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U.K. New Car Demand Declines by 3.5% Y/Y in May

6 Jun 08

Registrations of new cars in the United Kingdom took a tumble in May, falling by 3.5% year-on-year, following two consecutive months of growth.

Global Insight Perspective
Significance	In light of rising domestic energy prices, soaring fuel costs, and ever-increasing food prices, it is little surprise that U.K. consumers purchased 3.5% fewer cars in May compared to the same month last year.
Implications	Demand for new cars in the United Kingdom has been mixed so far in 2008. After a weak start to the year, sales increased in March and April, before falling again in May. This means that year-to-date demand is just 0.6% below that in the first five months of 2007.
Outlook	The prospects for the U.K. new car market look sure to weaken for the remainder of 2008, as living costs continue to increase, leaving less money for big-ticket items such as new cars. Taking into account other factors, such as the clear softening of the housing market and the fact that credit is harder to obtain than a year ago, Global Insight forecasts passenger car registrations of 2.32 million units for the full year 2008, down 3.5% from 2007.

Economic Concerns Weigh on Consumer Purchasing Trends

Registrations of new passenger cars fell by 3.5% year-on-year (y/y) in May, or by 6,525 units, to 179,272 units, according to data released by the national vehicle manufacturers' association, the Society of Motor Manufacturers and Traders (SMMT). This was the weakest May figure since 1999 and followed two months of surprisingly robust growth as rising living costs start to weigh heavily on consumers' minds and bank balances. As a result of the strength of demand earlier on in the year, year-to-date (YTD) registrations stand at 1,038,289 units, which is just 0.6% below the figure in the corresponding period of 2007.

“The slow-down in the overall new car market in May comes as no surprise and reflects concerns across the economy”, Paul Everitt, chief executive of the SMMT, said in a statement. “The figures are in line with SMMT forecasts for 2008, and we expect a tough year ahead. Vehicle manufacturers and dealers will have to work hard to attract consumers, who are facing increasing household and motoring expenses”, he added.

Key Trends

Smallest Cars Show Biggest Growth: Registrations in what the SMMT defines as the ”mini” segment of the market surged by 120% y/y in May and increased by 27.4% y/y in the YTD to a total of 11,415 units. The newly launched Hyundai i10 was the best-seller in the segment. It should be noted that the SMMT's definition of the ”mini” segment does not correspond directly with Global Insight's A-segment category. In order to qualify as a ”mini” car, the SMMT says that engine capacity must typically be less than, or around 1.0 litre. This means that cars such as the Fiat 500 do not qualify, whereas the Chevrolet Matiz, Smart ForTwo, and Hyundai i10 do.
Disparities in Demand for Larger Cars: We do not yet have access to the full breakdown of segmentation trends. However, the data that the SMMT has released shows that Land Rover sales shrank by one-third during the month to 2,500 units, down from 3,700 a year earlier. This would appear to suggest that demand for sport utility vehicles (SUVs) weakened compared to one year ago. On the other hand, 40 Hummer vehicles were registered in May, which is almost the same amount registered in the first four months of the year (86 Hummers have been registered in the United Kingdom so far in 2008).
Weaker Private Demand is a Concern: Private demand in May plummeted by 9.5% y/y, with 7,709 fewer registrations in this segment of the market. This is in line with the trend seen so far this year—only fleet volumes managed any kind of growth in the first five months. During May, private registrations accounted for 41% of the market, while fleet registrations took 53.9%.
Ford and Vauxhall Continue to Dominate: Seven of the 10 best-selling models in May were from the two dominant manufacturers of Ford and Vauxhall. The Ford Focus range remains the country's best-selling vehicle line, a position it has held for the last seven years.
Diesels Increase in Popularity: Despite the 3.5% y/y decline in the overall market, diesel registrations increased by 8.4% y/y in May to 80,246 units, lifting diesel's share of the market to 44.8%. For the first five months of the year, the U.K. diesel penetration rate stood at 43%. Diesel uptake has risen sharply in the U.K. market over the last decade, highlighted by the fact that average penetration for the 10 years between 1997 and 2007 was just 23.9%. The Ford Focus was the best-selling diesel model in May, but the Volkswagen (VW) Golf remains number one for the YTD.

Outlook and Implications

For the remaining seven months of the year, the SMMT notes that the outlook remains cautious, with volumes expected to slide further. However, it points out that so far the slowdown in new car sales remains relatively mild, considering the warning signs from other areas of the economy. This can be partially explained by the fact that manufacturers and dealers are offering competitive prices and attractive deals to maintain volumes while trading conditions are tough.

Global Insight agrees with the sentiment that volumes will fall further, as the range of economic headwinds being felt by consumers in the United Kingdom right now spans from falling house prices, a squeeze on lending, huge increases in food and energy bills, and the soaring cost of gasoline (petrol) and diesel. This negativity is amplified by the fact that 2007 was a far stronger year than expected, hence the base comparison is higher than was predicted. We thus forecast passenger car registrations of 2.32 million units for the full year 2008, down 3.5% from 2007. We see the weakness lingering into 2009, when demand will slip by another 1.6% to 2.282 million units.

In terms of segmentation trends, it cannot be disputed that the smallest segment of the market—defined by Global Insight as the A segment—has been the fastest-growing category so far this year. In the absence of any detailed data for May, a look at the market for the January-April period shows that 11,000 more A-segment vehicles were registered in the first four months of the year compared to 2007, a rise of 27.4%. In April alone, A-segment sales surged by over 43% y/y, meaning that over 3,000 more A-segment cars were registered compared to April 2007. A handful of models have been responsible for this growth, including the Ford Ka, Fiat 500, Smart ForTwo, Renault Twingo, and Hyundai i10.

However, it is also interesting to note that although SUVs remain firmly on the environmental “hit list” in the United Kingdom, they also remain firmly on the shopping lists of new car buyers and are a key growth area of the market. Breaking down the different SUV segments, the one that is growing at by far the most rapid pace is compact SUVs (SUV-Cs). This is thanks in large part to the Nissan Qashqai, which went on sale one year ago. Over 8,000 Qashqais were sold in the first four months of the year, making it the strongest seller in the segment, despite stiff competition from the previous best-seller, the Land Rover Freelander. More generally, 7,500 more SUVs (of all sizes) were registered in the first four months of 2008 compared to the same period in 2007, equivalent to y/y growth in excess of 11%, in an overall market that recorded no growth at all in that time. With more new SUVs on the way, their share of the market is expected to become even greater in the future. Indeed, this market remains one of the largest SUV markets in Europe, with SUVs having stolen sales across the segments in the United Kingdom. Some brands currently without SUVs are even planning multiple SUV offerings across segments, and the SUV bandwagon thus appears virtually unstoppable, even at this time of soaring living costs.

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