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Over-production accelarates depreciation

One of the most difficult tasks for the car manufacturer is squaring the circle between market penetration and the maximisation of back-end residuals.

Unfortunately, given the sheer size of the new car registration figures, very few players are able to carry this off successfully. Everybody agrees that the cars produced today are far better than their counterparts from even just three or four years ago in terms of specification, quality, performance and longevity. Yet today's cars are worth less.

The primary reason for this is, to put it in simple terms, that there are far too many of them. Current projections for a market of more than 2m new car sales are crazy - especially when you consider that this figure will be raised by parallel and grey imports which are not counted in the official industry estimates. The real figure is probably therefore closer to 2.5m new cars.

Most industry analysts believe that the market's natural level is closer to 1.7m. In other words, that is how many cars are needed to meet real demand, with no forced registrations and no fast-churn cars appearing on used forecourts, one day old.

It is too easy to lose sight of the impact that this has on the UK car owner. Accelerated depreciation due to oversupply puts a significant cost burden on all corporate and private car buyers. The corollary to this is that it makes buying a new car more expensive due to the widening cost to change.

The response by manufacturers is to constantly develop ideas designed to close down that gap by tinkering with new prices. Surely in the long term a much more sensible approach would be to look at the back end - the used market - in order to develop a more realistic view of the whole marketplace.

Manufacturers make their money by selling new cars but the risk to them is that corporate and private buyers respond to worsening residuals by extending the change cycle - a step which has already been taken by some.

The best possible move open to the manufacturers is to take steps to maximise their residual values, and the only real way to do that is by restricting supply. They would benefit by having a more ordered marketplace and their own vehicles - which tend to be six to nine months old - would also be worth more, thus reducing their holding costs. Clearly, the benefit to the consumer is that, once again, it makes a new car more affordable and without the need to reduce front-end prices.

This would clearly need to happen throughout the marketplace because, if one carmaker acted unilaterally, all that would happen would be somebody else moving in to fill the void.

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