European Recovery May Drive Up U.K. New-Car Prices

A recovery in the German markets may end the golden times for new-vehicle buyers in the U.K.

Car-pricing expert CAP Automotive says soaring new-vehicle sales in the region this year have been driven by aggressive price deals and other incentives as manufacturers diverted supply away from dead-in-the-water European markets.

But CAP Automotive chief forecaster Dylan Setterfield says the U.K.’s low-priced new-car boom may be living on borrowed time.

The main threat comes from Germany, where signs are growing of a car-market recovery that will encourage manufacturers to divert more supply to mainland Europe.

Setterfield says in a statement that German recovery not only would mean fewer incentives being offered in the U.K., but also could result in longer waiting times for certain models as production bottlenecks inevitably would arise.

Despite U.K. deliveries growing 10.8% to 1,794,924 units this year, Setterfield says manufacturers would rather sell cars in mainland Europe, because changes in exchange rates have slashed the profit on every car sold domestically over the past 12 months.

CAP says the financial crisis stopped the mainland European market in its tracks and it believes there is pent-up demand in Germany for more than 400,000 new cars. It estimates the figure for mainland Europe at more than 2.8 million units.

To meet this renewed demand, output will have to be switched to left-hand drive, which will increase lead times for new-car orders in the U.K. as production bottlenecks cause delays.

The reduced profitability of new-car sales in the U.K. compared with Europe is revealed by CAP Automotive’s database of new- and used-car prices.

The median, or typical, list price in CAP’s database is £25,425 ($40,604) and a manufacturer selling a vehicle for this price in September 2012 would have returned €32,086 ($51,242). In contrast, the same vehicle this September would have returned €29,646 ($47,346), a drop of €2,440 ($3,896).

“This illustrates why manufacturers will divert their attention to Europe as soon as they believe the market is picking up there,” Setterfield says.

“As soon as they see the opportunity for more profitable business elsewhere, there will be a vastly reduced need to offer the kind of incentives to drive new sales in the U.K. that we have seen this year.”

Setterfield says there are signs that recovery already is beginning to happen in Germany in particular.

“We tracked a stable used-car market in Germany during June and July, and then a usually predictable drop-off in demand and prices during August failed to materialize,” he says. “This kind of behavior in the used market is often a precursor to improvements in new-car sales.”

Germany’s new-car sales look to be turning a corner, Setterfield says, as September’s year-on-year figures were down only 1.2% compared with a 5.5% drop in August. “Many observers are now expecting a return to registration growth by the end of the year.

“Not only will U.K. customers see fewer deals on offer, (but) when European recovery does gather pace, order times will increase for many models. Looking back to when demand was increasing in the eurozone, from late 2009 until 2011 when the euro crisis left the market in a virtual coma, lead times in Britain grew in some cases to a year or more.”

Setterfield says pressures on supply also could come from Spain, where a highly successful scrappage incentive scheme to boost new-car sales has just been extended.

“Overall, the picture is of a potential turning point for the new-car market in parts of Europe, rather than a definite and sustained recovery,” he says. “Given that manufacturers are so keen to do more profitable business than they are managing to achieve in the U.K., Britain’s cheap new-car bonanza is now on borrowed time, with the only question being exactly when the taps will be turned off.”