In the UK, drivers are downsizing and smaller, cheaper and more
efficient cars are the flavour of the moment. What does this trend
to less expensive cars mean for finance houses, asks Jo Tacon.
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Nearly half a million visitors flocked to the British
International Motor Show, which took place in late July at the
ExCeL centre in East London, in order to gawp at the shiny models
on display. There were familiar old warhorses, such as the Ford
Fiesta, in new forms, given a facelift and a thorough
re-engineering; there was a raft of new product launches, with
Vauxhall’s Vectra-replacing Insignia the most significant new
unveiling from a fleet point of view, along with a clutch of
sportier models such as the Alfa Romeo MiTo, IFR Automotive’s
Aspid, the Mastretta MXT, and Lotus’ Project Eagle. But although
the low-slung and powerful sportscars on show may have drawn more
admiring onlookers and camera flashes, these are small-volume,
high-prestige cars which will never capture more than a negligible
amount of market share.
For observers looking to the future of volume car-buying
patterns in the UK, a clear trend emerged: small is beautiful.
Toyota had a prototype version of its tiny 3-and-a-half-seater iQ,
which the manufacturer is positioning as a serious contender in the
supermini segment, while Citroën showcased a range of the 24 models
in its line-up which emit less than 120g of CO2 per km.
Driven to distraction by rising petrol prices, more and more car
buyers are looking to downsize and cut their running costs. A
survey by insurers Swinton found a “dramatic” increase in the
numbers of motor quotations for smaller-engined cars, with
enquiries for cars with sub-1.5l engines up 20 per cent in a year.
Correspondingly, quotes for SUVs were down 11 per cent over the
same period. SMMT figures show that in 2007, sales of band B cars,
i.e. those emitting between 101g and 120g of CO2 per km, were up 20
per cent year on year, to 128,646 units. In the SMMT’s monthly
figures for July, meanwhile, sales of Bentley fell by 46 per cent,
with Aston Martin down 44 per cent, and Land Rover sales tumbling
38 per cent.
Retailers have noted the trend, too. David Dyson, finance
director of Lookers plc comments: “At Lookers we operate across 31
different brands in our franchise business and in recent months we
have seen a trend in consumer buying patterns towards smaller
vehicles with lower emissions.” Further confirmation of the shift
comes from insurer esure, which found in a poll that 17 per cent of
respondents were considering switching their current car to a more
fuel-efficient model, with another 14 per cent saying they would
change if fuel prices continue to rise.
It all adds up to a pretty convincing picture of market
evolution. But what does it mean for motor financiers? Is a greener
car necessarily a cheaper one – and if so, what effect is this
trend having on finance houses’ profit margins?
Higher volumes of lower-value transactions?
Miles Roberts, managing director of independent financier
Southern Finance, says that the trend to smaller cars in the UK has
been “very noticeable, particularly over the last six to eight
months” and that buyers currently have a ‘pain threshold’ of around
£7,000, over which they are very reluctant to spend.
Roberts says that Southern is “enjoying the market at the
moment”, and has seen the new business opportunity grow as the
“majors” tighten their underwriting criteria – “there was an
element of ‘write business at any cost’ but that has now entirely
disappeared,” he says. Southern does not credit score its
prospective finance customers, meaning that people rejected by
bigger names are turning to his company for loans. “We’re writing
more deals for the same volume,” he comments, “which I think is a
consequence of a significant drop in consumer appetite for bigger
lending.”
But Roberts is not unhappy about seeing a higher volume of
lower-value transactions – quite the contrary. “It’s better to
spread the risk over many smaller deals than fewer larger deals,”
he says, adding that Southern has not changed any of the terms of
its finance products, as he thinks it is important for dealers in
such a turbulent time to have stability from their motor finance
provider: “We might not lend as much in terms of an advance to
trade, but dealers at least know exactly what they are dealing
with.”
Peter de Rousset-Hall, former managing director of Ford Motor
Credit and currently chairman of Woburn Consulting, points out that
dealers on fixed margins, who find the average price of the cars
they sell is falling, will see their pound margin decrease while
percentage margins stay the same, with a potentially damaging
effect on profitability.
But the real danger to the industry, as de Rousset-Hall sees it,
is falls in residual values (RVs), as larger, more-polluting cars
lose their appeal to second-hand buyers. “Dealers and lessors will
see losses with cars coming off-lease thanks to minimum future
guaranteed values promised to customers several years ago, when the
RV outlook was very different,” he says. “It may impact voluntary
terminations. If you are a finance company customer with a Jeep,
and you see its anticipated £10,000 RV move suddenly to £7,000, if
you have made more than 50 per cent of your payments you can hand
the vehicle back to the finance company” – which is bad news for
the financier, who is stuck with a car worth much less than
predicted at the outset of the lease, trying to sell in a buyer’s
market. De Rousset-Hall predicts that canny customers will “go into
PCPs” to avoid RV risk.
Are people paying less?
De Rousset-Hall notes that while a supermini will not suit every
lifestyle, what might well happen in showrooms is that car buyers
“will move into a more economical but better specced model” – so
the average spend per vehicle may not decline as much as one might
have thought. “People who are downsizing will buy at the top end of
a smaller model, but will still want all the goodies they had in a
larger or prestige car, although this depends on what is driving
purchasing decisions: If it’s recessionary pressure, people will
spend less overall, but if it is fuel prices, consumers will not
spend much less, but will want a much more efficient vehicle,” he
explains.
Paul Harrison, head of motor finance at the Finance &
Leasing Association, says that the association’s members do not
expect the trend to greener cars to have a significant impact on
new car PoS finance penetration, and points out that average
advance size may well rise, rather than fall, as a result of a
shift to more efficient models: “The newer technology on greener
cars means that, when compared on a like-for-like basis, they are
generally more expensive than conventional models.”
Jason King, head of market intelligence at data company
EurotaxGlass’s, concurs with the point that ‘greener’ does not
necessarily equate to ‘cheaper’, with the sub-100g/km CO2-emitting
Ford Fiesta ECOnetic – unveiled at the Motor Show – more expensive
than other Fiesta variants, with a starting price of £11,800. “Will
people be prepared to pay that premium?” he asks.
King points out that captives of manufacturers with a strong
line-up of smaller and/or efficient cars may do better in current
market conditions, as their parents’ sales volumes rise, and
finance opportunities grow commensurately. “When the market gets
harder, car buyers tend to stick to what they know, meaning it is
easier to stock, say, Fiestas and Focuses rather than some of the
newer brands to have set up in the UK. This conservative attitude
may also hold back wider adoption among the general public of
alternative-fuel cars,” he adds.
Shift rather than shock
Nigel Williams, business development manager at Black Horse
Motor Finance, points out that in the UK, car buyers have been more
environmentally aware for a longer time than in other countries,
meaning that the move to smaller cars has been more of a “gradual
shift”, and giving motor finance providers time to adapt to the
changes. “It’s safe to say we expect to see some impact on average
balances, although this is affected by which segment of the market
you are aiming for,” he says. “At Black Horse we are looking to
spread our risk appetite, and are now prepared to look at financing
older cars, which has obviously brought the average balance
down.”
Dennis Foley, joint managing director of former General Motors
captive GMAC, now majority-owned by private equity house Cerberus,
is of the opinion that the UK “has been a small car market for
quite some time” – a boon for a GM-linked financier, as the
manufacturer makes the best-selling Corsa and Astra models. “If you
look back 15 to 20 years, there were large luxury sedans such as
the Senator and the Omega, but these have all gone,” Foley
says.
It is not the case that buyers of smaller cars are more or less
likely to use point-of-sale finance than buyers of larger vehicles,
Foley believes – in his view, age is a more important factor.
“Buyers of smaller cars tend to be younger, and therefore have
fewer alternative financing methods – such as remortgaging or
buying out of savings – available to them than older buyers. This
makes PoS finance a good deal, in many cases.
“PCPs are also popular among younger buyers, who tend to be less
wedded to the idea of ownership rather than usership,” he
continues.
GMAC has seen an increase in PoS volumes this year across all
model sizes, Foley stresses: “We’re not necessarily doing more
small car finance [as a proportion of the total] than a year ago –
there hasn’t been a huge shift in model mix, which might cause
problems.”
In the US, he observes, there has been a switch “almost
overnight” from large SUVs to superminis, driven by fuel prices,
“but that’s not the situation here”.
Dreams of an electric future
The UK prime minister Gordon Brown has said that by 2020, he
wants all new car sales to be either hybrids or electric-powered
models, emitting under 100g/km CO2. While manufacturers are working
hard on producing alternatively-fuelled vehicles, there is a long
lead-time on new launches, especially for new and unfamiliar
technologies. They also present singular challenges for finance
companies.
Harrison says: “Whilst vehicles powered by new fuel types – such
as hydrogen – are on the horizon, the key issue for finance
companies will be to calculate residual values once these cars come
to market. Until then no-one can accurately predict their worth –
or indeed if there will be a strong second-hand market.”
Finance house practitioners believe that electric vehicles and
the like “will undoubtedly present an opportunity for the future”,
as Roberts puts it. Williams comments: “I don’t personally believe
that manufacturers will allow fuel costs to rise and rise without
reacting to them [by mass-producing vehicles which use different
forms of fuel]. But I also don’t believe that we will see a
reduction in vehicles on the road, as personal mobility is so
important to people’s lifestyles.”
‘Personal mobility’ may well be the key phrase. While SMMT data
showed new car sales fell by 13 per cent in July compared with the
same month last year, with the year-to-date figure down 3 per cent,
motorcycle dealers, by contrast, are doing a roaring trade. Sales
in July as reported by the Motor Cycle Industry Association were up
22 per cent to over 14,000, a bright spot for financiers offering
loans to bikers – a case of four wheels bad, two wheels good,
perhaps.
