The list of challenges to car dealerships seems endless, with nothing to look forward to in 2010 except more problems, writes MICHAEL McALEER

AFTER A decade of high-speed growth, the motor industry hit a wall in 2009. The impact was head-on – and bloody. New cars sales fell 62 per cent, more than 70 businesses closed, and an estimated 10,000 jobs – nearly a quarter of the motor-related workforce – were lost.

While the global recession sent motor businesses over the edge, it had been pushed to the precipice over the preceding years.

Following revised EU competition rules for the car industry in 2002, manufacturers could set minimum standards for dealers in their networks. Ambitious plans were laid down requiring dealers to invest in premises, stock and staff. In many instances, the requirements stretched to the colour and size of the floor tiles.

Unfortunately, the creation of these “glass palace” dealerships now littering suburbs coincided with the property boom: dealers paid top prices for property and for builders. Some were able to cover the costs through profits made during the boom years at the start of the decade. Most, however, were forced to borrow. No problem when credit was cheap.

Then came the introduction of an emissions-based tax system. From July 1st, 2008, motor tax on new cars went from a 22-band system to seven bands. Falling into a certain tax band was a deal-breaker. Lower emissions diesels were the big sellers; petrol engines were pariahs overnight.

In hindsight, most dealers reckon they could have weathered the changes and taken a hit on the unpopular models, but the changes came just months before the global economic storm swept across the State.

Consumer spending collapsed, banks tightened credit lines and customer numbers plummeted. The bank situation also had a significant impact on dealers who were financing stock through credit. Working capital became the biggest problem. Shiny new showrooms stood like Ozymandian symbols of Celtic Tiger folly.

To cap it all, during the boom the motor trade had shifted to a low-margin, high-volume model. When sales volume collapsed, margins could not be used to compensate due to sterling-euro rates that made UK imports attractive to Irish buyers. The result: big name closures and job losses.

So what does 2010 have in store? While months of lobbying for a new scrappage scheme was rewarded in the Budget speech, the expectation is that it will lead to between 10,000 and 12,000 extra sales. Otherwise the market will be much the same as this year, partially buoyed by the expected return of some fleet buyers who put off purchases this year. Most distributors estimate the 2010 new car sales figure will finish at about 67,000.

Securing finance for cash-strapped customers remains a problem. While several car firms boast credit acceptances of between 70-80 per cent, it’s from a much smaller volume of showroom traffic, most of whom would have had no problems securing finance at any time.

For distributors, 2010 is likely to be about reducing dealer numbers. The view is that it’s better to have a few profitable dealers than a host of struggling ones.

Claims that customers demand a local dealer have been dismissed. Many distributors privately point to Dublin, where they say a network of two dealers – one either side of the Liffey – is more than ample for most brands. The same is true for the rest of the State, where smaller dealers may become service agents.

The trend of manufacturers taking over distribution here is likely to continue. Our smaller market means amalgamating Ireland into a division of UK operations looks increasingly attractive for car firms. The Irish motor industry has certainly lost its swagger internationally.

For dealers, the problems do not end here. Several years of strong cashflow but low margins attracted some to the greater profits in that bastion of investment: property. They are now being squeezed by a collapse in the core business, and significant losses on investment properties.

While some may happily hand back their new car franchises, relieving themselves of further commitments, losing the new car lustre in exchange for a leaner used car operation is not always financially liberating. For a start, many of their former sales staff start out on their own, taking customers with them. Indications are that the number of start-ups in the motor industry towards the end of 2009 shot up by 20 per cent.

The attrition rate in the used car market is likely to be severe. In terms of servicing, the attraction of small independent mechanics will appeal to a price-conscious public, further harming the one area of the business where dealers were hoping to cash in.

Amid all this turmoil comes a global revolution in the car industry. The internal combustion engine that has powered vehicles for over a century is likely to give way to electric power. Brands such as Renault, Opel and Nissan look set to sell mainstream plug-in family cars in Ireland in the next two years. The ESB is committed to a support infrastructure for such vehicles in the next decade.

Across the business world established business models are collapsing and the motor industry faces a tumultuous future. While the new scrappage scheme offers some respite, major changes – and more closures – seem inevitable.