Optimism as new car production improves

The standout performer in terms of registrations in 2022 was clearly the electric vehicle sector, with more than one-fifth of all registrations in the UK being plug-in vehicles. This performance demonstrates manufacturers' continual investment and determination to prioritise low and zero-emission vehicles following governments’ legislation, as well as the public's shifting attitudes towards cleaner motoring.

But as we edge closer to the Zero Emission Vehicle Mandate regulation, it's clear more needs to be done for EVs to truly become the dominant mode of transport. Significant investment is still needed in the charging infrastructure to support a growing EV parc. In addition, the comparably high cost of EVs remains a barrier to entry for many people.

A side effect of the transition to hybrid and EV is that manufacturers are increasingly culling the number of models and derivatives, reducing customer choice further still.

A key factor in the recovery of production and supply levels is the securement of materials, more specifically, the raw materials required for battery electric vehicle production. The last three years have clearly demonstrated the impact of broken supply chains and the manufacturer's heavy reliance on a just-in-time process. In addition, a cloud remains over the war in Ukraine, and there are growing tensions between China and Taiwan, one of the world's largest semi-conductor suppliers.

Regardless, manufacturers continue to build their strategies for the future. Stellantis' deal with Elements 25 Limited to secure the supply of magnesium sulphate for their electric vehicle batteries is just one example of manufacturers’ direction of travel.

The agency model continues to accelerate in the UK. Still, there remains a divide between those OEMs who are convinced that early adoption is the correct strategy (for example, Mercedes-Benz, Stellantis and Cupra) while others hold back to observe how it performs. One area of caution around the agency model is the pressure it creates on cash generation, working capital and exposure to market volatility. Agency shifts the risk from the retailer to the manufacturer and not everyone’s ready for this change.

Renault Group CEO Luca de Meo, has been quoted as saying: "Agency is particularly risky as volumes increase. A company selling about 100,000 cars a year typically holds 30,000 cars or a three-month supply. At an invoice price of 25,000 euros, that translates to 750 million euros of capital."

Lessons are also being learnt from markets outside of Europe. In Australia for example, many manufacturers that felt compelled to transition their dealer network to the agency model due to the supply disruptions caused during the pandemic. It remains unclear however what the impact has been on both volume and profitability.

As we commented on throughout 2022, we are now clearly seeing an appetite from Chinese brands to enter both the UK and European markets. In the past, consumers have been open-minded about adopting new operators as they've entered the market, so there's no reason to believe the same won't be true of Chinese car brands. The timing couldn't be better for them as established OEMs step away from affordable but ultimately unprofitable legacy models. Ford’s decision to cease production of its long-term best-selling Fiesta model may be the highest profile casualty but it’s just one example. This will leave a void to fill as people still need small, cheaper cars.

Then we have the impact of the cost-of-living crisis on vehicle financing. Interest rates have already risen to levels that take many previously affordable models out of reach for many consumers. If interest rates continue to rise, 2023 will be a critical year where we could start to see pressure on brand ownership.

With fewer new car incentives, higher list prices, reduced appetite for negotiation and increased appetite for profitability, many consumers may find it difficult to upgrade and maintain the same brand and vehicle type level they've been accustomed to. Therefore, we may see a reversal of those drivers who switched from volume mainstream to premium brands, forced back, or even switch to a used vehicle.

Building on recent new car figures, the market factors described in this article, and in line with previous Cox Automotive forecasts, we have adjusted our new car registration forecasts. Our forecasts are broken up into three scenarios – upside, baseline, and downside – each with its justification below.

Upside scenario 

• New vehicle production globally recovers at a faster rate than many are predicting and closer to pre-pandemic levels.
• Both consumer and business confidence recover in the first quarter of 2023, and lead times and order banks for new vehicles begin to fill up.
• There is a resolution of the war in Ukraine and the European distribution network, and the risk of tariff implementation doesn't cause further disruption to new vehicle supplies.
• Inflation and interest rate rises stabilise quicker than many are forecasting and begin to decrease in a reasonable time. As a result, the inevitable impact of interest rate rises on vehicle funding doesn't hit consumer spending.

Baseline scenario

• The stabilisation observed in the second half of 2022 continues, and vehicle supply and production recovery continue at the current pace.
• The current interest base rate continues at its forecast levels, changing ownership behaviours and choice of brands.
• Recent activities observed in Q4 2022 continue where certain manufacturers returned to strategic and tactical registration activity. In addition, appetite within the leasing and contract hire sector returns, and incentives are implemented to support the purchase of new vehicles.

Downside scenario

• The Ukraine war and post-Brexit complications begin to halter production and distribution recovery. In addition, particularly within the UK market, we are exposed to vehicle price increases due to the implementation of vehicle tariffs, notwithstanding the continual risk of conflict between China and Taiwan and the devastating impact that would have on the supply chain for the automotive sector.
• The recent initiatives by the UK government to slow down inflation and the incentives placed to support the energy crisis don't provide an early boost to consumer and business confidence.
• Interest rate rises, increasing cost of ownership because of the energy crisis, and continual inflation of new cars significantly detours new vehicle replacement.