Another tough year for motor sector

While car sales recovered somewhat, the motor trade here faces a struggle to prevent further job losses, writes MICHAEL MCALEER, Motoring editor

WHILE IT WAS a year when the nation wallowed in the depths of recession, the motor trade in Ireland can at least look back on 2010 as a time of some stability after a disastrous 2009. End-of-year sales figures of 88,373 are impressive when you consider the 55,578 new cars sold the year before.

The Government’s scrappage scheme for cars of 10 years or older, introduced at the behest of the motor trade, has benefited the sector, with nearly 17,000 new cars sold under the scheme last year. The sector’s lobby group, the Society of the Irish Motor Industry (SIMI), suggests an extra 10,000 new cars will be sold under the scheme in its six-month extension.

Even then, it’s very unlikely to herald a return to the boom times of the early 2000s.

Expectations for new car sales vary significantly between experts, but if you were to average out the estimates from some distributors, a figure of about 75,000 to 80,000 new car sales would seem to be the most likely outcome at the end of this year. If it slips below 70,000, however, further turmoil and job losses will result. Even at 80,000, there is believed to be pent-up demand for replacing cars in the current fleet. While families are reconsidering their transport needs and reducing the number of cars on their driveways, there is still a need for the replacement of a number of the national fleet of 1.9 million privately-owned cars. Figures for 2009 from the Department of Transport show that, while there remained 2.5 million licensed vehicles on the roads, that was down 29,608 on previous years.

Accepting that families and businesses will cut their fleets, there is still a need to replace cars at the end of their lifecycles. That replacement occurs for buyers with cars of differing ages, up the motoring food chain until someone at the top buys a new model. Many dealers and distributors still believe that, even allowing for a reduction in the fleet, 75,000 new cars would still be significantly below the replacement requirements for the national fleet. As people keep their used cars longer, the repair and maintenance costs will start to make a new purchase more sensible.

One short-term problem in the market might be a shortage of used cars in Ireland from 2009 and last year. Some of the shortage will be assuaged by UK imports, but the UK also recorded a decline in new car sales during those years. As a result, used car prices in the UK for cars from this period are quite strong.

Aside from the 75,000 new-car buyers, the likely need to replace ageing vehicles is therefore going to help with used car sales. This may be the lifeblood of the trade for the next few years, which is likely to see further reductions in dealer networks by car brands.

Whatever about their extra-curricular investments made during the boom years, the motor trade is no different from other retail sectors in that it needs working capital loans to trade. It’s unlike many other trades in that many customers also require finance for their purchases. With Central Bank figures for November showing household lending down 4.9 per cent and commercial lending down 2 per cent, access to cash is going to be an issue for 2011. That’s part of the reason some car firms with wholly-owned distribution arms here have opened their own finance arms. VW Bank started lending directly to customers at the start of 2010 and BMW’s finance arm begins trading this week. Not only does it plan to lend to customers, but a subsidiary arm, Alphera Finance, will also operate as a finance partner to non-BMW outlets.

Dealer networks themselves have been cut in size since the onset of recession. As car firms took back direct control of their brand distribution in Ireland, many have instigated restructuring of their networks. Between 2008 and 2010, dealer numbers are estimated to have fallen by 13 per cent to just over 530. While many have closed, others have either reopened outside franchise networks, selling used and imported cars, or operate as service arms to big brands. While a focus on used car sales will help them survive, it’s going to be a cut-throat year in the used car game.

The challenges don’t end here. Buyer trends are pointing clearly towards downsizing, with customers demanding smaller cars but refusing to accept any reduction in either safety equipment or creature comforts. Customers also expect to pay significantly less for the small cars, simply because they are small. That’s a massive challenge for car firms already working off tight margins on small cars. The only refuge from this consumer demand is through economies of scale, a point that has not been lost on the likes of Carlos Ghosn, head of Renault-Nissan, and Sergio Marchionne, boss of Fiat Group and the recently purchased Chrysler family of brands.

These industry leaders believe that in the medium-term only the very biggest producers will survive. Their point is further underlined by the increasing consumer demand for clean energy vehicles. These require massive investments in research, something smaller car marques will struggle to match. In the car market it seems that size – and scale – really does matter for survival.

Those are the global issues facing the industry, but they’re reflected in consumer demands in Ireland. New cars will tempt buyers, while the continued improvements in fuel efficiency will capture the attention of logically-minded buyers. Whether or not they can attract more than 75,000 new buyers – including those still interested in taking part in scrappage – it’s going to be another challenging year for the motor trade in Ireland, regardless of the stylish or innovative new models that come our way.