If anyone had been looking for a car in which to navigate the automotive sector’s twists and turns over the past sixteen months, a rugged all-terrain vehicle would have been the ideal choice. Like much of the economy, the industry has found itself slipping and sliding through all sorts of unfamiliar driving conditions – with the emergency stop of enforced dealer and factory closures followed by accelerating demand for used cars and chronic supply chain issues for components on production lines the world over.
Yet even before the pandemic arrived, the sector was in the midst of profound structural change – from the types of vehicles being sold to the way consumers want to buy them. As the economy emerges from the depths of the pandemic, we’re likely to see a number of these issues return to the fore.
Changing consumer behaviour
The pandemic has seen a remarkable shift in consumer behaviour, with surging demand for used vehicles in particular. The SMMT recently reported that sales of used cars in the second quarter of 2021 were up 6.6% on the same period in 2019. Perhaps more tellingly, specialist analyst CAP-HPI have shown the typical value of three year old cars having increased by over 20% in the past five months.
To provide some context as to how atypical this is, the market would usually expect depreciation of about 5% over this period. The idea of used cars, of almost any make and model, appreciating by this amount is almost unheard of.
Of course, the challenge here is determining to what extent this change is due to short-term COVID-related matters and which are permanent structural shifts in the market. Demand for used cars in recent months has at least partially been driven by the much-publicised global shortage of semiconductors. Toyota, JLR and Geely are just some of the global marques who have publicly reported slashing production volumes for the year ahead. With delivery dates for new cars being pushed out by months, it’s unsurprising that many buyers with more pressing requirements will consider a used car instead.
The surge in used car sales has also been driven by many consumers, in the teeth of the pandemic, looking to avoid public transport. Yet as we gradually return to something approaching ‘the new normal’, with hybrid flexible working engrained and concerns around public transport receding, it’s likely that we’ll start to see multiple vehicle households in particular review their overall requirements. We’re already seeing anecdotal evidence of households consolidating the number of vehicles they own or extending the ownership period of cars now covering far fewer miles and remaining in better condition as a result.
The upshot is that whilst used car sales have surged coming out of lockdown, it’s possible that over the medium-term demand could balance out to match the fall in supply of cars originally manufactured during the pandemic. The relative strength of these countervailing forces is likely to determine how the market for both new and used cars shapes up in the months ahead.
It’s also worth taking some time to look at the impact of the used car market disruptors, allowing consumers to buy and take delivery from the comfort of their own home. One of the larger players in the market, Cazoo, went public in New York recently in a deal which valued the business at a reported $8bn, instantly making it the highest valued UK firm trading in the US.
For a business only founded in 2018, it’s been a remarkable growth trajectory and Cazoo’s heady valuation perhaps gives an indicator as to where many see the market going.
Cazoo - and its rivals - arguably provide a polished customer experience that far more closely apes that of buying a new car – removing at a click of a mouse the hassle of trudging round windswept forecourts and the back-and-forth haggling. Whilst older motorists well-versed in the art of negotiation may still prefer to ‘kick the tyres’ in person, for tech-savvy Gen-Z drivers the convenience of the online platforms is clear. The digital genie is out of the bottle, and it’s unlikely to go anywhere fast.
With interest rates at record lows, unsurprisingly there are some great finance deals available for new cars, with the Finance and Leasing Association (FLA) reporting that over 93% of new private vehicle registrations were purchased on some form of finance in the year up to June 2021. For both new and used cars, finance has become an increasingly important means of attracting customers and providing an additional revenue stream for dealers and third parties.
With COVID-19, in some quarters, resulting in high levels of household savings, and with inflation potentially set to outstrip typical savings interest rates by a factor ten, it’s plausible that consumers may look to use to more of their cash savings to pay for their car, either buying the vehicle outright or, more likely, increasing the deposit put down in order to reduce future monthly outgoings.
Whilst there remain highly competitive finance deals on new cars, finance on the used car market still ranges between around 5-9%. For those households with some cash saved away earning very little interest, there’s a growing incentive to reduce the reliance on finance on used car purchases. In a highly dynamic market, it’s very possible that the APR on used car finance may be where the next battle for customers is fought.
The multi-billion-dollar question is the transition from internal combustion engines (ICE) through to electric vehicles (EV). JLR have announced their intention to switch to EV powertrains for their Jaguar brand by 2025, and other manufacturers are pushing similarly ambitious timetables.
For consumers, this creates a range of plausible scenarios.
For owners of petrol or diesel vehicles - especially those who own their vehicle outright - it may make sense to hold onto their existing cars for a few extra years whilst the range (in both senses) of EV grow.
On the other hand, with technology moving so quickly there may be a further incentive to avoid committing now to a single vehicle. Leasing or taking out a Personal Contract Purchase (PCP) agreement may instead give drivers the flexibility to ‘stick or twist’ as technology advances and it becomes clearer which manufacturers have made the best transition to the burgeoning EV market.
There’s also a range of new consumer innovations. One example is subscription operating models, which are attracting growing interest. This premise here is that drivers effectively rent the car rather than effecting a sale, but unlike leasing, the contract may be as short as six months. Whilst relatively expensive over the long-run, it can provide huge flexibility for consumers - especially for consumers who may not have a long-term requirement for a vehicle or simply want a single price with everything except the fuel included. If it takes off, the impact on the wider new and used car market could be significant.
The car market has seen the biggest shake-up in a generation, and it’s too early to say for sure exactly how the cards will fall. What can be said for certain is that all players – from manufacturers and their suppliers through to auction houses, dealers and financiers, will need to track consumer trends extremely closely and act decisively. Cruise control is not an option.