Bacon reports dealer network 'unsustainable'

Peter Bacon's economic report of the motor sector gives little comfort to those working in the industry, reports MICHAEL MCALEER, Motoring editor

FOR THOSE who this week lost their jobs at the Casey dealerships in Co Mayo, joining the growing number of unemployed from the motor industry, the strategic review of the sector by economist Peter Bacon offers little comfort. The report paints a picture of an industry in the throes of upheaval, predicting recovery to 2007 levels may be four years away.

When the market stabilises, it’s clear that some level of consolidation is inevitable. In simple terms, that means the current scale of the dealer network, with an estimated 540 franchised dealers and approximately 150 others, is unlikely to survive in a market the report says is less than that in the Manchester area.

“Even in the peak sales year of 180,000 new cars in 2007, there was an average of only about one new car sold per trading day per franchise dealer. It’s now believed to have fallen to one sale every three days.”

In terms of dealership overheads, the Bacon report states that there has been an upward trend in labour cost per unit of sales “which would certainly appear to be unsustainable”.

“If labour costs per car sold in 2009 were to fall to their 2007 level, labour costs would have to be cut by about 25 per cent.”

It finds that the new car stocking cost for dealers is “almost three times its level in 2006-2007 and about double its long-term level”.

In the report, Bacon defers from offering any predictions as to the likely size and scale of what he refers to as a rationalised sector, but it’s clear manufacturers will play a greater role in both distribution and dealer networks here.

“This will likely mean a loss of independence, but the era of dealers working independently rather than as part of a supply chain is passing,” it states.

The current structure of the industry is set for a radical change. Those decisions are going to be taken at corporate level, but the report is more specific about the moves Government can make to bring some short-term stability to the industry.

The proposals range from practical to ambitious. Certainly a two-year scrappage scheme co-financed by industry and Government could help boost sales and has proven successful in other European markets. It estimates that 52,000 additional sales, to people who would not have bought a new car in this period, could be created, generating approximately €317 million in tax, while the scheme could have a limited Government outlay of €100 million.

Another practical proposal that might help the industry – in light of the weakening of sterling against the euro and with parity possible in the near future – is the introduction of a VRT (Vehicle Registration Tax) offset scheme.

At present, Irish car prices carry a significant VRT burden and that makes them uncompetitive on the UK market. If sellers could be credited with the VRT element of a used car value, these cars could then be sold at competitive prices in the UK. The report reckons such a move would be revenue neutral as most of the excess used cars that would be exported would be at peak trading months, while the lost revenue would be recouped from the imported used cars coming into the State later in the year.

The seasonality of the market has long been a problem. A great deal of this is down to the prominence of the year on number plates that creates a surge in demand at the start of each year. The report recognises “an excess emphasis on the year of first registration as an indicator of the quality and value of a car, although this feature should be only one factor in determining quality”.

It also criticises the inclusion of the county initials on plates for distorting prices. In terms of a replacement, it suggests a sequential system such as that used in Britain, but accepts there are plenty of alternatives.

Arguably, a more ambitious proposal is a 25 per cent cut in VRT. Given the turmoil created by the change to emissions-based tax last July, many in the industry would be loathe to introduce yet more instability to the market. The removal of VRT is in line with the proposals put forward by the recent Commission on Taxation report. It also argued for a move towards usage tax and away from the punitive system currently in place that seems to penalise ownership.

However, while the report highlights various methods of introducing the switch, Bacon doesn’t offer any in-depth advice on how to counteract the impact such a drop in VRT might have on used car values. The report states: “If the reform is introduced at the start of the year, it is expected that the disruption would be less, particularly since the stock of used cars in dealers is now lower than in July 2008. However, it would not be eliminated and the potential for changes to VRT to disrupt the sector and cause losses is still present.”

Its only suggestion is that Government should consult closely with industry. Given the diverse views of many industry players, the likelihood of agreement on one approach seems slim.

It also doesn’t take into account the appetite of Government to introduce such fundamental changes at a time when its tax revenues are already under severe pressure.

Finally, while it says that the impact on dealers might be negated by the fact they have lowered their stock levels, it doesn’t take account of the impact on private motorists, who would bear a significant loss on their resale value.

It remains to be seen how influential the Bacon report will be on the Minister for Finance’s Budget preparations.

The fact that several “concerned motor dealers” sponsored the report highlights a realisation that the motor industry landscape in Ireland is going to radically change in the coming years. This will be led by the manufacturers in conjunction with dealers willing to adapt to the changes.

The Government’s role will be to bring some stability to the market and remove the inefficiencies and problems created by current tax and regulatory issues. Many of these problems were masked by the economic boom. Such a cushion is no longer available and the inherent problems in the sector are being laid bare.

If there is good news, it’s that Bacon sees long-term growth in the industry. “In the longer term, demographic factors and relatively low car ownership rates in Ireland combine to suggest that the stock of cars is likely to grow. Sales of cars are projected to stabilise at about 240,000 per annum if some of the changes are introduced.” It’s now a question of who will be left to reap the rewards.