Further headwinds as sector faces uncertain 12 months

Philip Nothard, Insight & Strategy Director for Cox Automotive, reveals the headwinds the industry is facing this year, how this is impacting the new and used markets, and what this means for sales.

The sector has had a tough time in recent months. However, industry experts – Cox Automotive included – were optimistic for a slow but steady recovery throughout the year, with supply returning and price rises settling down. Still, as we learned with COVID-19 and now the distressing conflict in Ukraine, you can never truly predict what will happen.

Setting geopolitical issues aside, the first quarter of 2022 has shown that vehicle volumes will not return to pre-pandemic levels any time soon as semiconductor and raw material shortages continue to grip manufacturers worldwide. 

And even if supply improved, would the consumer demand be there? The rising cost of living is having a profound effect on millions of people across the UK. Rising inflation, energy prices, and interest rates create a perfect storm that will leave most households with less money to spend.

Cox Automotive predicts that the automotive market may never return to pre-pandemic levels as new and used vehicle sales continue to be hit by several headwinds. As a result, we have downgraded our new and used car forecasts to reflect the current state of the industry and ongoing challenges.

I believe businesses should look to adapt and transform existing operations to meet changing customer requirements and demonstrate flexibility. And while profit opportunities still exist from the manufacturer to the end retailer, businesses must be operating very smartly to seize them.

Another blow to new car recovery hopes

We entered the new year knowing that new car supply would remain constrained for the foreseeable future but hopeful of a smooth and progressive recovery throughout the year as semiconductor and raw material supplies steadily returned. However, with the appalling conflict in Ukraine impacting the automotive supply chain and the entire logistics and distribution network, that recovery looks murkier than ever.

None of us foresaw the Ukraine conflict at the start of the year, but it’s added an additional layer of risk to the market, and as a result, Cox Automotive’s predictions for the year must be revised.

But even without the Ukraine crisis, Cox Automotive would have been looking at a revision to the forecasts. At the same time, there have been anecdotal reports that manufacturers have begun to fulfil orders from a supply-starved leasing sector and even reports of tactical registrations (albeit nowhere near pre-pandemic levels), supply has not picked up in the volumes anticipated.

Much of the registration activity in quarter one came from the long-awaited fulfilment of orders made 12 or even 18 months ago, which is likely to be the case going into quarters two and three. However, there are also reports of this year’s order books already being full, so it’s clear the backlog of orders will only grow, and new orders won’t turn into actual registrations until at least H2 2022 or even into 2023.

Many of the cars eventually rolling off the production line are missing specifications such as touch screens, heated seats, and sat-nav. This workaround is a short-term solution many manufacturers are implementing due to the ongoing semiconductor shortage but means consumers are often compromising on what they initially wanted in order to receive a car they ordered over a year before. The effect of this on residual values is as yet unknown. Still, there will inevitably be a consequence when cars manufactured during this period compete with correctly specified cars in the used market several years from now.

Revised new car forecasts

As a result, Cox Automotive has adjusted its new car forecasts for 2022, with the latest projections published in AutoFocus. Its baseline scenario sees Q2 2022 end on 436,286 registrations, a reduction of -9.9% down year-on-year, while Q3 2022 is now predicted to end on 483,433 registrations, a +22% increase year-on-year. In addition, Cox Automotive expects the baseline scenario for the full year to end on 1.65 million registrations, a +0.2% increase year-on-year, but a -13.8% downgrade on its previous forecast at the start of the year. 

Is the used car bubble about to burst?

For two years now, the used car market has enjoyed a period of unprecedented performance. Consumers who have grown tired of lengthy wait times on their new car orders have increasingly turned to the used market, driving record demand levels and, in turn, trade values. However, a market like this can’t last forever, and although we do not expect performance to drop off a cliff, could the bubble be about to burst?

Current signs indicate it could be. Consumer confidence is weakening, with the UK consumer confidence index showing a five-point drop to -31 index points in March, its lowest reading in 17 months. This indication that consumer spending appetites are waning should come as no surprise: inflation, soaring energy costs and national insurance hikes are causing a massive rise in the cost of living. The knock-on effect on the used car market is inevitable.

The used vehicle market remains crucial at a time when new car supplies face further pressures. Dealers will continue to rely on their used car programmes to support their businesses while they simply cannot get the new cars they need. The used market remains a crucial area of growth and investment for many, whether from current players or new disruptive entrants.

As always, used car supply relies heavily on the new vehicle market. But while today’s used car market is demand-driven, there remains continual pressures on new car supply, and this is having an impact on the used vehicle parc. The result could be a supply-driven used car market that sees prices maintain their current record levels or increase further.

But for the time being, the market is coping extremely well and has demonstrated resilience to these external pressures, with 7.5 million used car transactions in 2021. Although this may not have necessarily been a result of strong retail demand, nevertheless it’s a positive result compared to 2020.

Consumer demand still exists, but the effect that reduced consumer confidence will have on the market remains to be seen. At least for now, retailers are seeing increased stock turn and a desire from consumers who are not prepared to wait the lengthy lead times to buy a used vehicle instead – but this could all be about to change.

Revised used car forecasts

Due to a combination of the headwinds mentioned previously, Cox Automotive has also adjusted its used car market forecasts for 2022, as first seen in the latest edition of AutoFocus. Its baseline scenario sees Q2 2022 end on 1.91 million used car transactions, a reduction of -11.9% year-on-year, while Q3 2022 is now predicted to end on 1.95 million transactions, a -4.2% decrease year-on-year. In addition, Cox Automotive expects the baseline scenario for the full year to end on 7.41 million transactions, a -1.6% decrease year-on-year, and a -1.3% downgrade on its previous forecast.