Risk of oversupply with new Chinese entrants

OVERSUPPLY could begin to push the new car market back towards the kind of peaks seen in the mid-2010s, members heard at a meeting of the Vehicle Remarketing Association (VRA) earlier this month.

However, a return to nearer 2.5 million sales would be unlikely to represent real demand and would generally be accompanied by poor unit profitability for dealers, a panel discussion during the AGM at BCA Birmingham was told.

Discussing the state of the UK automotive retail sector, Mike Jones of Fresh Track Holdings, explained: “When we saw those record highs, sales were being powered by oversupply. It was a false market that was created by manufacturers pumping stock into the new car market.

“The question is whether that will happen again and the risk largely comes from Chinese new entrants. If you speak to those businesses, several are aiming for annual sales of 100,000 units each. Add those to existing legacy manufacturers and we’re talking much higher volumes meeting unchanged demand.”

Rising pre-registrations warning

VRA chair Philip Nothard (left) said that rising pre-registrations were a signal that an issue could be arising: “After being subdued for recent years, we are seeing high levels of registration at month ends, which is always a danger. It’s a sign that manufacturers are making too many cars for real world demand and is also forcing dealers into refocussing on new volume sales, after some years of concentrating on more profitable used activity.”

Mike Allen, managing director of Cambria Private Capital, added that the key to understanding the mid-2010s record markets was that they were not a time of high profitability for dealers. “If we started to approach those numbers again, similar problems are likely. In fact, the most profitable time for dealers in recent years has been when new car supply was at its lowest. Those big sales volumes don’t represent actual demand for new cars, which we think is roughly where the market is now, around 2.0.-2.1 million units.”

Used car stability

While the new car market was potentially hotting up, the used sector was showing welcome signs of stability, the meeting heard.

Stuart Pearson, chief operating officer at BCA, said: “This is probably the most normal used vehicle market we have seen for some time. LCVs have stabilised after some ups and downs last year and we have reached a point with EVs where there is some pricing volatility but ready demand. The mood of the market is positive.”

Chris Plumb, head of current car valuations at cap hpi, said: “We tend to view 2019 as a benchmark year because it was the last time we saw a customary pre-Covid used vehicle sector and what we are seeing today are seasonal price movements in line with that kind of market. Demand is healthy and the market is in a good place.”