provides a clear picture of stock volumes and the time vehicles remained on the market.
Untimely increases in stock volumes are an early indication of market instability and could suggest that the UK’s vote to leave has had a material impact on used car demand. An emerging oversupply situation also leads to discounting to accelerate stock turnover, hurting residual values.
The pattern of stock movements in 2016 is entirely consistent with that in the previous year to the extent that the index of the daily stock volumes for 2015 and 2016 map directly on top of one another (see Figure 1). Changes in stock volumes are the result of seasonal buying patterns and not a decrease in demand. Dealers typically try to minimise stock volumes and turnaround times in March and September in line with the twice yearly change in registration plate. Levels tend to climb towards the end of the year as consumers delay vehicle purchases until after the festive season and then begin to decline again as March approaches.
Figure 1: Daily stock volume index for the UK used car market, January 2015-December 2016
This is good news for the UK used car sector. It suggests that consumer confidence and market demand are holding up. As a result, Autovista Intelligence stands by its earlier forecast. Residual values will continue to decline in the UK, falling by around 1% in 2017. Strong new car sales over recent years mean that there will be growing numbers of used cars being returned to the market in the coming 12 months. The impact of this oversupply situation does not appear to be being compounded by any Brexit affect.
For this to continue, Hawes believes, there needs to be significant focus on inward investment. Growth in the UK automotive industry post-Brexit is highly dependent on how attractive the UK and its products remains. Given the proportion of parts that UK automotive manufacturers source from outside the UK, vehicles manufactured in the UK could fail to meet rules of origin requirements specified in most trade agreements. Trade deals usually specify that a defined proportion of any product is sourced and manufactured in the exporting country. Most vehicles assembled in the UK do not meet the typical 55% threshold. Without sufficient investment in the manufacturing supply chain, this could be an enduring problem for the UK, regardless of a favourable Brexit deal. Hawes welcomed the UK government’s announcements of a revised industrial strategy as a step towards generating that investment, but there needs to be enduring focus on developing the supply chain.
Finally, he cautioned that Brexit may be attracting attention away from other industry priorities. Hawes commented that it is easy to believe that Brexit is ‘the only show in town’; issues such as air quality are not receiving as significant attention in the UK as elsewhere. But there is significant likelihood of action to reduce emissions in 2017 at both a national and local government level.
The UK’s Modern Transport Bill is also just around the corner. Many had anticipated it would be published towards the end of 2016, but it has yet to materialise, having been caught in the queue behind the Brexit debate and legislation to confer powers on the government to trigger Article 50. This should bring with it increased investment in charging infrastructure for electric vehicles, as well as guidance on the testing regimes for autonomous and connected cars.