THE Market: Forecasts and PROJECTIONS
New car forecast
Adjusting to the 'new normal': welcoming a 1.57m registration new car market
Headlines through 2020
There have been some interesting headlines in 2020, with exceptional results announced by the Society of Motor Manufacturers and Traders (SMMT) each month. No one would have predicted at the start of the year that zero-emission capable vehicles would make up almost 36% market share year to date in October 2020, as compared with just 6% in 2019 (SMMT, 2020). We even saw Tesla top the new car best sellers list in April and May 2020, albeit largely due to a direct-to-consumer model which was less severely.
It is no exaggeration to say that COVID-19 impacted new car registrations hard. Factories closed around the world, halting production, and impacting supply chains; swiftly followed by the closure of retailers. While an initial full nationwide lockdown saw much of the UK shut down for three months, the longer-term implications of restricted movement are still being felt across the country.
As this report is published, England is in the midst of new National Restrictions, referred to by many as ‘Lockdown 2.0’, while Wales has just completed a 17-day ‘firebreak lockdown’ and a five-level system of restrictions has been introduced in Scotland. All of this is likely to place further restrictions on the smooth operating of the automotive sector.
In a Cox Automotive Sentiment Survey in May 2020, three quarters (76%) of dealers agreed that consumers would be likely to respond to COVID-19 by purchasing a car as an alternative to public transport in the short term. Two fifths (38%) expected consumers to downgrade their vehicle, while a similar number (42%) suggested a more cautious attitude to finance. In the medium to long-term, two fifths (39%) of dealers felt consumers would shift to a different fuel type as a direct result of COVID-19. However, with working from home now becoming a norm for many people, has the need for permanent access to a vehicle changed forever?
Trends following the spring lockdown
As the country came out of the initial spring lockdown, several interesting trends came to light. AA Populus/Yonder data suggested 40% of drivers would look to drive less to maintain air quality improvements (AA Driver Poll, 2020) while the most popular car journeys initially included trips to a garden centre or DIY store (34%); visiting friends or relatives (30%); and travelling for exercise (22%) (AA Driver Poll, 2020).
However, by the end of July, Department for Transport (DfT) figures suggested traffic had returned to near normal levels. In contrast, public transport remained at less than a third of usual levels (DfT, 2020). With children heading back to school and some workplaces recalling staff to their offices, figures for the first few days in September reached 100% of average traffic levels. In early October, traffic hovered around 90% of usual average levels, staying around 85-90% throughout the month. Conversely, rail levels have remained below 40% of average during this period, and bus journeys below 60% (DfT, 2020).
Within this context, continued demand for private transport offers significant opportunities for the automotive sector but must be balanced with ongoing environmental commitments. And, while the final quarter of the year initially looked to provide slightly more positivity for dealers looking to recoup their losses; there is no hiding from the fact more than 600,000 vehicles that were expected to be registered this year, have not made it to market. Likewise, with a second national COVID-19 lockdown as we enter the usually quieter winter months, it is clear that dealers are not yet out of the woods.
"We expect the movement away from public transport towards privately owned vehicles to continue to benefit the sales of new and used cars. Additionally, the increase in disposable income for many consumers who have not been on holiday and were able to save during the lockdown can fuel demand."
Sue Robinson, Chief Executive of the NFDA
Diving deeper into 2020
At the start of 2020, the market was relatively flat. This came off the back of a disrupted 2019, which was impacted by political uncertainty, restricted fleet supply and the looming impact of Brexit. The real impact of COVID-19 was not felt in Europe until February, with dealerships closing in the UK amid a full nationwide lockdown from 23 March until at least 1 June 2020.
Once the country slowly started to open up again, the pent-up demand in the market led to a relatively strong summer period with strong wholesale and retail demand and prices. As noted above, the switch from public to private transport and the surplus disposable income for some people due to not commuting or going on holiday provided opportunity for dealers.
While not available to everyone, government subsidy and support in the form of the furlough scheme, business loans and tax holidays all created a comparatively positive trading environment for many dealers and their customers. Indeed, the new car market bounced back in quite a strong V-shape up until August 2020.
New car registration figures for August and September should be viewed with care. Although clearly down on previous years, it should be noted that the figures during the same period in 2018 and 2019 were influenced by the changing European emissions regulations, WLTP and RDE – prompting excess registrations before the deadlines.
As noted, the ‘firebreak lockdown’ in Wales from 23 October 2020 has contributed to the nation recording –25.5% fewer new registrations during the month. Overall, the industry recorded the weakened October since 2011, -10.1% lower than the average recorded over the past decade (SMMT, 2020). National Restrictions in England throughout November will clearly have a significant impact on figures for the final quarter of 2020.
Explaining the 2020 forecast scenarios
In light of National Restrictions in England until at least 2nd December 2020, and the potential for national or regional restrictions through until the end of the year, the SMMT has revised projections of 1.66m new cars in 2020 down to 1.56m. This equates to a total year-on-year decline of around 750,000 registrations and a £22.5bn loss in turnover. Indeed, 2020 is expected to be the weakest year since 1982 (SMMT, 2020).
The revised Cox Automotive and Grant Thornton forecast for 2020 also takes into account the impact of national and regional lockdowns in the run-up to Christmas. Unemployment is expected to rise in this scenario, with associated weakened consumer confidence. There are still uncertainties around the fall-out from Brexit, but a deal of some sorts is expected, and transition into 2021 comes with agreements on low or no tariffs and smooth customs movements.
An assumption has been made about trading activity continuing through click and collect, mitigating some of the worst impacts of the first lockdown. However, November and December are both expected to be significantly tempered when it comes to new vehicle activity.
Therefore, the revised Cox Automotive and Grant Thornton forecast model predicts 1.57m new car registrations by the end of 2020, down –32.2% on last year's figures.
It is important everyone in the automotive sector is preparing their risk schedules and contingency plans to respond to best- and worst-case scenarios around the end of the year. As has already been seen in 2020, the unexpected and unprecedented can and will happen.
Forecast of cumulative new car registrations - 2020
Explaining the 2021 forecast scenarios
Building on the assumptions for the end of 2020, several scenarios have also been outlined for the New Year. There is a high, medium and low scenario with the middle ground representing perhaps the most likely outcome. As ever, there are significant, multiple and complex variables at play, so dealers and automotive retailers are advised to prepare for all possible contingencies. Additional information can be found in section six of this report.
Worst-case scenario (unlikely)
While unlikely, this scenario is based on heavy tariffs, WTO impact, weakened Sterling and the continuation of significant disruption from COVID-19 long into 2021. As a result, fragile consumer confidence, increased debt, high unemployment, and increased interest rates are all on the cards. Supply restrictions create significant issues, and the vehicle mix is affected, with EV and BEV vehicles diverted into Europe.
Mid-case scenario (likely)
The most likely scenario, given everything that is known when this report is published, the mid-case outcome assumes relatively low consumer confidence, ongoing increases in indebtedness, rising unemployment, and cash weakness. The expectation in this scenario is for medium tariffs, a weak appetite from the OEM to invest in the UK market and ongoing impact from COVID-19 lockdowns.
Best-case scenario (unlikely)
The automotive sector will have its eye on the potential for a bounce-back recovery, even while preparing for the worst. Within this scenario, there are no significant tariffs, a soft Brexit, ongoing support from the UK government, and no ongoing fall-out from COVID-19. Unemployment returns quickly to previous levels, consumer confidence is returning, Sterling remains strong, inflation is low, and vehicle supply improvements are matched by a strengthening in demand. Clearly, this is the outcome many would like to see but perhaps a little optimistic given where the sector stands today.
The new car forecast for 2021
Based on new car registration data from the past decade, a comparative analysis of the recovery post-2007/8 and integrating the trends in demand for private over public transport, the Cox Automotive and Grant Thornton Insight team has gone on to extrapolate the data for 2021, projecting 2.02m new car registrations as the most likely scenario, a fall of -12.8% against the 2001-2019 average. This is based on the mid-level recovery scenario. The team has also developed projections for best-case and worst-case recoveries for contrast (2.29m and 1.76m, respectively).
The SMMT projection for new car registrations in 2021 is marginally lower, at 2.001m, revised down in the October 2020 Outlook. This is up 20.2% on the October 2020 Outlook level, with increases expected across BEV, PHEV and HEV registrations. The next forecast publication is expected in January 2021.
The European new car market continues to see underlying strengthening, but with ongoing consolidation activity and mergers between OEMs, the forecast is that not all brands will be represented in all markets. Likewise, the introduction of tariffs of 10% and more is likely to cause issues. Increased processes will be required to import cars to the UK market, which may damage volumes in the early part of the year.
This is combined with a reduction in models being offered as a result of adopting strict EU CO2 emissions regulations (Batchelor, 2020). While providing segmentation benefits for the retail sector, this will ultimately reduce model availability. The city car sector is already under pressure, with 11 ranges available in 2020 compared with 24 models in 2017.
Forecast of cumulative new car registrations - 3 Scenarios for 2021
"Dealers have demonstrated over the past year how agile they can be. Indeed, has COVID-19 enabled them to find new, lower cost operating routines which deliver an integrated online and in-store experience? As we head into 2021, issues of supply and demand will continue to make an impact. Will there be sufficient consumer demand to drive the recovery? And how many of the right vehicles will be supplied to the UK market to meet that demand?"
Philip Nothard, Insight and Strategy Director, Cox Automotive
Dealer predictions for 2021
In a Q3 Cox Automotive Dealer Sentiment Survey, half of dealers (52%) surveyed expect new car registrations to decline in 2021, with two fifths (42%) anticipating a further fall in consumer confidence.
It should be remembered that we are asking dealers to predict 2021 when there is still a great deal of uncertainty as to how we will end 2020. However, on the assumption that we will not see another nationwide lockdown period in 2021, unlike the whole trading periods missed this year, then you can understand why two fifths (42%) of those surveyed are optimistic that new car registrations will increase. Interestingly, a third (36%) also feel consumer confidence will increase. It may be that they feel we have already reached the bottom of the market or hope that to be the case anyway!
Although a third (33%) believe new car supply will increase in 2021, with one respondent suggesting a 35% increase in volumes, perhaps due to manufacturers pushing product to market which could not be shifted this year, just over a quarter (27%) think supply will decline. This could be a reflection on the enforced plant shutdowns this year or readjustment of manufacturer expectations. Likewise, we know consolidation activity was already underway, with not all manufacturers expecting to import their whole model range into the UK. Despite UK-specific nuances such as Brexit, these same concerns are being discussed in showrooms across Europe.
"We are still very much in a delicate balance globally. Everyone is acutely aware of just how difficult 2021 is going to be. With manufacturers still unsure just what numbers are going to be needed, the supply numbers are anything but sorted. The whole world is very much in 'creeping' mode."
David Bilsborough of Cheshire Cars
Comparisons with the 2007/8 financial crash
Looking back to the financial crash of 2007/8, it is clear there are some similarities in terms of uncertainty, business nervousness and government intervention. However, while support in 2007/8 featured a scrappage scheme specifically designed to reinvigorate the automotive sector, there has not yet been any stimulus targeted for automotive in 2020.
Indeed, while government intervention has been broader and more wide-reaching this time around, there has as yet been little in the way of targeted incentivisation of consumer activity in the automotive space. This is not a financial crash in the typical sense. Lending is still taking place, with banks supporting business and individual customers. Sub-prime lending isn't currently an issue, and loan rates remain realistic.
However, with the potential for a global recession heightened by a second wave of COVID-19 having even more significant impact over the winter months, and the chance of a Brexit deal (or no-deal) which doesn't favour anyone, it is possible that some of the hallmarks of the 2007/8 crash could make their way into the market.
As such, Cox Automotive and Grant Thornton have combined insights from how the market reacted more than a decade ago with considerations around Brexit, COVID-19 and vehicle supply when constructing the scenarios.
In the short-term, issues around Brexit, the availability of a COVID-19 vaccine and vehicle supply will all play a role. Slightly further out, there is every possibility of a recession and impact on trading conditions which lasts three or four years, perhaps not the seven-year impact of the last crash but still a clear catalyst for a paradigm shift in the market.
Building on this analysis, the three, five and seven-year forecast recovery graphs show how the market may look dependent on how long it takes for the new car sector to return to more ‘normal’ levels. The financial crash of 2007/8 had a seven-year recovery cycle, with seasonal curves and fluctuating rates. As noted above, as this current situation is a healthcare crisis and not a financial one, there is every chance the recovery could be quicker. The chart suggests what recovery trends could look like from 2021, if the market returns to pre-pandemic levels in three years, five years or seven years.
New car registrations - 3 scenarios beyond 2021
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