How to recover from the perfect storm


NEWS ANALYSIS - CONSUMER CONFIDENCE:David Baddeley, managing director of Volvo Ireland, outlines what needs to be doen to reassure buyers.

THE CAR industry has, in the last months of 2008 and the beginning of 2009, faced a perfect storm – the confluence of a reduction in available credit for buyers, the weakness of sterling, a change in the tax system reducing the value of used cars in Ireland and a significant fall in consumer confidence.

The key question for those in the industry now is: what will encourage customers to buy cars again?

Despite the pervading doom and gloom at present, it will come as a surprise to many people to be told they may be better off changing their car now, rather than holding out for “better times”.

The unprecedented fall in the new-car market in Ireland has been well-reported in recent months. The rate of decline has been greater than virtually all other European countries.

While there are experts who can inform us in detail about the impact of credit availability to Irish banks, what we are seeing on the ground is that, for a customer with a decent credit history, finance is available. Take Volvo Car Finance. Its only reason for existence is to fund the purchase of new and used cars. It is most definitely open for business.

Unfortunately, as has been reported by one of the major banks recently, the availability of house mortgages is not enough to restore confidence in the housing market. The same appears to be true for cars.

Over the last six months there has been a massive realignment of used car values in Ireland, driven by the weakness of sterling and the emissions-based tax system that came into effect on July 1st. This has cost car owners dearly.

However, many Irish dealers have now taken the pain and adjusted their prices to this new reality. Which brings us to the last element of the perfect storm: customer confidence.

Why should someone change his or her car right now? It could be the most prudent financial decision an individual can make. Running costs can be significantly less for a new, CO2-efficient car, benefiting from lower fuel and road tax costs as a result of the revised VRT (vehicle registration tax) and road tax.

In addition, between the discount that can be negotiated and the price a dealer will pay for your current car, there is now real value available in Ireland. For example, many of the dealers that represent Volvo, along with others, are offering significant deal enhancements to people who are in the market to buy now.

However, concerns about the possibility of impending redundancy loom large when considering a major purchase. Unemployment is increasing, with forecasts that it may reach 15 per cent. For further security, a new loan with the benefit of payment protection insurance, covering redundancy and other risks, can remove that concern.

So a new car, with lower CO2emissions and lower operating costs, may well be the prudent financial decision, funded in part by a loan insured against the risk of redundancy.

Buying a car might actually put some people in a better financial position.

The Government also has a vital role to play in restoring consumer confidence. With no indigenous car makers, the car industry might not appear to be at the top of the Irish Government’s list for help.

However, the car industry employs 50,000 people in this country – through supplying parts, making repairs and retail dealerships – and contributes billions of euro in the form of VRT, VAT and motor tax. It is a cost-effective tax collection mechanism.

Actions by the Government to encourage consumer confidence are key to maintaining the industry and protecting jobs. Ideas like the reintroducing of a scrappage scheme or a Government-provided payment protection insurance via the social security system could make a significant difference.

The overwhelming focus on January for new-car registrations also works against both the customer and the industry. There are some benefits (the registration plate is easily remembered) but now is the perfect time to at least consider legislation to deliver a more even sales pattern through the year.

Car buyers and the car industry have each faced a greater level of change in the last 12 months than in a generation. But, at the end of the day, buying a new car remains an exciting experience for most, while delivering a substantial chunk of tax to the Government to help bridge the budget deficit. And, by purchasing from Irish retailers, we can protect Irish jobs.

Now that’s a win-win position worth pursuing.