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Will the automotive industry bounce back post-lockdown?

Oliver Bridge Oliver Bridge

The impact of COVID-19 on the automotive industry has been profound. Oliver Bridge and Owen Edwards review the chances of recovery and outline the three biggest issues in automotive right now.

While in January, the novel coronavirus was a matter of UK public discussion[1] it wasn’t yet affecting UK automotive industry sales. Both January and February’s new passenger car (PC) registrations had tracked below the previous year (-5.8% aggregate YoY), but reduced private sales were blamed on uncertainty around the future of combustion engine cars.

It wasn’t until the beginning of March (a plate change month that historically brings the highest registrations in the calendar year) when cases in the country began to surge and 23 March when non-essential retailers were closed as part of lockdown measures, that we saw registrations plummet across private, fleet and business sales (-44.4% YoY). The timing meant dealers lost the important last days of the month when registrations are typically high. To make matter worse, dealers were left holding new vehicle stock that should have been sold and delivered in March.

The impact of lockdown on the UK automotive industry was immediate. Automotive manufacturers were spared lockdown where they could do so safely, but without retailers to sell vehicles and with demand subdued, it made little difference. Automotive manufacturing plants still closed and large parts of the workforce were furloughed. In April, IHS Markit forecast that European automotive production would fall by c.25% to 15.9 million units in 2020.

With showrooms closed, and retail and manufacturing workers furloughed, April and May saw very low new UK PC registrations of just c.25k units (2019: c.345k) over the period. The impact appears to have been lesser elsewhere in markets such as mainland China, the USA and the EU. Figure 1 shows the movement in new PC and light truck[2} registrations on a rolling 12-month basis.

Figure 1: Global passenger car and light truck registrations

DS1925-passenger-car-light-truck-registrations-12m-rolling_v02-UPDATED.png

Source: Refinitiv Datastream 2020 


Will the automotive industry bounce back?

The question mark for many in the automotive industry was whether there would be pent-up demand over this lockdown period. Were consumers and businesses delaying their purchases and lease renewals? Or had travel lockdown and an apparent seismic shift in attitudes towards working from home reduced demand permanently?

Registrations did make a comeback in July with 174,887 new PC registrations reported by the Society of Motor Manufacturers and Traders (SMMT) – and YoY growth was positive for the first time since March 2020. This  significant improvement on April, May and June's registrations represented a growth of 11.3% YoY for July.  However this was the first full month of registrations since lockdown for the whole of the UK, as Scotland and Wales opened their dealerships late in June, and the year-to-date position still shows an overall decline of -41.9%.

When considering where those new PC registrations in July came from, private registrations were strongly up (20.4% YoY), while fleet and business registration growth was less pronounced at 4.5% YoY. Fleet and business registrations were hardest hit in June and it seems businesses remain cautious given the economic uncertainty ahead. 

Our mid-case scenario for the UK automotive industry suggests that we won’t see the release of pent-up demand that brings year-on-year growth across the remaining months of 2020. Our outlook shows a year-on-year reduction in each month until December, when it finally plateaus, totalling c.1.5 million new PC registrations for the year versus c.2.3 million in 2019. We show our three scenario outlooks in Figure 2.

Figure 2: Annual new car registrations outlook

DS1868-AutoBlog-new-car-registrations-down-34.9%Junev02-01-UPDATED.png
Source: Grant Thornton UK LLP

Key issues for the automotive industry

With these scenarios in mind, and assuming that the country finds a way forward to restart, restore and remain out of lockdown, we think there are three key issues for the UK automotive industry to contend with:

1 How to build consumer demand

This first point is outside of automotive industry control. There will be deals to be done on the forecourts, but for retail, much rests on the overall health of the British economy, and both consumer and business confidence. For British automakers and the manufacturing supply chain, much also rests on the European and US export markets.

The other two issues offer more manageable and actionable opportunities for UK businesses.

2 Pro-active cashflow management

We’ve heard from automotive industry dealers that cash levels for some are surprisingly strong, given the circumstances. The furlough scheme, rental and mortgage holidays, rates relief, VAT deferment, the Coronavirus Large Business Interruption Loan Scheme (CLBILS), a number of automakers paying volume bonuses in full in Q1 and Q2 2020, and robust sales of used vehicles have all contributed to many dealers holding strong cash balances. Indeed, Vertu commented in its latest annual report:

“Cash levels have been significantly higher than the Group’s initial forecasts with cash balances at 22 May of £44.7 million, up from £30 million disclosed on 7 May.”

Of course, this is likely to be a temporary state of affairs. The furlough scheme is gradually being wound down between 1 August and 31 October, rental and mortgage holidays are ending, and VAT deferment ended on 30 June. The challenge will be in managing cashflow as some of these aids reduce, while the automotive industry winds back up again and working capital requirements increase, particularly as we head towards September – a plate change month and the second highest for new vehicle registrations.

Since a large part of the UK’s overall annual reduction in registrations and production for 2020 will be attributed to the months of April and May, it’s important to focus, not on the outturn figure for 2020, but the run-rate going forwards. Part of the cashflow solution, as evidenced by the many recent public redundancy announcements by large household-name businesses, is cost optimisation solved for this new run-rate.

How long might it take for this run-rate to bring the automotive industry back to 2019 levels? In June, LMC Automotive forecast that European light vehicle production is unlikely to surpass 2019 volumes until 2023.

3 Brexit can present both opportunities and challenges

While coronavirus has dominated much of our attention for the past five months, the timetable for Brexit hasn’t changed. The 11-month transition period ends on 31 December 2020 and progress to date on a trade deal has been challenging.

What can the automotive industry do? We've covered this previously, but in short, it can:

  • prepare for a no-trade-deal Brexit
  • dust off old Brexit plans
  • don’t forget the opportunities
  • use preparing for Brexit as an opportunity to make your business more resilient and agile.

If you find yourself still unsure, or would like to explore your current thinking with us, we offer a Brexit workshop. This interactive, half-day workshop is designed to challenge your existing thinking and create practical tailored plans for any eventuality.

If you’d like to discuss the Brexit workshop or anything to do with the automotive industry, contact Oliver Bridge.

References

1 The first two UK cases were confirmed at the end of January

2 For the EU and UK 'light trucks' are represented by light commercial vehicles < 3.5 tonnes

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