New car forecast

To the end of August 2021, UK new car registrations were up around +20.3% on the previous year. While a positive trend, this was alongside a pandemic-hit market in 2020, in which showrooms were closed for much of the year. Indeed, the Society of Motor Manufacturers and Traders (SMMT) figures highlight total registrations in 2021 were still -25.3% below the ten-year average for the period January to August. This underlines the ongoing impact of not only COVID-19, but also materials supply shortages and challenges in the manufacture and distribution of new vehicles.

In what would usually be one of the strongest months of the year, September 2021 saw a year-on-year decrease of -34.4%. Year-to-date, the market is now tracking at +5.9%. This continues to represent the impact of semiconductor shortages, Brexit, and continued supply constraints. It is hard to determine the real level of consumer demand given the supply situation and whether the market has recovered to pre-pandemic levels.

Across Europe (EU, EFTA and UK), new car sales were up by +27% in the first half of 2021, based on data from the European Automobile Manufacturers’ Association (ACEA), but this had fallen back to just +11.2% by the end of August after a challenging summer in which new car supply issues seemed to get worse. The strongest percentage growth in the first half of the year came from markets like Greece (+59.6%), Italy (+51.4%), and Croatia (+49.1%), as well as Iceland (+44.1%) and Estonia (+41.7%). The only negative market in the first six months of 2021 was Romania at -4.9%; however, the Netherlands only registered +3.3% growth, while Belgium and Denmark were also single-digit at +7.3% and +9.2% respectively.

A similar pattern emerges in the US, where total passenger car registrations were up +11.3% on 2020 by the end of August. In contrast to Europe, the summer months were actually relatively strong, although still lagging behind pre-pandemic registrations. In China, the new car market is showing decline, with registrations falling for four consecutive months to the end of August. While this has impacted the year-to-date figures, the market was still up +16% over the same 2020 period. Like Europe, semiconductor microchip shortages played a significant role in the figures.

One of the biggest challenges for markets like Australia and New Zealand, where there is no domestic vehicle production, is the escalating cost of shipping. With some carriers having mothballed their ships during the pandemic, the average cost of chartering a car carrier has jumped from AUS$5,000 per day to AUS$32,000 per day. The cost of moving containers of vehicle parts around the world has also increased, with congestion in ports and containers in short supply or stuck at end-of-line port locations.

While COVID-19 has obviously had a major impact on vehicle manufacture and distribution, the biggest challenge to new car markets worldwide at the moment is the semiconductor microchip shortage. Many of the world’s best-known manufacturers have lead times of 12 to 18 months on some of their new vehicles because of the pandemic backlog of fulfilling orders combined with materials shortages. There are now more than 1,000 microchips required in each new vehicle, and it is only getting more complex. But factories have been closed over the past 18 months due to COVID-19, the raw materials to manufacture chips are in short supply, automotive chips are different from those in other industries, and the automotive industry does not have the dominance of demand.

While some manufacturers have tentatively trialled making and shipping vehicles with the option to retrofit less essential microchips later (i.e., infotainment and navigation systems, duplicate keys, phone pads), the reality is this is unlikely to lead to a satisfactory situation for anyone involved. Current customers won’t receive what they have paid for, and there could be real challenges when it comes to setting residual values and remarketing these vehicles if the reality doesn’t match up to the guide descriptions because the retrofit didn’t take place. Recall success rates are already low.

Looking to the future, there are clear questions being asked over the viability of the Just-in-Time (JIT) supply chain model when factories around the world are being forced into temporary shutdowns because they don’t have materials. Demand is outstripping supply and the concept of build-to-order is back on the agenda as manufacturers consider how to reshape business models to be more efficient moving forward. In the UK, in particular, Brexit has only exacerbated the situation, with delays at customs and increased freight forwarding costs hampering supply chains.

Just one in 25 dealers (4%) in a summer 2021 Cox Automotive survey of UK franchises expected the new vehicle supply issues to be resolved by the end of Q3. Three fifths (59%) expected issues to continue into 2022.

Source: Cox Automotive Survey June 2021

Among the negative headlines, there is a glimmer of light for the electric vehicle sector. With battery electric (BEV) and plug-in hybrid electric vehicles (PHEV) making up around 16.6% market share to end September 2021, versus 8.8% in 2020, there is a clear move towards electrification in the UK market. This trend is echoed globally, with a significant uplift in China perhaps the most notable evidence that BEVs have gone mainstream.

In Europe, the picture is mixed, with northern countries trending towards a higher EV market share, although there is significant growth taking place across the board. The second quarter of 2021 saw big gains for BEV in Spain and Germany, while France has also seen an uplift. When PHEVs are also included, Italy is also performing well. The US is seeing increased interest in EV but has ground to make up to hit the double-digit market share figures of Europe and China. Australia is also lagging, with around 2% EV market share in the first half of 2021.

Natural gas vehicles (NGVs) and LPG-fuelled cars have also both shown an uplift in Europe during 2021, highlighting that electrification isn’t the only route being trialled towards decarbonisation. While hydrogen i.e., fuel cell vehicles (FCEV) are still very much in the minority, announcements from the likes of Hyundai at the recent Munich Motor Show suggest it is only a matter of time before this becomes a viable option. Hyundai intends 80% of sales to come from BEV or FCEV by 2040.

Two of the major trends noted above – electrification and semiconductor shortages – are likely to continue to impact the new car market in the UK in the short to medium-term. The market ended 2020 on 1.63m new car registrations, falling by -29.4% on the previous year. By the end of September 2021, total registrations had hit the 1.3m mark. The July 2021 SMMT forecast suggests a year-end figure of 1.8m, although this may be revised later in October. The Insight Report forecast is on the lower end, at 1.6m for 2021. This is less than anticipated at the end of 2020, and falls within the worst-case scenario from the 2020 Insight Report.

Given anticipated upsurge in demand, and the hope that manufacturers will be able to access the materials and resources to both clear the backlog and make new sales, the SMMT July 2021 forecast suggests a year-end figure for 2022 of 2.1m new car registrations. Again, this could be revised shortly after this report is published. This is still below the average of 2.26m for 2007 to 2016, and a long way down on the figures for 2016 to 2019. The Insight Report forecast for 2022 is at the lower end, at 1.87m. For the following year, 2023, the Insight Report forecast is 2.09m.

There are some significant factors which may impact where in these ranges the eventual figures end up. It is increasingly looking as though it may take several more years than first anticipated to recover from the triple threat of COVID-19, Brexit, and vehicle supply shortages. Indeed, the seven-year recovery scenario proposed in the Insight Report 2020 is not looking quite so far-fetched with the benefit of hindsight. However, semiconductor and raw material shortages aside, the push towards electrification combined with pent-up demand in the market as consumers need vehicles to re-enter society means there is a growth opportunity for the automotive sector – if investment is channelled into the right places.

As noted in the introduction, the Insight Report 2021 is looking at several possible scenarios this year rather than a best, mid and worst-case position. The variables involved over the coming decade are significant, offering multiple routes forward. Clearly, there will be ongoing impact from COVID-19, Brexit, and the current supply chain issues. There is also an imperative to electrify model ranges and vehicle fleets by 2030. However, in among those driving forces, there are some key influences and trends which also need to be considered. For the purposes of this report, they have been classified as Necessity, Affordability, Availability, Economy.

For some drivers, organisations, and fleet managers, there is a need to invest in new vehicles to keep business going, ensure families are able to meet their daily needs, and support access to the workplace. However, for many consumers, there is a choice in how and when they change their vehicle. With increased flexible and dynamic working, some households may find they no longer need multiple vehicles to manage their work and childcare demands. As such, the number of vehicles per household could decline.

With the opportunity to work from home continuing in some industries, it may be that vehicles are travelling fewer miles and won’t need to be replaced as quickly. This may mean people holding onto vehicles for longer, and replacement cycles changing in the new car market. Alternatively, individuals who are nervous about shared and public transport because of the ongoing COVID-19 pandemic may actually spend more time in their personal vehicle, prompting them to upgrade quicker to something which meets their needs.

Although still relatively early in the adoption cycle, market share for battery electric and other new energy vehicles is rising. This will continue to accelerate over the coming decade. The question here is whether consumers will replace existing petrol or diesel vehicles with a cleaner option; or whether range and battery health anxieties will see households invest in running multiple vehicles for use dependent on the journey type. For example, an electric run-around for city driving and an older petrol or diesel SUV being maintained for long journeys.

All of this is likely to have an impact on the way in which vehicles are financed going forward, with shorter-term contracts, flexible rental, and subscription models becoming more prevalent in the new vehicle market. Change cycles will, therefore, be altered and the traditional three-year contract renewal may change. In reality, however, this could take a number of years to have a real impact. The growth in digital sales over the past 12 months is also set to increase, with more consumers becoming comfortable selecting and paying for a new vehicle online.

For the purposes of this report, affordability relates to the purchase price of new vehicles, as well as their ongoing running costs. While prices are starting to come down, and there are some cheaper options at the value end of the market, electric vehicles and their alternative fuel counterparts are still being offered at a higher price point than traditional ICE vehicles. This is unlikely to change, as manufacturers will need to recoup the development costs for new powertrains and vehicle architecture.

In addition, the increasing complexity of the vehicle – due to electrification but also connectivity, autonomy, and evolving safety requirements – means they are becoming more expensive to build. Couple this with shortages in raw materials, issues with recruiting and retaining skilled labour, increased transportation and logistics costs, and a possible reduction in vehicle volumes, and it is clear that the relative prices of electric vehicles to ICE will increase, alongside absolute vehicle prices. This will also be influenced by a move to the agency model and a focus shift by many manufacturers away from volume and towards profit per unit.

Although real household disposable income and consumer spending have both largely recovered to pre-pandemic levels, there are few signs of growth in the short to medium-term. Indeed, economists in both the UK and the US have downgraded their forecasts for the end of 2021 and 2022 to account for uncertainty around virus-sensitive industries, like tourism and hospitality, over the winter months. Recovery of GDP to pre-pandemic levels does not prevent further economic shocks. Ultimately, the cost of the COVID-19 pandemic will need to be paid for by governments.

Thinking about the coming decade, there are real concerns over whether consumers will have the means to upgrade vehicles as frequently as today. Finance models will need to evolve in response to consumer fragmentation between those who are willing to pay a monthly fee to access mobility, and those who are more comfortable purchasing and owning a vehicle outright. The uncertainty caused by the pandemic and reduction in income for some households may mean they don’t want to be constrained by a finance contract in case they have lean months again.

Of course, it is one thing to question whether consumer demand will be there for new vehicles but this is largely irrelevant if stock isn’t available to service demand. The issues caused by COVID-19, Brexit, and semiconductor shortages will have an impact that runs longer than just the next 12 months. With raw material supply continuing to impact new vehicle production over the coming decade, along with high investment required by manufacturers to convert production away from ICE to electric and fuel cell vehicles, it is unlikely that new vehicle stock will enter markets in the same way as before.

Just-in-Time (JIT) supply chains are under review, with manufacturers considering how they can best streamline their resources. In some cases, as with the likes of Tesla, there is a real focus on getting the raw materials, factories that build the vehicles, and supply chain partners in the same geographic location to minimise both emissions and transport costs. The requirement for vehicles sold in the UK and EU to have a certain percentage of domestic parts will also impact how and where manufacturers choose to build.

With increasing specialisation around electric and connected vehicles, more outsourcing is likely to take place. However, this means there could be even more reliance on a smaller number of plants to deliver vehicles for multiple manufacturers. Thus, creating a possible weak link in the new vehicle supply chain. If that one site is unable to access raw materials or labour for a prolonged period, distribution for multiple manufacturers could be affected. While it may sound far-fetched, there have already been examples of this as a result of the disruption from COVID-19.

As previously noted, sustained recovery from the pandemic and associated challenges to the economy is unlikely to take place quickly. How long it continues will be dependent on the way in which various economic levers are pulled by governments around the world. The recession caused by the pandemic saw 2020 experience the steepest drop in UK GDP since records began in 1948. By July 2021, there had been a bounce back and GDP was only 2% lower than before the pandemic. However, economic growth has slowed over the summer months, while inflation has risen, and is expected to continue to do so.

The Organisation for Economic Co-operation and Development (OECD) data from September 2021 shows global GDP has now risen above pre-pandemic levels, with further anticipated growth in the coming year. However, issues in supply chains, increased food and commodity prices, and rising transport costs, are all contributing to sharp rises in inflation in some markets, such as the US. The OECD’s expectation is that price increases in durable goods, like cars, may ease once this short-term tension is resolved. However, this is dependent on the wider marketplace and runs counter to the feeling that new car prices will have to rise in response to increased production costs. Inflation is expected to slow down or reduce in most markets by the end of 2023, while another recession could be on its way.

In this scenario, many of the plans for the automotive sector have been put on hold. A continuing lack of new vehicle supply, slowing economic recovery, and increased debt have led to declining business and consumer confidence.

While mobility services may begin to see a resurgence nearer 2030, the electrification roll-out has not gone as smoothly as the industry hoped. Targets are unlikely to be met due to poor strategy and implementation.

Electric vehicles will be priced out of reach of some demographics, creating inequality in the marketplace. But it is hoped technology will develop sufficiently to support mainstream adoption by the end of the decade.

In this scenario, there is a fairly steady economic recovery and returning confidence counters any impact from inflation in the first few years. While there will be some economic decline in the middle part of the decade, this will be manageable and short-lived.

There may be fluctuations in unemployment and disposable income, but these will be comparatively minor in the context of recent years. Transport patterns are likely to return to pre-pandemic levels, with a resumption in commuting.

Manufacturers overcome most of the supply chain issues and maintain market share through the transition from ICE to increasingly electrified vehicles. EVs become cheaper in the second part of the decade, as battery technology leaps forward.  

In this scenario, there is a healthy post-pandemic bounce back in the economy with returning confidence and government fiscal stimulus. The middle part of the decade may see a slight flattening but this is unlikely to go below pre-pandemic levels.

Vehicle ownership and usership is likely to increase, with manufacturers and fleets making the switch to EV by 2025. Mobility-as-a-Service, connectivity, and autonomy are all making a significant impact, with manufacturers leaping forward in capability.

There could be minor challenges due to oversupply of ICE vehicles in the early years and a shortage of raw materials in the latter part of the decade but this is unlikely to impact on the overall shape of the market.