Low interest rates and inflation, a strong pound to the Euro, gradual increases in new car prices, high consumer confidence and strong residuals (see graph below) have combined to create a positive market for new car retailing, allied to an emerging trend of vehicle use rather than ownership amongst the newest generation of buyers.<\/p>\n
But, while there are fault lines occurring in the bonded positivity, the industry will adapt.<\/p>\n
This was the key message in a webinar hosted by Grant Thornton on the topic of PCPs today.<\/p>\n
It was hosted by Paul Burrows, Grant Thornton\u2019s automotive director responsible for M&A, with Richard Parkin, associate director of its strategy group, Bill Parfitt, former managing director and chairman of General Motors UK and now automotive advisory consultant for Grant Thornton, and Colin Tourick, its professor of automotive management at Buckingham University.<\/p>\n
The weak point that could be predicted, particularly by industry watchers, was a \u2018softening\u2019 of residual values and with the reduction in the equity value of car for a consumer on a PCP, who was more than likely expecting this to be a deposit at the end of the contract term \u2013 particularly\u00a0when the dealer called part-way through this with an enticing offer to renew for a new car, while paying no more each month.<\/p>\n
Parkin said that not until the end of this year and into 2016 will there be a \u201cnormalisation\u201d of vehicle supply.<\/p>\n
\u201cWhat we\u2019ll end up with around the end of this year and into next will be supply growing at a faster rate than demand. At auction we\u2019re still seeing trading on three year values at slightly higher values than they were a year ago. But they may well have peaked.<\/p>\n
\u201cAdditionally, forecast values being used for PCP products, are changing. CAP has forecast values recently (in Gold Book) much higher than it had historically. It looks like it\u2019s becoming increasingly unlikely that the level of equity people have so far enjoyed will be available in a vehicle.\u201d<\/p>\n
However, Parkin cited Manheim research that suggested 80% of customers expect there to be equity in the PCP when it reaches full term.<\/p>\n
\u201cThe residuals on PCP deals will mean early redemption will not be possible.\u201d<\/p>\n
He said there wouldn\u2019t be a massive, overnight increase in supply, but a slow trickle from the September plate change. \u201cMost people expect the current levels of RVs are not sustainable, and I expect a correction of around 10-15% over about a year to 18 months.\u201d<\/p>\n
But the continuing strength of the pound in the climate of a weak European economy would mean manufacturers were willing to increase the level of their support in finance products,\u00a0helping to mitigate the impact of softening residuals.<\/p>\n
It was said in the webinar that more than 80% of Ford\u2019s private sales were on PCP, 70% of Hyundai\u2019s and about 40% of Vauxhall\u2019s.<\/p>\n
Parfitt said: \u201cCustomers have got used to low deposit and monthly payments and if they have sufficient equity they will renew the PCP agreement, locked into finance packages for some time. Individual contracts will get longer as residuals weaken – we\u2019re already seeing five year terms,\u201d he said, based on research he had done of around 30 dealer groups.<\/p>\n
And Tourick said: \u201cIf we get to a situation in a year or 18 months\u00a0when customers\u00a0don\u2019t have a lot of equity, something has to give and its normally accepting that the agreement will have to be longer.<\/p>\n
\u201cIf a consumers gets to a point at three years where there is no or negative equity it makes sense to extend a contract term\u00a0because the monthly payment is the same, but the level of depreciation in absolute terms is diminishing \u2013 you\u2019re playing catch up.\u201d<\/p>\n
If the early churn of current PCP deals reduces , it follows that new car registration totals would reduce the panel agreed. \u201cBut it depends on reliance on the PCP product and reliance on it based on a manufacturer\u2019s residuals,\u201d Parkin said.<\/p>\n
Tourick said manufacturers will then behave \u201crationally\u201d.<\/p>\n
\u201cIf customers are aware of not having any equity in their vehicle, the manufacturer will still want to hold onto them,\u201d he said. Tourick suggested personal contract hire (PCH) deals could provide an alternative: \u201cPCH gives the manufacturer\u2019s captive finance company an advantage: on a shorter term deal, it\u00a0gets the profit at the end of it; with PCP the profit is given away to the customer. So, you can retain the customer, potentially keep the profit and churn vehicles with PCH.\u201d<\/p>\n
So, if PCPs get tough, manufacturers will start pushing this alternative product, Tourick predicted.<\/p>\n
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