The European market is currently facing a unique series of opportunities, changes and challenges. Chris Farnell takes a closer look at what these are, and how they are reflecting wider shifts in the global economy.
The EU contains 7.3% of the world’s population, and nearly a quarter of the global nominal GDP.
It is one of the largest and most significant markets in the world, and according to the European Commission’s latest forecasts, the EU is set to continue expansion for the foreseeable future – even if at a more moderate pace than in recent years.
While the European Commission predicted a slowing in the GDP growth from 2% in 2018 to 1.4% last year, it also predicted that, despite strong domestic consumption, the looming possibility of a no-deal Brexit, and enduring global trade tensions on the economy worldwide, GDP will grow by 1.6% over the course of 2020.
It is not hard to see why the market has a great deal of appeal for the motor finance sector; however, aside from the promised continued growth, there are also a number of factors that make the European motor finance sector unique. In particular, there is the continent’s extremely active commercial vehicle leasing sector.
“In comparison to markets on other continents, the European market is dominated by commercial vehicle leasing mostly in combination with service contracts such as maintenance and wear-and-tear repairs or tyre services,” explains Kai Vogler, head of sales, Europe at Volkswagen Financial Services (VWFS). “Moreover, used car financing is getting more and more important in Europe. In contrast, classic retail financing dominates the Chinese market, for example.”
Used to the Market
Indeed, over the first half of last year, demand for new passenger cars across the EU was down by 3.1% when compared to the same period last year, reaching only 8.2 million total registrations for the region. The European Motor Manufacturers’ Association’s (ACEA) Economic and Market Report for the first half of 2019 stated that after a small uplift of only 0.1% in May, Europe’s new car sales fell significantly (7.8%) in June, because of the negative calendar effect.
Of course, the European market is made up of a number of extremely diverse countries, each with their own economies and issues, and the trends have not been completely uniform. Among the Central European countries new car registrations actually grew by 1.4% during the first half of the year, driving demand for the continent as a whole, while registrations in Western Europe continued to decline by 3.5%.
Aside from the 0.5% growth reported by Germany, the five biggest EU markets all posted losses for the first part of 2019, with Spain in particular seeing a drop of 5.7%.
However, while the new car market has been facing slowing growth, possibly driven by the wider economic uncertainty in Europe right now, the used car market is one that presents many opportunities for financiers.
“In recent years, there has been a strong increase in used car financing,” Vogler tells Motor Finance.
“Also, for us, this is an enormous growth opportunity, as we have around 100 million Volkswagen Group vehicles currently on the roads worldwide, many of them changing hands in the medium term, and we aim to finance them. That is why we have established our online used car platform, heycar, in Germany and the UK.”
The heycar platform is intended to provide customers with a new way to buy used cars, including quality checks, warranties with every car, and a user-friendly website. The trend towards online and digital solutions for car finance is as visible in Europe as it is elsewhere in the world; however technological changes are not the only ones that the European market is having to consider.
Age of Uncertainty
When looking at the shift away from new to used cars, there is one factor, one driver of economic uncertainty, that is never far from anyone’s thoughts: even with the result of the recent UK elections and Prime Minister Boris Johnson’s promises to “get Brexit done”, there remains as much doubt as ever about the eventual status of the relationship between the UK and the EU.
ACEA’s forecasts for the latter half of 2019 claimed that the outlook “appears increasingly uncertain”, something it attributed to moderating levels of economic growth, but also to the prospect of a no‐deal Brexit, and the knock-on effect that is having on business and consumer confidence in the region.
For the full year 2019, ACEA revised its forecast for 2019 passenger car registrations downwards to ‐1%, with total EU car sales projected to be just above 15 million units at the end of last year.
Indeed, while Vogler is optimistic about the opportunities for motor finance in the European market, he is also realistic about the challenges that sector is facing right now.
“The greatest challenges arise from the volatile economic development in many parts of the world,” he tells Motor Finance. “Due to numerous issues such as Brexit and trade conflicts, it is difficult to predict how the economy, and consequently the sales of new vehicles, will develop.”
This uncertainty is reflected not only within Europe, but in how Europe is interacting with the global market at large. Halfway into last year, according to ACEA, exports of passenger cars from the EU represented a value of nearly €62bn (£53bn), 4.9% down from the previous year. At the same time Europe has seen the imports market grow, with the value of car imports increasing by 5.7% to €26bn in total. What this means is that, as a whole, the surplus generated through the trade in passenger cars during the first half of last year declined by 11.2% to €36bn.
Looking more closely at the imports sector, the EU has seen double-digit growth in passenger car imports from Japan, both in terms of value (14%) and volume (11.6%) in the period between January and June last year, marking Japan out as the number one importer of cars to the EU.
Countries including Turkey, South Korea and the US, as well as Japan, accounted for over 70% of the total value of EU imports during this period. The US, one of the EU’s largest trading partners, also saw imports to Europe grow again after 2018’s slowdown. However, at the same time Turkey and Mexico have seen their shares of the market contract, with the countries losing both volume and value in imports during the first half of 2019.
Meanwhile, on the exports side of the table European-built passenger cars have seen a market in decline across Asia. During the period covered by the ACEA report, exports to China fell by 6.9%, while exports to Japan fell by 6.1% and exports to South Korea fell by a substantial 18.2%. However, during the same period, exports to the US grew by 9%, marking it as a valuable export market for European cars.
Overall, the latest figures available from 2019 indicate that the number of cars shipped from Europe to its six largest export markets has dropped significantly, with the total number of individual cars being sold by the EU to the rest of the world between January and June falling by 14%.
The tipping of the import-export scales, combined with a domestic market that is swinging towards used cars, puts a great deal of pressure on the automotive finance sector in Europe. However, there are opportunities as well, and as Vogler rightly points out, Europe’s automotive market is not solely built on individually owned passenger cars.
Talking to Vogler, it is clear that VWFS sees potential for growth around the sale and management of commercial fleets.
“I see the biggest opportunities for us in Europe not only in the used car market, but also in the commercial vehicle fleets,” he explains. “The goal of VWFS is to become the world’s largest fleet provider. The potential that needs to be raised, for example, lies in the segment of non-group brands.”
To make the most of these opportunities, it is not enough to simply specialise. In a market where people and businesses are increasingly shopping for services rather than products, financiers moving into the commercial fleet sector need to be able to offer value-added service.
“It is also key that the ‘all-round carefree package’ is becoming increasingly more important, not only in leasing, but in the entire mobility sector,” Vogler points out. “Many companies, for example, combine the organisational aspects of company car fleets and business travel. However, customers increasingly want mobility and individual services from a single source. Not many competitors will be able to offer this integrated service. On an international basis, this is a huge challenge, but also a promising area of growth.”
Vogler foresees the mobility sector as a whole becoming a huge part of the motor finance landscape over the coming years.
“It will be increasingly important to offer mobility from only one hand,” he explains.
“This means businesses will need to add highly frequented, automotive-related operations to the traditional low-frequency financing and leasing products. For example, in the areas of payment, parking, fuelling and renting.”
Mobility is not the only growing sector of the European market, however: there is another sector that has been a long time coming, and one that is being heralded as due to record massive growth throughout the 2020s.
“More and more electric vehicles (EVs) will be financed or leased in Europe in the coming years,” Vogler predicts.
The decade of the electric car is here. Europe has, in many ways, been at the vanguard of the change. According to data firm HIS Markit, the number of EV models available to buyers in the EU will rise from less than 100 to 175 by the end of this year. By the time we reach the halfway point of the decade, that number is expected to have reached over 330.
The EU is driving this change through legislation, and from the beginning of this year manufacturers can expect to face heavy penalties if the average carbon dioxide emissions their cars produce rise over 95g per kilometre. Car manufacturers that exceed this limit will pay an enormous €95 per gram of carbon dioxide they produce over the target, multiplied by the number of cars sold. It is a powerful incentive to the industry to produce greener vehicles.
“For example,” Vogler says. “Volkswagen starts with its newly developed all-electric ID model family next year, and will have launched almost 70 all-electric models group-wide by 2028.”
The market for EVs in Europe is already the second-largest in the world. China’s market is far larger, but Europe is well ahead of its nearest competitor, North America. At the end of last year, the EU announced an unprecedented plan to become net neutral on carbon emissions by 2050.
However, it is not enough to simply have the cars themselves on sale. For EVs to achieve true market dominance, especially in a market where used cars are gaining majority share, retailers will need to have a robust range of financial options for consumers to choose from when they are looking to buy.
“In addition to numerous other factors that will be decisive for the success of electric cars, the automotive financial service providers are of great importance,” Vogler says.
“Especially in Germany, vehicle leasing is, and remains, the dominant form of procurement for commercial customers. In order to further promote sales in this vehicle segment, the automotive financial service providers will develop new offers together with the manufacturers.
“VWFS expects that around 80% of the e-vehicles sold by the Volkswagen Group in Germany will be financed or leased by us in the future.”
By providing these financial products, Europe may not just be showing the way to its own future, but to that of the world.