Despite interruptions to supply caused by the introduction of new WLTP emissions and economy ratings for all new cars sold from September, the new car market is set to be down on last year, but in relatively good shape.
The impact of WLTP on the new car market
New car registrations dipped -2.9% in October to 153,599 units, according to the Society of Motor Manufacturers and Traders (SMMT)1, although this marked a welcome slowdown of the -20.5% recorded during the all-important September plate-change month.
Most of September’s shortfall can be attributed to the impact of the introduction of the new Worldwide Harmonised Light Vehicle Test Procedure (WLTP) regulations applied to all new cars sold across the European Union from 1 September2.
However, to partly offset some of this decline the August market was up 23% as automotive manufacturers and dealers moved to sell non-WLTP compliant vehicles ahead of the regulatory changes.
WLTP is the new laboratory test measuring all regulated vehicle emissions, crucially the CO2 levels used for VED and Benefit in Kind (BIK) taxation, and fuel economy. The test is more thorough, dynamic and accurate than the old New European Driving Cycle (NEDC), introduced in the 1980s and last updated in 1997; factoring in a greater range of vehicle and engine speeds, engine load, gear changes and temperatures.
Manufacturers were given 13 months to recertify their entire car ranges, with tests required for different specification and equipment levels, rather than a blanket rating for models by engine and transmission.
The introduction has caused some extended lead times with many car brands struggling to complete their homologation programmes in time for the introduction of the new 68-plate which also fell at the beginning of September, the second biggest sales month of the year after the March plate-change.
WLTP had already prompted many fleets to put on hold new car replacements and extend vehicle life cycles until they knew how the government would use the new ratings to determine future Vehicle Excise Duty (VED) and BIK rates. These delays are set to continue with the government announcing in the Autumn Budget that its review into the matter will not be published until next spring.
We are also hearing that there is a delay in the supply of some models which do not presently meet WLTP requirements and therefore will not be available for retail customers and fleets to buy until next year.
Year to October fleet sales are tracking at -7.8% below 2017, with the full market down -7.2% year-on-year.
July to October 2018 registrations
As the introduction of WLTP is an anomaly we thought it would be insightful to analyse how the last four months have performed to put October’s registrations into perspective.
Our analysis is revealing. Between July and October the market experienced a significant -8.8% decline in registrations with 80,876 fewer vehicles registered compared with the same period in 20173.
In the lead up to WLTP the market grew by 1.2% in July (an extra 1,901 units compared to prior year) and then jumped 23.1% in August (an extra 17,661 units compared to prior year), as car brands and dealers moved to clear their existing new car stocks of NEDC rated vehicles ahead of the deadline.
The level of activity in August saw many brands experience year-on-year double digit growth, totally out of kilter for the month. To illustrate this we have reviewed some of the brands to see how their volumes increased in the month compared to the same period last year: Peugeot grew by 53%, Seat 62%, Honda 92%, Jaguar 120%, Subaru 127% and Suzuki 147% 4.
Assuming that car registrations in the months of July 2018 and August 2018 had followed a similar -3.5% year-on-year decline to that of June 2018, it would indicate that around 28,000 additional units were registered due to WLTP. Had those units being registered in September, when seasonal demand is higher, because of the plate-change, the rate of the market fall for the month would have been -16% rather than -20.5%.
The market was braced for shortfalls in September, as car brands adapted to the new regulations.
Full year forecast
For most brands the rate of decline eased in October and we would expect to see this pattern continue into 2019 as supply and stocking levels return to more normal levels.
However, there is a risk that some brands will still be short of stock in the last part of Q4 2018. It is unclear what the full impact of this will be for motor retailers. Much will depend on whether this shortage of vehicle stock for certain OEMs will see less loyal customers move to another brand where there is sufficient stock to fulfil their requirements. Lost sales here will have a knock on effect as dealers will potentially lose related three year servicing work and the potential to retail the car at the end of its PCP or leasing tenure.
So where does this leave the full-year market?
2018 has been a challenging year for the UK economy and consumers which leaves us moving towards the year’s end with a sense of uncertainty.
Yet despite the regulatory and economic headwinds the SMMT’s latest full-year forecast shows the new car market likely to close on 2.4 million registrations, just -6.3% down on 2017’s total of 2.54 million.
Meanwhile demand for used cars remains strong, generating robust revenue and profitability for some motor retailers. We believe that the used vehicle market will continue to grow in Q1 2019.
WLTP: the European experience
The impact of WLTP on new car registrations was felt across Europe with sales climbing in August, ahead of the introduction, before crashing in September when the rules became mandatory.
According to JATO Dynamics, the independent automotive research firm, the European market reached a 20 year high for the month of August with a year-on-year sales growth of 30% to 1.17 million units5
JATO attributed the rise to “stock clearances” ahead of the introduction of WLTP and noted a 38% increase in fleet and business registrations for the month.
However, September witnessed the highest monthly decline of the decade with year-on-year volumes down -23.4%. According to JATO 1.12 million units were registered in the month, 343,000 less than September 20176.
The decline was felt across the EU with 23 of the 27 countries analysed by JATO reporting double-digit drops. Despite August’s increase and September’s fall, volumes were only down -3% between the two months, meaning year-to-date figures were not strongly impacted with the market up 2.3% at the end of September.
3 Vehicle Data – July-October 2018, Grant Thornton, November 2018
4 Vehicle Data – July-October 2018, Grant Thornton, August 2018