This is a statement that we should never lose sight of in the Automotive Sector and I ponder it today more than ever after some of the recent statements made by Manufacturers regarding all-electric cars, in fact any car that is more emissions efficient including hybrids and mild hybrids.
I don’t want to delve into my personal thoughts here, just how I feel this headline statement may have to change the mind-sets of some manufacturers, and governments for that matter, who by the way are past masters at making statements without thinking and fooling themselves that they can control markets.
The UK governments recent statement about an all-electric car policy from 2040 is interesting, not only in its folly, but because they seem to take for granted the fact that all manufacturers will be producing all-electric cars by then and that if they are not, the lure of the UK market will be so strong that they will have to switch to all-electric production, just so they can serve the UK market.
Well the world is littered with manufacturers who don’t import into the UK so luckily, they have built in enough time to change their mind and I for one am relieved. Quite understandably manufacturers tend to enjoy the business model where they produce the cars that people actually want to purchase. The ones who don’t are doomed to fail and in the recent past we only have to look at the story of SAAB, in order to see how things can all go terribly wrong in the blinking of an eye.
Luckily for the industry it would appear that a “Guinea Pig” for the non-petrol and non-diesel model range has appeared on the horizon and I’m sure that everyone in the industry will be watching with interest. Volvo’s decision, (and I know many of you reading this are my connections at Volvo), to make no solely diesel and solely petrol cars from 2019 is interesting, especially in terms of the rush to market.
It is not my place to comment on the decision, it could equally turn out to be incredibly forward thinking, as much as proving challenging, but it will be interesting to see how the owners of Volvo combine the challenges of switching to all electric/hybrid/mild hybrid production model range and the effect that this policy, being delivered so sweepingly and in the near future, will have on the used car values for Volvo product, (in the short term), in all European markets.
I appreciate that Continental Europe is only one of Volvo’s markets and I have no idea how critical the market is to the overall success of Volvo as a global manufacturer, but one thing I do know is that strong residual values and a dealer network that is successful in the remarketing and retailing of used cars, are of paramount importance to the success of any manufacturers new car aspirations.
Those of you who read my recent post about the importance of PCP’s; http://usedcarbusinessdevelopment.blogspot.co.uk/2017/07/pcps-retaining-customers-and.html and/or who follow my blog, http://usedcarbusinessdevelopment.blogspot.co.uk/ will know my thoughts about how important PCP’s have been in the growth of the new car market in the UK, and I am sure that all manufacturers will have strategies in place to grow other new car markets, by utilising the appeal of PCP’s and the new car ownership benefits that they can offer customers.
In the UK PCP’s have been an instrument of growth by meeting the changing purchasing habits of new car consumers, but regardless of how a new car is purchased, (either via a finance agreement or a straight cash purchase), what happens when the car returns from the first period of ownership is critical to the on-going affordability of new cars.
New car customers may be sympathetic to a view on electric and hybrid cars, but invariably they are not generally willing to pay over the odds, (on mass), to support that view. If new car customers in the UK are now, (in the main), using PCP’s as the financial model of car ownership, and other European markets embrace how PCP’s can be leveraged to grow new car sales, then this will pose an ever growing challenge for all the makers of electric and hybrid models; what happens when they reach the used car market and how much are they worth?
And by this I don’t mean the manufacturer’s perspective of value or the future residual value set by the in-house finance company, I mean it’s actual market value; the price at which a business, be it one of their franchise partners or an independent retailer, will write out a cheque for, in order to acquire that car, confident in the knowledge that the car represents a good profit opportunity for their business.
This is normally the first moment in a cars life when the manufacturer loses control, because manufacturers can’t control the used car market like they can the new car market. For a car to be sold as a used car, it has first to be purchased by a business, either a member of their franchise dealer network or an independent dealer, who is then confident that they can sell that car and make a profit; and this only happens when the buying public perceive the car as both desirable and “Value for Money.”
The fascinating point in all this for me will be how both the dealers and the used car buying customers take to the thought of stocking, retailing and owning these all electric/hybrid/mild hybrid cars; if they don’t then residual values are likely to plummet and this will result in a very challenging new car trading environment for manufacturers.
Why? Well cash purchase customers will be presented with an increasing cost to change to a new car and will be more likely to delay the decision to purchase a new car, and for those customers who have embraced the purchasing benefits of a PCP agreement, (or indeed any purchasing agreement involving a guaranteed future residual value), the future market value is likely to fall short of the guaranteed future residual value required, in order to leave the new cars competitively priced in the new car market on monthly rental basis via a PCP agreement, or indeed any finance agreement involving a future guaranteed residual value.
Now the monthly rental figure for new car customers can be controlled to a certain extent by the manufacturer and their in-house finance company, if they make a decision to bridge the gap between the future residual value and the guaranteed value required, in order to remain competitive in the market, (in terms of the monthly rental/payment value), but this process does cost money.
However, this is not an option available to the manufacturer in the used car market and this is the market that is critical to the new car success of any manufacturer. The used car market is an unforgiving market where the preferred business model is thus;
Businesses invest in stock when it is available at a price that they perceive they can then retail with a margin that will result in them making a profit and if they don’t think the market is ready for the product, because customers are not asking for it, they will not purchase that stock and then actively try to sell it.
Thus my question in the heading for this post, and the answer. It will be interesting to see just how this plays out for Volvo and all the manufacturers producing all-electric/hybrid/mild hybrid cars for sale in the UK and Continental Europe. I know the used car market and how fickle and cruel a mistress it can be, and it will take much planning, resilient approved used car remarketing programmes and successful used car operations within their franchise dealer networks, (and maybe some deep pockets in the short term), to support this drive to all alternatively powered cars and to ensure that demand can be created in the used car market place.
And all this will be vital, especially the ability of the used car operations within their franchise dealer network, to stock and sell these cars in the volumes that are going to be required and at the prices required, in order to support the new car aspirations of this move to all electric/hybrid/mild hybrid production. And complicating matters for manufacturers is the fact that the used car business is very different to the new car business; yes at its core it involves the selling of cars in order to be successful, but operationally it is a very different business and requires different skills-sets from those required for success in the new car market.
Luckily help is available and if this post has resonated with you and you would like to know more about our used car business development consultancy programmes, because you would like to partner with an organisation of professionals who have faced the challenges of fast paced evolutionary markets and know how to develop a successful and profitable used car dealer network programme on your behalf, (in order to keep your new car and total business objectives growing and on track), then we would very much like to hear from you.
The owners of Autoformance have owned and run successful used car operations and been at the forefront of the development of approved used car programmes for a host of manufacturers. For an exploratory conversation regarding our services and how we can develop bespoke used car business development and consultancy programmes on your behalf, please do not hesitate to contact one of our Used Car Business Development Directors; Andrew Banning at ajb@autoformance.com or Malcolm Thomas at mgt@autoformance.com
Alternatively please feel free to call us on 0044 345 057 3177.
For more information about our services please visit our website at www.autoformance.com
Andrew Banning.
Used Car Business Development Director.
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