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Insight: Future of the car market

The car scrappage scheme has been likened to a short-term ‘sugar rush’ for the market, hiding potential further difficulties for the automotive sector likely to last for the next few years.

In a far-reaching survey, Auto Trader has used statistics from the Society of Motor Manufacturers and Traders, AM, CAP, BCA, the Bank of England and its own website data to assess the new and used car markets until 2013.

The research aims to answer critical questions: the number of new car registrations and used car transactions in 2009; forecast transactions for the next four years; the influence of scrappage on providing adequate economic stimulus and answers to the understanding dynamics of supply, demand and prices within the sector.

Tim Peake, Auto Trader commercial director, said the combined decline in new car registrations in 2008 and 2009 would lead to an approximate loss of 500,000 new cars in the market now, compared to 2007. The reduction in new cars for the last two years would in turn lead to around 650,000 less used car transactions in the next four years (2009 – 2013). 

There is unlikely to be a v-shaped recovery in the market. New car registrations are forecast to top 1.9 million this year and for at least four years to see no significant growth – and actually drop in 2010 without the benefit of a scrappage scheme.

He also highlights a strong correlation between UK home loans and the new car market (graph 1), leading to an assumption of a 28% year-on-year decline in new car registrations, close to the current year-to-date figure, excluding scrappage, of 25%. 

“Understanding 2010 forecasts for UK home loans will be a key determinant of our forecast for new car registrations for next year,” Peake said.

“Without the scrappage scheme this year’s decline in car registrations would have been close to 25%. Implementation of the scrappage scheme and the pull-forward of sales ahead of the VAT increase is undeniably helping registrations in the short term, but this could lead to lower sales for the next five years. 

Analysis of previous recessions shows forecasts of a 28% year-on-year reduction in registrations, excluding scrappage, are applicable, Peake said. In 1974/75 new car registrations fell 25%, in 1978/80 by 13% and by 21% in 1991 and 1992.

“On each occasion new car registrations took six years to recover to their previous levels,” he said. 

Used car transactions are following a similar trend to new car registrations. Auto Trader forecasts used transactions at 6.7 million for 2009, down around 6% on 2008 and remaining broadly flat for the next four years.

Auto Trader also considers the impact of a fall in the number of fleet vehicles available for remarketing from 1.34 million this year to 680,000 in 2012 (chart 2). 

“In 2012 we may see a further dip in used car volumes as fleets have extended their replacement cycles in 2009 from three years to four and consumers keep cars for longer.”
The scrappage scheme may even be detrimental to the market for the next four years.

“The impact on dealer sales is akin to running a marathon on doughnuts – a short-term rush of energy leading to a longer period of flagging performance.” 

He based his comments on the profile of the average scrappage customer: around 80% of customers are 45 or older and, as the previous owner of a 10-year-old car, unlikely to return within five years to buy a new one, therefore contributing to a reduction in part-exchange stock. 

“If fleets continue to work to extended replacement cycles, the loss of the scrappage scheme and the increase in VAT in 2010 could lead to a combined total reduction in new and used car transactions of 1.3 million through the next four years compared to 2008,” said Peake. “Sourcing cars, and finding the right stock that matches consumer needs, will be even more important. We are working closely with dealers to understand new ways to source stock, for example by providing email leads from consumers who are searching our website for specific cars.”

The conclusions are in part drawn from Auto Trader data from the 12,000 dealers using its website, advertising 350,000 each day and eight million unique users generating 650 million page impressions and 100m searches each year.

The full version of Tim Peake’s report will be in the December AMe.

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