The engine may be stalling; but we’re ready on the accelerator

The UK automotive market has been hit almost as hard as travel…

The impact of Covid-19 on the UK’s automotive industry has been rapid and severe. Multiple OEMs have closed production sites, dealerships have been forced to close doors, and many import and logistics businesses have had to mothball operations until the crisis blows over. In many ways, the automotive engine has stalled.

At first glance, the outlook is bleak with SMMT expecting full year 2020 UK automotive production to be down 18% [1], with vehicle registrations 45% down in March alone [2]. However, there are early signs that China is already starting to turn the ignition – Daimler, Volvo and other suppliers are reporting their plants are coming back into operation –  which should begin to ease the global supply pains. 

…but there will be opportunities as ‘new-world’ business models become more attractive

Nevertheless, the lasting impact of Covid-19 will breed winners as well as losers, which in turn will drive M&A. Ultimately, we believe that once the engine has been restarted, we will see an acceleration of those consumer behavioural trends which were already present pre-crisis. While some ‘old-world’ business models may suffer, this new environment will drive M&A for thriving businesses demonstrating characteristics of the ‘new world’:

  • Used will become the new ‘new’
  • The online dealership will be King
  • Millennial mobility and beyond

As both corporates and financial sponsors seek to acquire assets demonstrating strength in this ‘new world’, automotive businesses that are suddenly in vogue could well come out on top: DC Advisory’s UK automotive experts discuss >

With consumers trading down, ‘used’ will become the new ‘new’

Job security concerns, financial distress and limited impulse purchasing behaviour will prompt consumers to trade down from new to used vehicles. Coupled with production facilities, import & logistics operations, and dealerships in large scale shut down, the automotive supply chain will see significantly reduced new car volumes for some time.

Following the global financial crisis (GFC) in 2008, we saw a similar trend of consumers switching from new to used vehicles which went on to impact new car volumes for years to come. In fact, it wasn’t until c.2013 before we saw new car sales return to pre-GFC levels. We’ve already seen new registrations drop dramatically across Europe with declines in March of up to c.70% commonplace [3].

And while, like new cars, we saw a rapid decline in used car volumes in September 2008 as consumers chose to keep their existing vehicle, the used car market rebounded far more quickly. Cars continued to crash, breakdown and drop out of the UK car parc – and ‘used’ became the consumer choice for a replacement.

But this swift rebound created interesting dynamics in the used car market. Combining increased consumer demand, and a ‘fixed’ supply of used cars (you can’t, after all, manufacture a 3-year-old vehicle), used vehicle values increased in the short to medium term. In 2009, average used car values rose to higher levels that even those seen in the years pre-GFC [4] which is something we could begin to see again in the coming months in the UK.

Unlike 2008 however, this crisis has seen a significant reduction in car mileage overall, with total journeys estimated to be c.60% down from late February levels [5]. We anticipate this trend will continue for as long as social distancing and isolation measures are in force across the country and with fewer cars on the road, we can expect less pent-up demand when markets return, than in 2008.

...once the engine has been restarted, we will see an acceleration of those consumer behavioural trends which were already present pre-crisis...

The online dealership could be King

For those that do enter the market for a vehicle during or post Covid-19, they may find the car buying process is changing. It was well documented prior to the crisis that the traditional car buying process was deeply in need of a refresh, as research [6] shows:

  • 88% of millennials are negatively influenced by the high pressure sales tactics at dealerships, and 95% of them are negatively influenced by the bad attitude of the salesperson
  • Many consumers feel unwelcome or out of place in dealerships (often females and young people), turning to online alternatives wherever possible
  • Consumers now perform the vast majority of their research online, avoiding going into a dealership until the last minute (on average, a car shopper spends nearly 9 hours researching online)
  • Consumers are more reluctant to physically go somewhere to buy a car if this can be done faster and more conveniently online – 63% of millennials are negatively influenced by inefficient processes and paperwork

We were therefore already seeing many OEMs and dealerships invest heavily into developing e-commerce offerings. However, cars are possibly the most complex purchase we ever make – with thousands of models and customisations available, and varied sources including factory built-to-order, pre-registered new, as well as used vehicles. This, coupled with complexities such as test-drives, part-exchange, financing and delivery, make car buying an extremely difficult process to replicate online.

Despite the complexity, and with dealerships currently shut, there is a desperate need from the industry to provide online options, quickly. In 2019, research [7] showed 1 out of 5 dealers didn’t have their own website, while 3 out of 5 were not planning on investing in digitalisation anytime soon.

While some have invested in their own online transactional platform – few work well. Dealers and OEMs will need to turn to smaller, more-nimble software focussed businesses to get sufficient online capabilities up and running in the short term, making these software businesses and e-retail experts highly sought after by acquirers.

...online systems, app-based consumer interactions, and alternative financing models will become increasingly attractive to the automotive majors...

Millennial mobility and beyond…

The buzzword of the last decade has been ‘mobility’ – the expected move towards models such as car-sharing, car-pooling, ride-sharing (among others) has resulted in multiple platforms popping up to support these trends. However, while these businesses have had success they are mostly relevant to large urban areas where public transport is plentiful and car ownership is difficult.

Dedicated vehicle access is clearly still important, as 74% [8] of consumers view exclusive use of their own vehicle as ‘essential’ for their daily requirements (e.g. commuting, shopping, school runs), but also because of the perceived hassle of using mobility alternatives for routine use.

The concepts of ‘mobility’ are still accessible for those who want exclusive use of a vehicle however, the trajectory over the last decade from people buying cars outright to now over 90% [9] financing their purchase, monthly payments have become the norm. Now, over 60% of drivers’ [10] report having a strong appetite for their monthly payment to include breakdown, servicing, repair and insurance to provide greater clarity and transparency on the total cost of ownership (TCO). We therefore expect a strong drive towards consumer leasing over the coming decade (in much the same way we saw this happening to the business car landscape over the last decade), as consumers seek to reduce risk exposure and manage their cash flow more effectively during and post-Covid-19.

Lease pricing will also become more attractive – partly due to offers OEMs introduce to support new car sales – and partly due to increased used car values as discussed above making residual values more favourable. All of these effects will likely drive renewed enthusiasm for businesses successfully bringing hassle-free, transparent TCO to consumers in lease or long term rental models.

Conclusion

Covid-19 will likely accelerate many of the trends that were already underway within this sector. Those providing online systems, app-based consumer interactions, and alternative financing models will become increasingly attractive to the automotive majors, and many acquirers will be looking to capitalise on the opportunities which the recovery from Covid-19 will present.

Dealerships which have been slow to react to changes over the last decade will feel increased pressure as the consumer turns to online alternatives at greater pace. Many automotive software businesses will benefit from this drive to online, as dealerships look to rapidly increase their ability to facilitate an end-to-end customer journey online.

In addition, increased distance purchasing will support other areas of the supply chain. Logistics and delivery operations will become particularly important for example, as they will then handle the only face to face interaction the consumer has at handover.

Businesses offering leasing and mobility-like alternatives to car ownership will also benefit as the consumer continues to seek to reduce risk exposure and hassle while achieving greater clarity on total cost of ownership.

It may feel as though the automotive engine has stalled, however, once lockdown is lifted, it is likely the market will return with an acceleration and further development of the trends present pre-Covid-19, and those who are most prepared for the ‘new world’ will prosper.

References:

[1] SMMT, UK car production steady in February, down -0.8%, as sector braces for coronavirus impact, 27 March 2020 https://www.smmt.co.uk/2020/03/uk-car-production-steady-in-february-down-0-8-as-sector-braces-for-coronavirus-impact/

[2] SMMT: UK new car registration data March 2020 https://www.smmt.co.uk/vehicle-data/car-registrations/

[3] Autovista: Unprecedented fall in new-car registrations across Europe in March, 02 April 2020 https://autovistagroup.com/news-and-insights/unprecedented-fall-new-car-registrations-across-europe-march

[4] BCA: The Used Car Market Report 2014 https://www.bcamarketplaceplc.com/~/media/Files/B/BCA/documents/bca-used-car-market-report-2014.pdf

[5] Department for Transport: COVID-19 Press Conference slides (15.04.2020) https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/879613/COVID-19_Press_Conference_Slides_-_15_04_2020__1_.pdf

[6] CDK Global: Special Report – Online Retailing: Taking Advantage of the New Frontier https://www.cdkglobal.com/us/insights/online-retailing-taking-advantage-new-frontier

[7] Accenture Study: The Future of Automotive Sales https://www.accenture.com/_acnmedia/pdf-108/accenture-study-the-future-of-automotive-sales.pdf

[8] OC&C: Global Automotive Disruption Speedometer 2019 https://www.occstrategy.com/media/2422/the-occ-global-automotive-disruption-speedometer_uk-online.pdf

[9] Finance & Leasing Association https://www.fla.org.uk/research/motor-finance/

[10] OC&C: Global Automotive Disruption Speedometer 2019

UK Automotive contacts:

 

 

Ben Thompson
Executive Director, DC UK

T: +44 16 1362 6787
E: ben.thompson@dcadvisory.com

 

Robert Jones
Executive Director, DC UK

T: +44 16 1362 6795
E: robert.jones@dcadvisory.com

 

 

Richard Pulford
Managing Director, DC UK


T: +44 (0) 16 1362 6789
E: richard.pulford@dcadvisory.com

 

Ben Jones
Origination Lead, DC UK


T: +44 16 1362 6792
E: ben.jones@dcadvisory.com