Racing new car retailers towards the cliff edge

The global market for fleet vehicles  is “flourishing” says the Financial Times.

 Companies that deferred renewing their fleets during the credit crunch are now making up for lost time, and ordering record numbers of company cars, vans, and heavy trucks .

Looks of puzzlement and mutters of ‘I wish’ greeted this clip during an auto industry meeting attended by QuadRant yesterday.

To be fair to the FT, the clip was not news or comment but their ad department attempting to drum up support for a forthcoming fleet supplement.

Fleet sales down

In fact UK fleet registrations were down by 0.7% between January and August this year. Business sales (to small companies and sole traders) were much worse – plunging by 15%.

Only private sales look good. But much of the 10% rise reported by the SMMT is deceiving.

Nearly new cars languish on dealer forecourts,” reported Motor Trader last week.

 Despite the market being supported by the private sector Glass’s reports that franchised dealers do not recognise this strengthening in retail demand.

Adrian Rushmore, Managing Editor of Glass’s, said: “What is recognised is the growing number of nearly new cars that have started to languish on forecourts.” Between June and July the number of 1212 plated cars advertised increased by 50 per cent.

In other words, the market is loaded up with cars registered by the industry to itself, just to keep its numbers up.

Manufacturing used cars

It’s true that ‘manufacturing’ nearly-new cars actually accounts for a big chunk of the auto trade. Employees of the car makers and retail outlets are given brand new cars every six to nine months.

Then the cars go to the forecourts with a few thousand miles on the clock as ‘ex demonstrators’ or suchlike, at a substantial discount. Hundreds of thousands of ‘nearly news’ are made this way every year.

‘Fleet’ sales also include new cars registered to finance firms but driven by punters on personal leasing deals, and cars bought by daily rental companies.

That helps explain how the industry chalks up a million such registrations every year when genuine company car drivers currently need fewer than 300,000.

Stuffing the market with unwanted cars

But even this convoluted system isn’t always enough. Sometimes some manufacturers simply stuff the market with thousands of new registrations that nobody has any use for.

That’s what the Motor Trader article is highlighting. There are 50% more brand-new, plated cars with delivery mileage on the clock on forecourts. That will bugger up prices and margins throughout the house of cards that is the ‘new’ car market.

Sure, this sort of thing happens fairly regularly. But this time around there’s less chance of the market bouncing back to absorb the excess. The auto makers’ cushion is wearing thin.

The industry has a massive problem with fuel costs. I don’t mean high pump prices (although they are affecting demand). I mean the fact that the oil price needed to bring fresh supplies of liquid fuels to the global market is simply too high for Western economies to bear.

High-priced black stuff

Western economies, designed for $25 oil, don’t grow when the black stuff costs $100. But if crude sells for less than $100, there’s no justification for producers to invest in expanding expensive tar sands, shale, deep sea and polar sources.

So OECD growth stalls, household incomes stagnate and personal debt becomes disabling rather than enabling. People are forced to conserve. But conservation supports the high oil price at the root of the problem by killing the incentive to exploit the remaining, hard-to-get-at, resources.

Simply cutting retail fuel prices won’t help much. A few people will use their cars a bit more, or change them. But many would use cash saved at the pumps to pay down the loans, credit cards and mortgage debt that are crippling household finances.

Even so, the auto industry’s reaction is to repeat what it’s always done in the past. It’s stuffing unwanted units into a shrinking market. And hoping the surfeit won’t choke too many dealerships to death before growth returns ‘as it always does’.

Oil and energy prices say growth won’t return. So the car industry needs to find a smarter way to manage declining demand. Because doing what it has always done will turn a hazardous descent of a rocky slope into a full blown plunge over a cliff edge.

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