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Automotivesector outlook
Our review of 2016/17 and a look ahead to our predictions for the automotive sector in 2017/18.
Helping you prosper
2017/18
RURAL AND AGRICULTURE
Helping you prosper
Could Brexit make this the year of ‘peak car’?
State of the market in 2017
What’s in store for automotive retail M&A?
Value of car dealerships’ inventory is rising
Early indications that a post-Brexit rise in consumer car costs has begun
Lending to finance car purchases rising steadily
What lies ahead for the sector? Expert perspectives
So where from here?
Our national automotive specialists
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CONTENTS
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COULD BREXIT MAKE THIS THE YEAR OF ‘PEAK CAR’?
In this report, we take a look back at the performance of the market during 2016 with a comparative look at previous years and bringing in some of the key findings from our research throughout the year. We also cast an eye forward to the year ahead and feature predictions from both our own automotive sector experts along with leading industry figures from dealership giant Lookers and specialist investment banking boutique Zeus Capital. Our panel give their opinion on everything from the impact of Brexit on prices and M&A activity to overseas investment into the market and the reality of the threat from hybrid and electric cars.
Despite the turbulence caused by the referendum vote, the automotive sector recorded a bumper year last year, adding some £18.9 billion to the economy, with a record 2.69 million new cars registered in the UK.
WHAT LIES IN STORE IN 2017/18 FOR THE UK’S AUTOMOTIVE INDUSTRY – A SECTOR THAT HAS BEEN A BEACON FOR THE ECONOMIC RECOVERY SINCE THE RECESSION?
Despite the turbulence caused by the referendum vote, the automotive sector recorded a bumper year last year, adding some £18.9 billion to the economy, with a record 2.69 million new cars registered in the UK. And if Q1 in 2017 is anything to go by, it appears that this year is likely to at least follow suit and even potentially smash all previous records. The SMMT data released in April showed all-time March and quarter records for the new car market; with an 8.4% monthly rise in new cars registered in March and a 6.2% quarter rise.
However, despite this strong performance, economic and political uncertainty is only likely to increase in 2017 and beyond. Many challenges lie ahead, both in the domestic market and in exports, which vehicle manufacturers, OEMs and retailers will need to position themselves to meet.
UK distributor margins are at risk of erosion from the drop in the value of sterling against the euro and rising component costs. At the same time, retailers are also facing intense pressure
from manufacturers to meet sales targets under increasingly difficult conditions, with extra costs likely to be absorbed into the supply chain and subsequently passed on to consumers.
To compound the issue, the EU accounts for well over half of UK-built car exports (56% in 2016) and with Britain seemingly set on leaving the single market, new supplier networks and routes to market may have to be explored.
However, the automotive industry is nothing if not adaptable. Although 2017/18 will pose some unique challenges, the sector starts off the year in robust financial shape to address them. How it might do so and what issues they may need to consider are investigated in this report.
MARKET DYNAMICS 2016/17
• M&A activity in the industry remains strong and the average deal value has doubled in the last year, driven by buoyancy in the premium segment.
• The value of car dealerships’ inventory has risen 46% in the last five years, putting pressure on cashflow and profitability.
• Brexit challenges have led to a rise in the cost of leasing favourite consumer car models in a few months – and costs could be further impacted now that Article 50 has been triggered, officially starting the exit process.
• The use of finance to fund sales of cars is on the rise – value of new leases for car purchase has risen by 15% in the last year.
FORECAST HEADLINES
• The M&A market is expected to remain buoyant as strong balance sheets of major players spur consolidation of a fragmented market, and international interest intensifies.
• Manufacturers may diverge in their approaches to dealing with the collapse in sterling – some may see keeping prices low rather than passing on increased costs to consumers as the key to unlocking greater market share.
• Continued growth of competitive sales finance, in the used car market in particular, will be crucial to minimising the impact of sterling-related cost increases and maintaining consumer and business demand.
• There could be a risk of margin compression ahead, especially within the used car market as supply appears to be at record highs.
• Increases in new car list prices may help to support values of second hand cars.
• The after-sales market remains an important and growing future revenue stream, however capacity constraints could restrict expansion into this space.
• Lack of infrastructure and the need for advance in battery technology remain a major impediment to the widespread adoption of electric cars - though the shift is inevitable, there is still a long way to go.
THE HEADLINES
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STATE OF THE MARKET IN 2017
Over the years, the UK has established itself as one of the world’s leading centres of car production, forecast to bring in revenues of £55.4 billion from vehicle production and another £12.2 billion from parts and accessories manufacture in 2016/171. This world-leading position is jealously guarded by the automotive industry and the government alike, and maintaining it as the UK prepares to leave the EU will be a top priority.
Since UK-based manufacturers often rely heavily on parts imported from overseas, frequently from mainland Europe, the industry is particularly vulnerable to fluctuations in currency outside its - or policymakers’ - control.
1 Source: IBISWorld Industry Reports “Motor Vehicle Manufacturing in the UK” and “Motor Vehicle Parts & Accessories Manufacturing in the UK”2 Source: Society of Motor Manufacturers and Traders. Data refers to 2016
There is, however, one major positive which could help to offset concerns. The pound’s weakness, while raising component import costs, means export markets could remain relatively robust, particularly in the US and Europe. With eight out of ten UK vehicles produced being exported2, this is a critical consideration.
Despite this, the financial pressures manufacturers and their supply chains have faced following the pound’s recent fall could grow going forward as existing supply contracts come to an end and manufacturers are forced to agree new prices based on a much lower value of sterling.
If the cost of components produced overseas ratchets up, consumers are likely to feel the strain, and are already starting to see a small but noticeable increase. Other variables such as fluctuating steel costs and oil prices and rising wage bills could also be factors impacting the sector.
Whilst the most significant risks for the car industry are those that may emerge now that Article 50 has been triggered - in terms of uncertainty over tariffs and a shift of manufacturing to the continent - the issues outlined above demonstrate that there are risks in the near term, as well as benefits.
Demand from developing markets with high ongoing growth potential such as BRIC economies (Brazil, Russia, India, China) will also be increasingly important. Continuing to develop strategies to capitalise on - and build presence in - these increasingly competitive, though often volatile, markets will be key as we look ahead.
In more mature markets, emissions are likely to be increasingly under the spotlight and energy-efficiency is rising up the list of consumers’ and regulators’ concerns. While we may still be some way off reaching a tipping point for widespread adoption of electric vehicles, the impetus is real and growing.
In the UK, forthcoming changes to Vehicle Excise Duty from April 2017 exempting zero-emissions vehicles could prove persuasive for some consumers, however possibly only in terms of premium vehicles. This duty will only penalise new cars worth £40,000 upwards without zero emissions, and so it is likely to dampen demand somewhat for expensive products, but it may also drive opportunity for lower cost vehicles and mass-market brands. At the same time, significant additional resources made available in last year’s Budget for low emission vehicle grants should support further R&D into hybrid and electric vehicles and other new green technologies. And with new “real-world testing” plans on the horizon, the stakes are high to improve the eco-performance of diesel vehicles.
In addition, rising consumer demand for increasingly sophisticated on-board technology creates new ways for manufacturers to stimulate demand for cars with the latest high-tech gadgetry – even in the mid-market and small car sectors. The constant drive to adopt pioneering technological advances will continue to spur innovation and should help parts and accessories manufacturers to flourish, particularly in the UK as the weak pound makes products more competitive.
AUTOMOTIVE MANUFACTURING IN THE UK
If the cost of components produced overseas ratchets up, consumers are likely to feel the strain, and are already starting to feel a small but noticeable increase.
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AUTOMOTIVE RETAIL IN THE UK
rate deals risk creating artificial demand which may not be sustainable long-term.
At the same time, the second-hand market is still feeling the effects of the recession when the number of new vehicle registrations plummeted. As a result, there are fewer vehicles in the four to seven-year-old bracket which continues to cause issues for dealerships and consumers alike.
M&A ACTIVITY REMAINS HIGH
M&A activity in the automotive retail sector has remained high in the last year, with a consistent flow of deals reported and a near-doubling of average deal values, highlighting the continued strength of the industry.
After a collective pause for thought following the referendum result, interest levels quickly returned, and although a degree of caution remains, this may not be purely down to Brexit and might also reflect that the current cycle has crested after two extremely good years.
Attitudes towards car ownership are changing. Gone are the days when most people would buy a car outright – with today’s consumers increasingly comfortable opting for monthly payment plans, such as PCP (Personal Contract Plan) or PCH (Personal Contract Hire) arrangements.
There is no denying that monthly payment plans have helped unlock initial and ongoing sales for car dealerships, making it easier to buy a new car in the first place and then to upgrade regularly. People are changing their cars more often rather than having the car for the duration of its useable life. However, these low-interest
WHAT’S IN STORE FOR AUTOMOTIVE RETAIL M&A?
• 41 transactions between automotive retailers were completed to the end of 2016, compared to 45 during 2015.
• Average deal value continues to increase significantly, rising from £9 million in 2015 to £18 million in 2016, largely as a result of a shift towards deals in the premium sector.
• One very large deal completed in 2016 was Marshalls’ acquisition of Ridgeway for a headline value of £110 million. This was a 25% increase in value on the largest deal disclosed in 2015, in which Lookers acquired Benfield Motor Group for £87.5 million.
• 23 of the 41 deals involved premium brands, in part driven by the scale of Jaguar Land Rover’s network reorganisation.
• Brexit caused substantial (11% at 15/02/2017) reduction in share price for the listed groups and has resulted in a more cautious, although still active, market.
A HEADLINE LOOK AT M&A IN 2016
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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
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Number of deals per year
The M&A outlook for 2017/18 in the automotive retail sector continues to be positive, although the post Article 50 impacts are as yet unknown. Looking ahead, we expect to see:
Desire for premium brands continue to grow. The market looks set to remain buoyant in the premium segment with the larger players still looking to increase their exposure to luxury/high end brands. Buyers are seeing the current and future profitability that these businesses can generate and are basing offers around that potential – creating some very high goodwill profit multiples. Where dealer groups are a new entrant for a particular brand, we are also seeing high goodwill premiums, as cost of entry presents opportunities for exiting dealers.
THE OUTLOOK AHEAD
International interest likely to intensify, with a number of players who are currently not in the UK market potentially looking to make a significant acquisition to establish their presence. Internationals, who are attracted to the UK due to its perceived stability and appealing commercial property market, now also add the weakness of sterling as an added incentive. These businesses are from a range of countries including South Africa, China, America, Germany, the Nordics and the Middle East.
Scaled-volume businesses will remain appealing to large UK and international consolidators, if they are able to fill a gap in brand representation.
Opportunities exist for entrepreneurs for MBOs in volume/niche brands to fill a gap in the market for successful smaller businesses that are not attracting the interest of the bigger players.
As an indicator of things to come, the UHY automotive team have already been heavily involved in more transactional activity during Q1 of 2017, advising on ten transactions during the year to date. We predict similarly high levels of activity to 2016, particularly with increasing interest from across the water.
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GBP
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Average value of disclosed deals
Average value of disclosed deals
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The value of car dealerships’ inventory has risen 46% over the last five years to £23.4 billion in 2015, up from £16.1 billion in 2011. Car dealerships have also increased the value of their inventory by 13% in just one year.
During the same period, UK car dealerships’ turnover only increased by 32%, from £107.9 billion to £142.6 billion, with the value of unsold stock now accounting for 16.4% of total turnover, up from 14.9% five years ago.
Clearly, this poses significant risks, tying up capital and hitting profitability. Manufacturers can put enormous strain on car dealerships by encouraging them to increase the amount of stock on their balance sheets to meet contracted sales targets, as they look to reduce their own stock levels and secure greater market share.
The value of inventory is expected to continue to rise, and anecdotal evidence has suggested that some dealerships are having to acquire extra space to store their excess cars, which risks becoming an unsustainable financial risk for dealers who lock up too much capital in stock.
Dealers could face some tough decisions ahead, namely having to reduce prices or increase incentives to clear excess stock, squeezing margins in an uncertain post-Brexit climate.
A CONTINUING UPWARD TREND IN DEALERSHIP INVENTORY VALUES
With manufacturers across Europe continuing to produce more stock than demand calls for – this trend could take some time to reverse. Since the UK traditionally absorbs this oversupply from Europe, much of the excess stock is finding its way on to the balance sheets of UK dealerships.
However, this could change if weaker exchange rates force this excess stock to other European countries. Research shows that there has been strong growth in demand across the EU as the number of new car registrations in 2016 was up 2.3% on 20151.
With the impact of Brexit yet to be fully realised, businesses may look to pursue more conservative business models. In the event of any downturn, if the UK has a lower proportion of Europe’s stock it would make for a softer landing than in 2008 when vehicle values crashed.
Although a ‘just in time’ approach to stock control is desirable, to ensure storage costs are kept to a minimum and valuable capital is unrestricted – both of which would boost company performance – this is often difficult to achieve. As long as manufacturers control production levels and, by implication, the sales targets of dealerships, dealers’ autonomy is limited.
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£16.1bn
Billi
ons
2011
£15
£20
£25
2012 2013 2014 2015
£17.9bn
£18.9bn
£20.8bn
£23.4bn
1 Source: figures from the SMMT.
VALUE OF CAR DEALERSHIPS’ INVENTORY IS RISING
EARLY INDICATIONS THAT A POST-BREXIT RISE IN CONSUMER CAR COSTS HAS BEGUN
In the months following the referendum vote, several major vehicle manufacturers increased prices for new cars in the UK by up to 2%, and further rises look likely. According to the Society of Motor Manufacturers and Traders, list prices of new cars imported from the EU could jump by £1,500 unless the UK manages to secure tariff-free trade deals in its Brexit negotiations.
We can see this trend starting to filter through in to the average cost of leasing popular consumer car models, which has started to climb as post-Brexit inflationary pressures have begun to be passed on to consumers.
Analysis has been performed by comparing a basket of vehicles for a monthly PCH from a national vehicle brokerage site. This is telling, since it is estimated that over 90% of retail sales are now made on some form of a monthly PCP or PCH.
Overall, the trend has shown that prices are increasing post-Brexit for consumer favourite models. The prices of all the models have increased in the last five months of the analysis to February 2017.
Of the models reviewed, there have been significant short-term fluctuations in price for some of the models. For now, the data seems to indicate that prices will continue to rise in the future, however it is unknown what the state of the economy will be following the triggering of Article 50 and how prices will be impacted. UHY Hacker Young will continue to monitor the trend.
Brand Model SpecOctober Price (£)
November Price (£)
December Price (£)
January Price (£)
February Price (£)
1 Ford Fiesta 1.0 Titanium 3 Dr 169.74 169.74 169.74 190.14 192.54
2 Vauxhall Corsa 1.4 Design 5 Dr 167.34 167.34 167.34 204.54 202.74
3 Ford Focus 1.5 TDCi 120 Titanium 230.94 240.54 240.54 241.74 248.34
4 VW Golf 1.6 TDI 110 Match Edition 5 Dr 226.76 241.16 241.16 235.16 300.34
5 Nissan Qashqai 1.2 DiG-T N-Connecta 259.54 259.54 259.54 283.54 287.14
6 Vauxhall Astra 1.6T 16V 200 Sri 242.34 242.34 250.74 299.94 302.34
7 VW Polo 1.0 TSI BlueMotion 3Dr 216.34 218.74 218.74 218.74 231.94
8 Mini Hatchback 1.5 Cooper D Auto (Chili Pack) 5 Dr 232.14 279.54 297.54 355.14 265.14
9Mercedes Benz
C Class C220d Sport (saloon) 382.74 382.74 399.54 409.14 421.14
10 Audi A3 2.0 TDI Sport S Tronic 3 Dr 329.14 307.54 307.54 321.94 333.94
Average 245.70 250.92 255.24 276.00 278.56
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Demand for car finance has been rising over the last five years, so much so that the amount of lending advanced in the UK to finance car purchases has more than doubled, to £30.8 billion in 2015/16, up from £13.4 billion in 2010/11 . The value of new leases provided to customers for new cars has risen 15% since last year – from £15.2 billion to £17.6 billion. The value of new leases for used cars has increased by 13% since last year from £11.6 billion to £13.2 billion.
The popularity of this model has helped fuel the recovery in car sales post-recession, with the provision of point of sale finance now an indispensable tool to unlock sales. As improvements in the ‘residual value’ of cars have lowered risk for lenders, as demand outweighs supply, low interest rates have also given comfort to consumers.
There is still further opportunity for franchise dealerships to take advantage of this demand for finance as customers convert from the traditional payment model. This is highlighted by growth in the US market, where the auto-finance market has grown to £1.1 trillion and is now attracting peer-to-peer lenders.
There is also opportunity for dealerships to unlock sales of used cars through car finance. The view within the trade is that finance in the new car market has a 90% penetration rate, whereas the used car market only sees a 50% penetration rate for car finance, highlighting the scope for potential sales. Businesses may need to change the way that they market used cars, such as advertising their monthly cost, in order to unlock these sales.
LENDING TO FINANCE CAR PURCHASES RISING STEADILY
However, ensuring that monthly payments remain affordable is essential if market buoyancy is to be maintained. Since affordability levels have been driven by heavy discounting (as well as low interest rates), this could be increasingly challenging as post Brexit price rises filter through. Maintaining strong resale values is another critical consideration in ensuring that monthly payments for vehicles remain affordable. Residual value management by the manufacturers will play a key role in ensuring the finance model is robust.
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2009/10
20
18
16
14
12
10
8
6
4
2
0
£ Bi
llion
s
2010/11 2011/12 2012/13 2013/14 2014/15 2015/16
£17.6bn
£15.2bn
£13.3bn
£11.2bn
£8.4bn
£6.7bn£6.8bn
2009/10
20
18
16
14
12
10
8
6
4
2
0
£ Bi
llion
s
2010/11 2011/12 2012/13 2013/14 2014/15 2015/16
£13.2bn
£11.6bn
£10.2bn
£8.2bn
£7.1bn£6.7bn£6.4bn
Finance for leasing new cars rising steadily
Finance for leasing used cars also showing strong growth
WE ASKED A PANEL OF INDUSTRY EXPERTS FOR THEIR INSIGHT ON THE OUTLOOK AHEAD FOR 2017/18 AND BEYOND. Here are their views on some of the most pressing issues facing the automotive sector.
Commentating on the market were:
WHAT LIES AHEAD FOR THE SECTOR? EXPERT PERSPECTIVES
Andy BruceChief Executive of Lookers
David KendrickHead of Automotive at UHY Hacker Young
Paul DalyAutomotive Partner at UHY Hacker Young
Mike AllenHead of Research at Zeus Capital
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2 4 R
“Expect some M&A activity given the balance sheet strength amongst many of the larger dealer groups, as well as the fragmented nature of the industry.”
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DO YOU EXPECT M&A ACTIVITY IN THE SPACE TO INCREASE OR DECREASE, AND WHY?
Mike Allen is one of the leading analysts of the sector. He has worked on some of the highest profile automotive deals, including advising BCA Marketplace, Europe’s largest used-vehicle marketplace, on its £1.1 billion reverse takeover and Main market IPO in April 2015. Sharing his predictions for M&A activity in 2017 of car retailers, Mike said he “expects some M&A activity given the balance sheet strength amongst many of the larger dealer groups, as well as the fragmented nature of the industry.”
The UHY team share Mike’s view, expecting transactional activity to remain similar to 2016. David Kendrick, who together with Paul Daly was involved with 33% of the transactions that took place in the sector during 2016, comments “there are plenty of good businesses out there who are keen to expand and the larger players will continue to swallow up smaller operations.” Paul Daly adds to this that “the weaker pound is likely to further increase international investor interest, which in itself could translate into greater levels of ongoing activity.” However, they warn that the overall value of deals may be suppressed.
Looking at it from the perspective of one of the large consolidators, Andy Bruce, who steered Lookers through a number of deals during 2016, agrees that the market is likely to remain buoyant and thinks the reasons for people wanting to sell their business will only get stronger. “Lack of succession, unwillingness to invest in new premises or major refurbs, increased regulation and a view that the sector favours the larger players” are just some of the factors he thinks will have an impact.
DO YOU BELIEVE WE WILL SEE AN INCREASE IN THE TREND TOWARDS DEALERSHIPS HAVING OVERSEAS OWNERSHIP?
Andy expects that the acquirers in many of these acquisitions may come from overseas with that interest level raised by the sharp devaluation in the value of sterling.
David believes that some new blood overseas should help refresh the UK market and backs up Andy’s view that overseas operators are circling the sector. He says: “It’s only a matter of time.”
However, Mike cautions that, whilst acquisitions within the UK would benefit OEMs and would be overdue in an overly fragmented market, they will not do everything as balance sheets remain strong, albeit sterling weakness is a key incentive for them to transact. Adds Mike: “Purchases are going to be dependent on the scope for sensible returns. Medium term this may happen but we see nothing on the immediate horizon.”
WHAT PERCENTAGE OF BREXIT RELATED PRICE INCREASES DO YOU EXPECT MANUFACTURERS TO TRY AND PASS ON TO CONSUMERS?
Whilst opinions on how the fall in sterling is going to impact the level of foreign buyers in the UK market are split, there is also an expected divergence in the approaches of manufacturers in dealing with the post Brexit collapse in sterling and whether they will pass the increase in costs that has created onto consumers.
Mike says that many OEMs have long term hedging strategies in place and also want to increase their market share in Europe’s second largest new car market meaning they are willing to hold prices down. He adds: “Of course they may seek to mask price inflation through competitive financing costs or increasing the duration of the PCP if required.”
David’s view is that, although manufacturers will adopt different approaches based on their existing market position and future strategy, “we certainly anticipate some price rises.” His UHY colleague Paul concurs, adding that increases of 3-5% look possible in 2017. He believes that the continued growth of competitive sales finance will be key to keeping sterling related cost increases from scaring away the consumer. However, Andy Bruce says that it is not yet clear that Brexit will lead to price rises. Says Andy: “List prices increase every year on the whole so these recent increases are due to that rather than Brexit related. The key will be whether or not PCP rentals increase, given that 80% of private new cars are bought in this way.”
“The weaker pound is likely to further increase international investor interest, which in itself could translate into greater levels of ongoing activity.”
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DO YOU EXPECT RETAILERS TO START DISCOUNTING MORE HEAVILY TO SHIFT STOCK?Again, there was some differing of opinion in response to this question. Andy expects that overall margins on both new and used cars will remain stable for retailers. Whilst for Mike Allen, with the new car market expected to be down year on year, he feels that “in theory we could see more heavily discounted stock levels in daily rental and self-registrations to fall, especially if sterling weakens further from here”.
The UHY team also sees some risk of margin compression especially with the used car market, although David Kendrick points out that levels of discounting will be heavily retailer-dependent. “Those businesses that have a reputation for delivering a quality service and looking after customers should be able to retain margin as opposed to giving vehicles away” he says.
Paul Daly points out that although the used car market has remained remarkably robust in recent years, supply now looks like it is at an all-time high – with 465,000 vehicles on Autotrader. Says Paul: “That is up 10% in a year, so there are definite risks in this area. Dealers in this area are heavily focused on stock turn so I would anticipate action if demand slows.”
Paul was more sanguine about the new car market largely because discounting has already been high in recent years.
DO YOU THINK RESALE VALUES IN THE SECOND-HAND MARKET WILL REMAIN STRONG, AND WHY?David Kendrick is confident that they will – a view echoed by others on the panel. He explains that as new cars increase in price, the used car market should strengthen, with vehicle prices becoming more attractive.
As Paul Daly adds, “This is absolutely critical to the stability of the market.”
Andy Bruce expects that the absolute increase in list prices in the new car market have kept prices high in the second hand market. Here again finance is seen as the key with the more widespread availability of PCP helping to maintain prices.
Mike Allen also agrees that the increase in list prices for new cars will continue to support second hand car prices. Says Mike: “The softness of the new car market might also reduce the supply of vehicles in the 0-3 year old market. Compelling new car offers in the last couple of years have probably also created a substitution effect from used into new and, with new car inflation expected to rise, demand may swing back to used cars”.
ARE YOU EXPECTING CONSUMERS TO SHIFT TO THE BUDGET END, MID-MARKET OR LUXURY END OF THE MARKET IN THE NEXT YEAR, AND THEN THE NEXT FIVE YEARS? The mix of sales is also an area of debate with Andy Bruce expecting a continued shift towards the luxury and budget ends of the market with the mid-market losing out. However, Mike Allen says that higher car prices and any rise in interest rates will make it hard for consumers to trade up.
Paul says that continued pressure on mid-market car marques may see even more mergers in the future between manufacturers. With the French PSA Group, maker of Peugeot and Citroen cars, purchasing Opel/Vauxhall from General Motors’ for 2.2 billion Euros in March of this year, it would appear that Paul’s prediction is already starting to take hold.
Uncertainty over developments in this area is summed up by David, who feels that a major shift from the current status quo is unlikely, but adds that the new road tax rates that came into force from April 2017 may have an impact on the higher end, more expensive vehicles.
“In theory we could see more heavily discounted stock levels in daily rental and self-registrations to fall, especially if sterling weakens further from here”
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DO YOU THINK RETAILERS ARE TAKING FULL ADVANTAGE OF AFTERSALES OPPORTUNITIES?Looking further into the future we asked our panel of experts whether dealers will be able to make a more substantial and profitable push into the after-sales market. Whilst Mike Allen says that dealers have highlighted this to him as an important future revenue stream and are willing to make the investment, Andy Bruce points out there are capacity constraints that might restrict expansion into this space.
Explains Andy: “Many retailers do not have the capacity in terms of technicians and ramp space to accommodate the greatly increased volume of work. We will need to quickly address this if we are to take full advantage of this opportunity.”
David says, “The stronger retailers are definitely taking advantage of after-sales opportunities, however it is still an area that we see many dealers neglect.” He says that failing to make the most of the potential work available to them and improve customer service levels could be short-sighted.
Paul, who has conducted extensive research in this area, agrees. His conclusion is that there is huge untapped potential based on the growing number of vehicles on the road in the 0-5-year-old category - since although aftersales departments have grown, they have not done so in anything like the same proportion. He believes that there are some forward looking groups who are investing in offsite PDI (pre- delivery inspection) centres in order to free up retail space. By moving pre-delivery checks to specialist centres, dealerships will be able to have more room for vehicles that are prepared for sale. This will allow them to have better focus on the retail space and will aid in unlocking sales.
DO YOU BELIEVE WE WILL TRANSITION TO ELECTRIC VEHICLES AND, IF SO, OVER WHAT TIMESCALES?Looking even further over the horizon the panel considered the two hottest topics of the last few years: ‘Have we reached peak car?’ and ‘When will electric cars have taken a major market share away from hybrids and conventional cars?’
Zeus Capital say that the shift towards electric is inevitable but the speed of the shift will be determined by factors such as infrastructure, improved quality, tax advantages and improved affordability. However, Mike Allen points out that OEMs will have to work hard to get these right.
David Kendrick puts the timescale at five-to-ten years for electric to be a meaningful element of the market and, again, UHY point out that the lack of infrastructure is a major impediment. Says Paul Daly: “How do you charge your car if you live in an apartment or terraced house with no garage or off-street parking? It’s not easy, but the shift will happen.”
Lookers’ Andy Bruce also agreed the shift would take place but some of the timeframes being quoted by commentators are wildly overstated. Says Andy: “I think it will be a very long and protracted process.”
AND WHAT ABOUT THE RECENT CLAIM THAT WE HAVE REACHED PEAK CAR? Andy doesn’t believe that the days of ‘peak car’ are upon us just yet. He points out that although demand can fluctuate according to external economic factors in the short to medium term, new car sales track GDP and population growth in the long run. Given that both these factors will grow over time, he is confident that new records will be set in the future.
This is another area of interesting debate. While Paul thinks it’s going too far to call ‘peak car’, he notes that traffic congestion and road capacity are major issues which could have a growing impact on the market.
In David’s view, car sales have already reached their full capacity for the present, and he questions whether the true market value may actually be substantially lower, as many industry-watchers estimate.
“The softness of the new car market might also reduce the supply of vehicles in the 0-3 year old market. Compelling new car offers in the last couple of years have probably also created a substitution effect from used into new and, with new car inflation expected to rise, demand may swing back to used cars”
SO WHERE FROM HERE?
As we look ahead, the automotive sector is grappling with changing and increasingly challenging market conditions. Following a bumper year in which uncertainty, created by the Brexit vote, failed to dampen sales volumes and consumer confidence held up well, the threat of ‘peak car’ being close – or indeed, upon us already – may be over-stated.
That said, the industry appears to be approaching 2017/18 with caution.
Looming price rises are likely to put discounting under pressure and could impact significantly on monthly payment plan models. For dealerships in the UK, maintaining sensible inventory levels will be key. While hitting manufacturers’
sales targets will always be a critical consideration for everyone, rendering too much capital illiquid by tying it up in stock presents risks should the market experience a downturn.
The importance of ensuring a robust used car market to underpin overall market stability is clear - our experts raised the possibility of new car price inflation perhaps diverting more buyers into the used market in 2017.
Against this backdrop however, expectations for M&A activity among dealerships remain high, with interest from overseas acquirers a potential source of deals. Untapped opportunities are emerging which could boost revenues,
such as exploring new financing models and exploiting after-sales potential. Whether rapid expansion in consumer finance to secure car purchases is sustainable will be one of the key issues ahead for the sector.
The automotive sector has always thrived on innovation, adapting rapidly to new opportunities and risks throughout its history. Today, with the macro-economic future uncertain but market demand riding high, this resilience and adaptability will play a vital role in the continued strength of the industry going forward.
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OUR AUTOMOTIVE EXPERIENCEOur national automotive team is led by partners who are totally dedicated to the sector and who, between them, have considerable experience in the motor industry.
The team provide a wealth of services to suppliers, dealers, manufacturers and OEMs, including audit and taxation, mergers and acquisitions, independent business reviews, operational support and many other aspects of compliance, best practice and controls.
With a client base that ranges from the supply chain to large franchise dealership groups, our experience includes dealing with automotive clients from a local and regional perspective, to working with a significant number of the Motor Trader Top 200 franchised dealer groups in the UK.
In addition, we have a particularly strong track record of helping dealers to achieve their longer term objectives and of helping sellers to select the right partner to ensure the successful completion of a deal.
We are committed to keeping our clients informed; regularly producing updates, briefings and blog posts on topical issues and recent developments within the sector. Visit our dedicated automotive page for further information: www.uhy-uk.com/automotive.
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ManchesterPaul DalyPartnert: +44 161 236 6936e: [email protected]
SheffieldAndrew HulsePartnert: +44 114 262 9280e: [email protected]
BirminghamAaron ThomasDirectort: +44 121 233 4799e: [email protected]
SittingbourneBrian CareyPartnert: +44 1795 475 363e: [email protected]
LondonDaniel HutsonPartnert: +44 20 7216 4889e: [email protected]
GlasgowDonald BoydPartnert: +44 141 886 6644e: [email protected]
“I chose David Kendrick of UHY Hacker Young to lead our exit strategy. We had researched other options but concluded that David and his partner Paul Daly had the superior automotive M&A track record and industry knowledge. So it proved out, with our transactions being expertly handled from the IM, through due diligence, contract negotiation and on to completion. I set an ambitious time line and the deal was completed inside five months. The UHY team did a great job and I can confidently recommend them.”Philip Maskell, owner, Essex Auto Group
“Paul Daly is one of the premier advisers from an accounting and financial standpoint in the UK motor retail sector. He has deep knowledge of how things actually work combined with a level of detail and clarity that is second to none. I have worked with Paul for over 20 years and Vertu very rarely buys a business without him casting his eye over it first.”Robert Forrester, CEO, Vertu Motors
ManchesterDavid KendrickHead of automotivet: +44 161 236 6936e: [email protected]
NottinghamMike CarneyPartnert: +44 115 959 0900e: [email protected]
BelfastMichael FitchPartnert: +44 28 9032 2047e: [email protected]
YorkHayden PriestPartnert: +44 1904 557 570e: [email protected]
NewportPaul ByettPartnert: +44 1633 213 318e: [email protected]
OUR NATIONAL AUTOMOTIVE SPECIALISTS
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UHY Hacker Young Associates is a UK company which is the organising body of the UHY Hacker Young Group, a group of independent UK accounting and consultancy firms. Any services described herein are provided by the member firms and not by UHY Hacker Young Associates Limited. Each of the member firms is a separate and independent firm, a list of which is available on our website. Neither UHY Hacker Young Associates Limited nor any of its member firms has any liability for services provided by other members.
UHY Hacker Young (the “Firm”) is a member of Urbach Hacker Young International Limited, a UK company, and forms part of the international UHY network of legally independent accounting and consulting firms. UHY is the brand name for the UHY international network. The services described herein are provided by the Firm and not by UHY or any other member firm of UHY. Neither UHY nor any member of UHY has any liability for services provided by other members.
This publication is intended for general guidance only. No responsibility is accepted for loss occasioned to any person acting or refraining from actions as a result of any material in this publication.
© UHY Hacker Young 2017
