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Can used cars drive stalling UK car industry?

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

Is the UK car industry at risk of stalling? As we go into the last lap of the UK’s pre-Brexit negotiations global car makers have become increasingly vocal about the future as they see it. And it’s not looking shiny.

Can used cars drive stalling UK car industry?

BMW has warned that it could move production of the Mini outside the UK. Nissan is said to be planning on cutting one of the shifts at its UK plant, and taking up to 400 jobs with it, while Toyota has reportedly voiced doubts about the possibility of building any new models at its car factory in Sunderland.

And it’s not all talk. Every major mass market car manufacturer in the UK recorded a fall in production last year, except BMW’s Mini brand. The latest figures from the Society of Motor Manufacturers and Traders revealed that new investment in the UK by carmakers and their suppliers was almost 50% lower last year than the year before. Total new investment in the UK came to just £588 million in 2018, down 47% on the year before.

It also revealed that production too had now reached its lowest level in five years, with 1.52 million cars made in UK factories in 2018. While the UK car market has continued to decline steadily over the past year, there was a steep 20% drop in car manufacturing in January alone - proof that car makers are changing gear ahead of Brexit. But also in response to the fact that consumer sales are also stalling.

And not just in the UK. Falling exports to China, the world’s largest automotive market, and a consumer backlash against diesel vehicle, is also evident.

Just last week car dealership group Inchcape, which sells brands including Audi, BMW, Jaguar and Land Rover, saw its shares crash by 64% on the back of a slump in profits, blamed largely on a fall in the sale of new cars.

The company blamed weak customer demand as new car sales declined 7% in the UK, leading to a 72% drop in Inchcape’s trading profit. Its sales of new diesel cars slumped 30%, and the group said diesel vehicles now made up 45% of sales compared with 85% a year ago. Overall revenues rose slightly from £8.9 billion to £9.2 billion in 2018, but pre-tax profits fell from £369 million to £132 million.

Inchcape, which operates in 32 countries across Europe, Asia, Africa, Australasia and South America, said it was further hit by stringent new rules on emissions — the Worldwide Harmonised Light Vehicle Testing Procedure regulations — which led to supply shortages for certain models in the second half of the year.

Next week we hear from Lookers, which has already acknowledged the problems the industry is facing and taken steps to mitigate the impact.

Back in November it said its focus on improved aftersales service and used car sales growth was helping to offset falling new cars sales in the third quarter of the year. The aftersales service business, representing 42% of total gross profit, saw turnover and gross profit increase 5% and 6%, respectively. Turnover of used cars, meanwhile, increased by 10%, while gross profit from used cars increased by 10% during the period with improved margins per unit, the company said.

Turnover and volumes of new cars reduced by 7% in the nine months to September, in line with the wider market, on the back of a shortage of supply of vehicles that had been tested under the new emissions regulation, the company said. Overall, total gross profit from new cars fell by 5%, while margins and profit per unit were higher than the previous year. However, the company has maintained its full-year expectations so all eyes will be on Lookers on Wednesday for its assessment of the condition of the UK’s used car market.

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