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Car market trends: where is the deflation?

“If you think inflation is bad, just try the alternative” said an economist recently.

His point was that deflation leads to economic depression, as people see no point buying something that is going to be cheaper next year.

Well, the UK car industry is doing its bit to avoid deflation, led by market-leaders Ford.

The recent announcement of a 3.75% rise from April 1 was described as “counter-intuitive” by the MD of Ford, Nigel Sharp, but was met with a sigh of relief by other manufacturers planning to do exactly the same thing.

The expected tabloid backlash to Ford’s announcement failed to materialise, as Ford took the sensible precaution of wheeling out Sharp to brief newspaper hacks first.

His message was quietly-spoken but bleak – Ford has lost an amount “well into nine figures” because of the devaluation of the pound. While the journalists were mentally calculating that meant well over £100 million, he went on to say that Ford’s entire profit margin in the UK had been wiped out just by currency losses.

Ford used the example that, if 20% of the price of a car is a contribution to research and development, other overheads and corporate profit, then a 30% devaluation more than wipes out that contribution.

Ford did not quote their own margins, but no volume car maker is going to have a contribution of much above 20%, even in the good years.

Hence Ford felt it had no alternative to raising prices – and you can be certain that everyone else will follow suit.

So why did Ford go first? The simple fact is that in all industries, prices are set by the market leader. No one wants to be out of line with a bigger competitor, so they wait to see which way No. 1 goes.

Indeed, it is a reflection of the depths of the recession that prices have not been raised earlier. Previously when the pound collapsed (e.g. 1992), car companies were quicker to increase prices – and happy to keep increasing them.

Today the idea of “Treasure Island Britain”, with car prices 20% higher than mainland Europe seems laughable. Right now, “Money Pit Britain” is closer to the mark – even after the recent price rise, Ford has still not recovered its currency losses.

Indeed, cars are now starting to be re-exported from the UK. We spoke to one dealer in top-end luxury cars and he reported a mini-boom in exporting right-hand-drive Ferraris and Bentleys to other right-hand-drive markets, from Cyprus to the Far East.

A grey market in cars leaving the UK. There seems to be no end to the weird effects of the current financial crisis.

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