What next for the automotive industry?
The motor industry is evolving at an unprecedented rate, with emerging technologies, changing mobility trends and environmental concerns setting the agenda.
Business Leader partnered with Barclays Corporate Banking for a roundtable with some key players from the sector to ask: What does the future hold for the automotive industry?
What are the challenges facing the contemporary automotive industry?
Tim Bagnall, MD at CCR Motor Co: “Electrification – the transition from combustion engines to electric – is having a massive impact. I think general environment and social responsibility at board level, plus government policy, is driving the change through, and the pace of change is just immense.
“The challenge in the marketplace is getting the customer to understand that change, to understand the technologies. The buying public don’t really know what’s going on.
“From an infrastructure point of view too – how we charge these vehicles out on the roads – there are massive, massive challenges for everybody in all sectors of the industry.”
Robert Freeman, CEO of Malvern Tyres: “When you get down to it, where is the infrastructure? Are you going to have electric wires hanging out of shop windows?
“The public will not accept it unless the infrastructure is right. If the infrastructure is not right, they’ll do a u-turn, they’ll have to. I just can’t see the infrastructure spend.”
Martin Wilson, MD at Scot Group: “Is electric the ultimate answer anyway? Or is it just a stepping stone to something else? Why would you put massive investment into electric if it’s not the ultimate answer?”
Michael Finn, CEO at Wellington Motor Group: “There are still some major manufacturers investing very serious amounts of money in diesel technology. Everybody says diesel is finished, petrol is finished – why are they investing so much money? It’s confusing, it really is.
“If the world wobbles again – and we’re going to have another recession at some point – all of this gets put back at a dramatic rate.
“The government bringing back its petrol and diesel end date from 2040 to 2035 was a nice statement for them to say, it makes good headlines, but I honestly don’t think they knew what they announced. When it comes to hybrids, I definitely think there’s going to have to be a bit of back-pedalling.”
Kieran Hector, FD at Carbase: “It is just a political target, and you’re right, they don’t fully understand it. There’s obviously a huge amount of climate change pressure at the moment, but it’s the technology and infrastructure that will dictate how quickly all this is possible.
“In Norway, 40% of cars sold now are electric, so I think with the right push from the government to incentivise it and help with the roll-out, it can be done but I think the UK – despite its climate change claims – has a long way to go yet.”
Is there the same demand for electric vehicles (EVs) in the rental market?
Wilson: “Not at all. The investment at point of entry is huge. Plus, there’s so much inconsistency on diesel engines in the press. If you talk to the manufacturers, the diesel engines are more efficient, have less pollutants than petrol engines, but the big headlines are that we’re going to ban diesel – it’s crazy.
“My thoughts are electric vehicles will be a stepping stone for potentially hydrogen, certainly for commercials and trucks, and I agree the infrastructure is not there at the moment. But you could invest significant amounts of money into infrastructure to charge cars that could be obsolete within five years – trying to keep pace with that is incredible.”
Hector: “There is a problem as well with the physical space for charging, as it takes a lot longer to charge a car than it does to fill up with petrol or diesel. Having a petrol station equivalent where people could park for 45 minutes… the numbers don’t add up.”
What does the government need to do to understand the sector and get this right?
Freeman: “Stop playing games, and start being a government. It’s all about headlines and social media.”
Bagnall: “Communication for me would be the key. If I make a statement in our business that I want to do something, the question is always how are we doing to do it. You’ve got to have a strategy.
“And that’s the bit I find frustrating; they say by 2035, hybrid’s out. But unless they come out and say this is how we’re going to do it, that’s where confusion comes from, because they’ve come up with an idea and not told anyone how to do it.
“I don’t believe they’ve consulted with Society of Motor Manufacturers and Traders (SMMT), with manufacturers, not in any wholesale way, not spoken to anyone who does this for a living and come up with a plan.”
Finn: “You see all the headlines, but when you dive into it there’s not as much substance as you would want there to be. We want – and we plead for – clarity.”
How is the supply of electric vehicles?
Bagnall: “Supply has been genuinely difficult. We have a lot of Mitsubishi garages, which is a little easier because they have been in the flow of it for six years now. But supply is an issue for definite.”
Finn: “I think manufacturers are just thinking about China and North America; that’s the driver. The reality is, if they move the pendulum in China just a little bit, they have made it.
“So you’ve got one bit that is legislation-driven but the other side is commercial opportunity; the point I made earlier about a lot of manufacturers still investing in diesel, that is because they clearly see a market in certain territories, and it’s a lot bigger market than we’ve got. The UK market will battle for supply because the percentages are so tiny. You’re looking at 1.5, 1.6% in that sector.”
Wilson: “EVs are more expensive to produce, the margins are thinner, you haven’t got the profits driven through after-sales, so those things combined make electric vehicles more difficult. And the residual values aren’t as strong – or haven’t historically been as strong – as internal combustion engines.”
Hector: “There’s not enough genuine demand for them at the moment. We sell used cars, so we have to deal with electric very little at the moment, but we have a fleet of 50 company cars, and we took on eight or nine electric vehicles and they have had all sorts of problems with the range and ability to use them. The headline numbers don’t stack up with the practicality. The public isn’t ready to follow up on all this political talk.”
Why isn’t the demand there?
Freeman: “Because they know how difficult it is. I had a rush of blood and thought I might get an electric vehicle, but I spoke to a mate who has one – he couldn’t get back from his holidays, the charging point was vandalised, and I’m thinking we’re just not ready for this. It doesn’t work.”
Finn: “The people who have bought into it love it, and they would find it really difficult to change back. If they can live with it, they absolutely worship it. The problem being is that still only fits that amount of people.
“And of course they are perfect for city centres, perfect London vehicles, but you can’t charge out of your flat across the pavement with a lead, can you? If you live in the middle of nowhere you can have your home charging point, but then you’ve got this range anxiety. I think there’s an awful long way to go.”
Hector: “I think a lot of people like the idea of electric cars, but they just can’t make it work. I’m not sure there’s even an electric charging point where I live because there just isn’t the demand.”
Bristol is the first UK city to announce a diesel ban, but others will likely follow. What will be the impact?
Hector: “I think the local authority has got it wrong by trying to impose a flat ban. Suddenly the whole middle of Bristol is mapped out as banning all diesel. I don’t think people understand the implications of that, and we’re totally in the dark about whether that will be implemented in that form or will it be watered down.
“If you’re going to push for change, it has to be positive incentives to push people towards something rather than trying to ban something. The amount of upheaval from a blanket ban across the middle of cities is going to seriously threaten the survival of some businesses.”
Hector: “We’re looking to the future and trying to expand. I couldn’t tell you where we’d need to go, but we certainly wouldn’t put another one in any city talking about the same kind of ban.
“But where else? It’s presumably going to be quite fashionable for local authorities to say we’re going to do that as well.”
Freeman: “We run 30 vans through the centre of Bristol every day, but we won’t be able to do it. It’s been going 70 years that business, but it doesn’t work; they say things that look great in headlines but they don’t think things through.”
We’ve talked a lot about challenges. Where do you see opportunities?
Finn: “Because of the dreaded Brexit word, it feels as though the world has been up and down, but it’s settled down a bit. We have settled down, and our clients have settled down.”
Tim Lincoln, Partner at Grant Thornton: “Speaking to one client recently whose volumes have been steady, actually profitability has improved and they’re starting to get back to their past percentage of profits. It’s through focusing on some of the fundamentals, and putting in more incentives around things like after-sales, where the margin is. I think there’s profitability to be made if you’re focusing on the right things.”
Wilson: “I certainly think post-election that consumer confidence seems to be better. There seems to be a level of confidence that has come back in. Unfortunately we haven’t seen the residual value bounce that we lost from April onwards last year, but it’s definitely getting better. That’s much-needed because last year was tough.”
Darren Lakin, Aftersales Director at Wessex Garages “We’ve certainly seen that. Consistently over the past 12 months, after-sales has been the bedrock of the business, while new and used car sales has been weak.
“It’s a consistent approach to some very basic details which drives profitability, then you have a much more buoyant business – but we need all three facets of the business going at the same time.”
Is it the same picture for new and used cars?
Keith Parry, Relationship Director at Barclays Corporate Banking: “The headline new reg stats were a bit disappointing, 7% down. But all the dealers I spoke to said January was fine. Why do we put so much emphasis on that headline for new registration stats? If your aftersales is strong and you’re on top of used, then as a business you can cope with one of those plates not spinning as well.”
Bagnall: “The end market is not there, so you end up with an oversupply, which results in the residual drop we had from April. All the 2016 peak registrations coming off contract hires, there was just a flood of three-year-old diesel vehicles. The market had to realign. That hurt us all, and it was really painful last year.”
Hector: “We’re finding it an ongoing problem that every year the used vehicle market just seems to drop and drop. It’s just a race to the bottom. It’s harder and harder to get a supply of cars at a margin we can make work and I don’t know where that ends. The typical margin in the industry is about 1%, so it’s not like you have a lot of scope to absorb it.”
Freeman: “It is a race to the bottom – especially with increasing labour costs. We’re suffering from real creeping labour costs for MoT testers and technicians. The growth there is about 20% in the last few years, so you’re squeezing your margins all the time, with prices going down and labour costs going up.”
Is the sector facing a big threat from any disruptors?
Bagnall: “Mobility as a service is one of the megatrends coming through. It’s subscription-based – the idea that you pay £300 a month, or whatever, and you can have a car for three months, or a city car during the week and an SUV at the weekends.
“Our Japanese parent is a big rental firm, and that’s how they are pushing MAAS, not through dealers, but as the preserve of the rental operations because they are geared up to do it. That swap and change of SUV for Saturday, a sports car for Saturday night and a city car for the week, I don’t see that as a dealership issue and I think ultimately we are going to lose business.”
Wilson: “When you’re talking about swapping cars two or three times a week, there’s a huge cost. If you look at some of the initial out-and-out subscription services, they are hugely expensive, and Mercedes-Benz has pulled out of the UK because there’s just no market for it.
“The opportunity for someone to step into a sports car for the weekend, city car during the week, and an SUV for whenever – the cost of that is enormous.
“The point of someone wanting to not own a car will come. But I don’t think everyone is ready for it yet.”
Finn: “Ultimately there comes a time when a disruptor has to make a margin. In our business, it costs a lot of money to move a widget, it really does. When you start seeing those make serious money, you’ll see a lot of people want to get on board.”
How is the automotive labour market? Are there issues with skills, recruitment and retention?
Hector: “Technicians are the biggest problem – there just seems to be a shortage.”
Freeman: “It’s not trendy, is it? Truck tyre fitters is ten times worse. We could double our truck business if we had the staff. They are earning £30k, £40k, £50k, these truck fitters and they are still leaving. The younger generation have changed their expectation of life, and they don’t want to get their hands dirty. We need to address this.
“I have 20 MoT stations, and I’m actually looking at the viability of MoT testing because it doesn’t make money. You’re looking at £30 or £40 for an MoT, and the MoT testers have gone up to £30k; it actually is making MoT testing unviable.”
Lakin: “That has been driven historically by the race to the bottom. MoTs at £19.99 – we stopped that, £40 is our minimum. Otherwise it is not viable, because the cost of labour is skyrocketing. A guy doing 10, 12 MoTs in a day doesn’t cover his costs.”
And what is Barclays’ view of the sector?
Howard Noye, Relationship Director at Barclays Corporate Banking: “Negotiations around the UK-EU trade deal will be key to the industry’s long-term prospects, while motor dealers will also be focused on the recent government commitment to greener vehicle production by 2035.
“If the infrastructure necessary for electric vehicles is committed to wholeheartedly, then the public’s appetite for more environmentally-friendly modes of transport could provide a significant boost to the UK car market.”
Parry: “There are a lot of sectors, with the economy being the way it has been over the past couple of years, which are challenged. But since the election result in December, the market has been increasingly optimistic about an increase in consumer spending on big ticket items. Barclays remains keen supporters of the sector.
“There are a lot of big headlines, and a lot of it may happen over time, but I think it will be evolution not revolution and I think the sector is really resilient to cope with that change, I really do.”