Pre-registrations, or tactical registrations, tend to be synonymous with periods of uncertainty and decline in the automotive industry. Manufacturers and dealers turn to pre-registrations as a way of hitting out-of-reach targets, but the practice often has wider implications for the whole industry – affecting values and stock levels in both the new and used markets. Chris Lemmon speaks to industry figures to discuss the reasons for pre-reg activity and its resulting impact on the market.
A pre-registered vehicle is one that has been registered to a particular manufacturer, dealer, broker or leasing company, rendering it a used car – despite the fact it may not have driven a single mile. Profit margins will be lower from the sale of pre-registered vehicles, but sales targets are met – which could trigger certain bonus payments, encouraging dealers to take on pre-reg cars.
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“Think about it from a manufacturer’s perspective,” says Philip Nothard, customer insight and strategy director at Cox Automotive UK. “A car that is on their books is at their risk. If they can get the dealer network to take on a pre-reg, payment is triggered and the asset risk is moved from the manufacturer to the dealer.
“A lot of dealers push back because the more pre-registrations they are doing, the more stock they are sat on. It starts to take up a lot of their funding and cash reserves.”
Ultimately, pre-registered vehicle can be an opportunity for customers to pick up great deals on essentially brand new cars, with some pre-reg deals offering up to a 20-30% discount on the original new car price.
However, pre-reg activity can be difficult to track as there is very little data on how much activity is taking place. There are some tell-tale indicators of increased activity – for instance if you look at a month like September 2019, 28% of the month’s registrations were done in the last three days. Although a lot of those cars will be natural registrations, it does point towards pre-registrations taking place.
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By GlobalDataPhilip Jerome, managing director and owner of car rental firm Meridian Vehicle Solutions, points to manufacturers’ websites, where used cars are being sold in great volumes with zero miles on them. “They are clearly pre-reg vehicles, because someone has been incentivised to register that car and not find a home for it,” he says. “You can go on all of the big manufacturer websites and see a similar story – lots of cars for sale that have got very low mileage.
“If you go on Auto Trader and search for used cars from 2019 onwards with 0-100 miles, there are more than 13,000 cars on there. It’s another sign.”
What’s causing the upturn in pre-reg activity?
Rupert Pontin, director of insight at vehicle valuation firm Cazana, believes the increase in pre-registrations seen over the last 12 months has been a direct result of manufacturers needing to sell cars that did not meet new emissions regulations. Pontin attributes the specific boost in registrations in August 2019 to the WLTP regulations that were introduced back in September 2018.
“This legislation came with a derogation that allowed a proportion of cars to be sold at a later date but this expired in September 2019 at the time of the introduction of the RDE test,” he explains. “Therefore, remaining stock cars only approved under the old NEDC rules needed to be moved into the market or would be banned from sale.”
It is a similar story for the boost in registrations in December 2019, which Pontin attributes to the cars that did not meet the RDE2 legislation which restricts further emissions. “Manufacturers need to sell as many low polluting cars as possible to bring down their individual company emissions levels, which if not met would result in significant fines. This will be an ongoing challenge for manufacturers as the industry heads towards the 2035 ban on the sale of new fossil fuel powered cars.”
In addition to this, Nothard says there are challenges around supply, with some manufacturers holding back lower emission vehicles, despite the demand being there. He explains: “The manufacturer wants those vehicles sold next year because they need them to count as part of their CO2 output. So these vehicles were held back in 2019.
“In a declining marketplace dealer targets have continued to increase. Take the Volvo XC40 for example – it has got great demand but they have not got supply. It depends on what manufacturer you are and where you sit in the market. There are a lot of games taking place.”
Jerome however, believes the reason for the increase in pre-registrations goes beyond emissions targets, pointing to wider industry issues. “Fleets are still not buying cars in the numbers that they were doing over the past four years. Retail buyers, probably due to Brexit, have also been cautious around buying a new car.
“There has been a lot of uncertainty in the economy, yet manufacturers still need to sell cars. Factories need to produce an increasing number of cars each year, but there are not currently enough buyers.
“If a manufacturer wants to hit a certain registration target, it has to find channels that will take those cars. This could be through the broker channels, where they can put PCH offers out there and shift some cars that way, or it could be through the rental channel, which is very good at taking those cars quickly.
“But in the end, if there are still gaps and the manufacturers still need additional registrations, then it comes down to pre-reg activity.”
A rippling effect through the industry
Pre-registrations may serve as a way for manufacturers to reach targets, but the resulting impact ripples through the rest of the car industry – placing particular stress on the values of vehicles in the used sector.
“What happens is manufacturers offer vehicles to dealers at a reduced price if they take a big order and stick them on their forecourt as used cars,” explains Jerome. “So when you are trying to sell legitimate used cars into the marketplace the values are being skewed.
“Say for instance we have a vehicle that is 6-9 months old with 10-12,000 miles on the clock and cap says that vehicle should be worth £25,000. But there is a load of that same car sat on dealer forecourts with zero miles on them, six months old, for sale for typically less than the cap retail value.
“If the car we are selling exists in any volume on dealer forecourts with no miles on them, there is a strong chance that the value of those cars will be affected by that. It costs us money because we cannot sell the cars we have got for the value we expect to sell them at.”
Looking at the long-term impact of pre-registrations, Pontin acknowledges the knock-on effect on brand popularity and monthly finance prices. “All used car prices go down if there is too much late plate pricing pressure. Those that do pre-register a lot of cars and exert pressure on their brand essentially damage residual values. This means that with lower residual values brand profile and popularity is damaged as more customers lose more money on the cars they have bought.
“At the same time lower residual values mean less product confidence for lenders and therefore monthly finance and contract rates will go up.”
The impact of pre-reg activity does not stop there, with the new car market also feeling the burn. Manufacturing targets must still be met, in a market that has been facing significant headwinds for some time. To soften the blow to the new car market, a lot of business is being put through pre-reg activity.
However much of this business is not being done on the right vehicles, says Nothard. “Pre-registrations tend to be done on the vehicles that are available. The reason manufacturers have got an oversupply of product and all these vehicles in compounds is because they have not sold. So they end up pre-registering vehicles that do not necessarily have a huge consumer demand, unless the manufacturer has got their supply wrong.”
Where do we go from here?
When asked if they believe pre-registration activity will increase in 2020, 60% of Cox Automotive’s dealer network said yes.
The general consensus in the market is that despite the introduction of RDE2 emissions measures in 2019, we are still likely to see an increase in pre-registrations over the next 12 months – driven largely by the next phase of RDE2 and additional CAFE pressures.
The CAFE (corporate average fuel economy) regulation sets the fleet-wide average emission target for new cars at 95g CO2/km. From 2021, if the average CO2 emissions of a manufacturer’s fleet exceed that target, that company will be charged an excess premium of €95 for each g/km of target exceedance per vehicle registered.
Worryingly, the most recent figures from JATO Dynamics revealed that average CO2 emissions in the UK actually rose by 2.3% year-on-year to 127.4 g/km in 2019. As manufacturers scramble to avoid significant fines, pre-registrations could become even more prominent in the market.
However, as Jerome points out, the target of 95g is an EU directive. “I don’t think we fully know yet whether that target will be the same in the UK [following the UK’s withdrawal from the EU]. I think that is still to be negotiated by Boris Johnson.
“If we end up having a UK-only target, that is going to change the competition of what is registered quite dramatically because we won’t have all of the Nordic companies that buy a lot of electric cars and hybrids to offset or reduce our average CO2 emissions.”
Equally, Pontin adds that pre-reg activity can be determined by factory output as production plans are set some time in advance. “Market share requirements also play a part as does the performance in other markets, although the impact of a drop in the likes of France and the need to sell cars to your market instead is less immediate. This is because the factory will need to switch production of over-supply to right hand drive and UK spec.”
Sustainability in the market
Another question posed by Cox to its dealer network was if the UK market can sustain this level of pre-reg activity. Over three-quarters of respondents responded with no, highlighting the significant concern in the industry over the long-term impact of pre-reg activity.
With the economic turmoil surrounding the current market, it is difficult to see the market rebounding in a way that eases the impact of pre-registrations, as it has done in the past.
Nothard explains: “2016 for example was a good year for new and used vehicles, but there was a lot of pre-reg activity. But there was enough demand and strength in the market to take it. We had a good year on top of a good year in terms of new car activity, because used cars were buoyant.”
One solution to the pre-registration issue, according to Jerome, is for manufacturers to get in touch with companies like Meridian. “We are looking for cars all the time; we are buying cars all the time. There are plenty of companies like ours, so if you need to sell cars – talk to people that buy cars, don’t just put plates on them and force your franchised dealer to have them sat on the forecourt.
“That really does damage the market; it is not a positive message at all.”
