Automotive sector continues to grow, but concerns remain about 2024 – EY comments

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Automotive sector continues to grow

David Borland, EY UK & Ireland Automotive Leader, comments on the Society of Motor Manufacturers and Traders (SMMT) new car registration figures for November 2023:

“November 2023 saw a 16th successive month of growth for the automotive sector, with over 156,000 new car registrations recorded, representing a 9.5% year-on-year increase. Positively, this was broadly flat to pre-pandemic volumes as the market continues to recover and stabilise. Automotive sector continues to grow.

Automotive sector continues to grow

“There was however an anticipated challenge, with Battery Electric Vehicle (BEV) sales seeing a decline in the month, with a 17.1% fall compared to last year. It would seem this is largely due to the upcoming regulation on Zero Emission Vehicles (ZEVs) that starts next year, which is prompting manufacturers to take measures to limit their exposure to penalties. This was the first year-on-year fall for BEVs since April 2020, the first full month after the first lockdown of the pandemic. Automotive sector continues to grow.

“Despite the top line growth, the mixed channel trend continues with fleet sales growing at over 25% whilst private sales continued to face challenges with a 5.9% decline. This is because fleet continues to be the target for BEV sales whilst consumers are still navigating headwinds such as high interest rates in the run up to the holiday season.

“In further positive news, growth continued on the supply side as well with manufacturing volumes up 31.6% in October and almost 17% for the year so far, showcasing a promising year for manufacturing with 8 out of 10 months of improvements. As we look ahead, the sustainability of this growth comes into focus, particularly with the impending ‘rules of origin’ legislation for Electric Vehicles (EVs) scheduled to take effect on January 1, 2024. This milestone poses a crucial question for the industry’s future trajectory with potential tariffs that will need to be funded by customers or absorbed in the supply chain, providing yet another challenge to fine margins.”

Manu Varghese, from EY’s UK & Ireland Advanced Manufacturing & Mobility Team, adds:

“The dynamics of used car prices have continued to capture attention, marked by a consistent decline throughout 2023. According to the AutoTrader Retail Price Index, the average retail prices of used cars contracted on a year-on-year basis for the third consecutive month in November, registering a decline of 3.8%. Initially perceived as a temporary correction following the elevated prices witnessed in 2020 and 2021, attributed to supply chain challenges affecting new car availability, this downward trend persists. Despite the current trend, signs of recovery are expected in 2024. The market is dynamic and continues to encourage an optimistic outlook in used car pricing as we move into the next year. Automotive sector continues to grow.

Forward Look

“In November 2023, the Government made two significant announcements, including the UK Battery Strategy and the Advanced Manufacturing Plan (AMP). These announcements are anticipated to provide clarity and momentum to the domestic auto industry. Automotive sector continues to grow.

“Despite UK automotive’s sustained growth of late, challenges persist for the domestic industry, particularly in relation to the alignment of the Internal Combustion Engine (ICE) vehicle sales ban and the Zero Emissions Vehicle (ZEV) Mandate, both at a time when the UK aims to attract investment in the Electric Vehicle (EV) sector.

“The Office for Budget Responsibility (OBR), recently reported that only 38% of new vehicles sold in the UK in 2027 are projected to be electric, a decrease from the 67% forecast in March, highlighting the magnitude of the challenge facing Original Equipment Manufacturers (OEMs). Automotive sector continues to grow.

David Borland added:

“Despite the hurdles, the UK car industry continues to strive towards a transition to a zero emissions future. This transition is accelerated by new regulatory targets and Net Zero plans, creating fresh opportunities and avenues for value creation in alternative forms of technology. To ensure the industry’s resilience and prosperity in the future, securing both public and private investment, forging strategic partnerships to mitigate capital risks, and enhancing speed to market will be vital. Furthermore, OEMs and their needs will need to be closely monitored as they balance priorities between maintaining ICE sales, ramping up ZEV sales and ensuring regulatory compliance, particularly with profit margins associated with EVs currently appearing stretched, and residual values continuing to face marked challenges. Automotive sector continues to grow.

David Borland, EY UK & Ireland Automotive Leader, comments on the Society of Motor Manufacturers and Traders (SMMT) new car registration figures for January 2024:

“The UK motor industry continues to show encouraging growth, with 142,876 new car registrations recorded in January 2024, representing an 8.2% year-on-year increase and the 18th consecutive month of growth. The growth was predominantly driven by Battery Electric Vehicle (BEV) registrations, which were up 21% year-on-year, and Plug-in Hybrid Electric Vehicle (PHEV) registrations, which were up 31.1% compared to January 2023. Despite the growth in BEV sales and the cumulative milestone of one million sales in the UK being reached, the market share for BEVs was down to less than 15% for the first time in a year last month. This highlights the challenge that Original Equipment Manufacturers (OEMs) have to meet the target of ensuring at least 22% of their sales are accounted for by Zero Emissions Vehicles (ZEVs) as part of the ZEV Mandate, which came into law at the start of this year. Automotive sector continues to grow.

“In line with the trend the sector saw throughout last year, fleet sales once again were solely responsible for January’s growth, with an increase of 29.9% year-on-year, while retail was down 15.8%. This means that almost two-thirds of cars sold were to fleet, versus the traditional 50/50 split of fleet and retail. One critical challenge for manufacturers will be how to make this channel mix sustainably profitable.

“There is positive news on the supply side as well with manufacturing growth for 2023 at 17%, representing the best year since 2019. The deferral of the ‘rules of origin’ legislation will provide further impetus to automotive manufacturing, in the UK and continental Europe. Automotive sector continues to grow.

Forward Look

While the new year will undoubtedly present economic and regulatory challenges, the market is showing robust momentum as it heads into 2024 with further volume increases forecast for the year. This upward trend, coupled with the intensified competition from new market entrants, positions 2024 as another year of opportunity for the UK car industry to demonstrate its resilience and innovation. Automotive sector continues to grow.

David Borland, EY UK & Ireland Automotive Leader, comments on the Society of Motor Manufacturers and Traders (SMMT) new car registration figures for December 2023:

“December marked the 17th consecutive month of growth for the automotive sector, with UK new car registrations growing every month of the year in 2023. More than 141,000 new car registrations were recorded last month, up just under 10% on November’s figures, leading to a 17.9% increase for the full year. Despite this strong performance, registrations were still 17.7% below the pre-pandemic levels of 2019. Automotive sector continues to grow.

“However, a critical challenge that continued to face the sector was once again Battery Electric Vehicle (BEV) sales, which were down 34.2% compared to December 2022. This represented a second consecutive month in which BEV sales were down year-on-year. As with November’s decline, this was likely driven by Original Equipment Manufacturers (OEMs) gearing up for the Zero Emission Vehicle (ZEV) Mandate, which has now come into law in the UK, as companies looked to minimise their exposure to financial penalties in 2024. Automotive sector continues to grow.

“This concern has been counterbalanced to a certain degree by the European Union Council’s decision to approve a delay to tariffs on Electric Vehicles (EVs) traded between the UK and the EU, minimising commercial risk to OEMs as their Electric Vehicle (EV) targets increase in line with the ZEV Mandate. Automotive sector continues to grow.

“However, the disparity between the timing of the ZEV Mandate and the delay to the Internal Combustion Engine (ICE) vehicle sales ban will continue to represent one of the most marked challenges to the UK’s EV transition going forward, as OEMs attempt to provide a more compelling proposition to consumers to make the switch. And with question marks remaining around the residual values of EVs, while the current profitability of EV sales appears stretched, the road ahead will certainly be a complex one. Automotive sector continues to grow.

“On a positive note, 2023 was a strong year for fleet, which spearheaded an impressive year of growth for the UK’s automotive sector. Sales grew by at least 25% year-on-year during every single month of last year, with overall growth of 38.7% across 2023. A critical question for OEMs is whether this is a sustainably profitable channel with private retail sales only managing to broadly flatline in 2023. A key task will be for government and industry to work together in order to increase appetite among consumers and businesses alike, particularly for EVs.

“As auto companies in the UK look to build on a significant year of growth in 2023, striking the right balance between their ICE and EV priorities will be critical. The ZEV Mandate will prompt OEMs to place an increasing focus on EVs and how they manage the complexities of product planning, but the full portfolio of powertrain technologies must continue to be considered. With Plug in Hybrid Electric Vehicles (PHEVs) having the highest growth of all powertrain types at nearly 40% for the year, it is clear that they are part of the solution to provide consumers with comfort amid any hesitancy they may have to go all electric in the near term. Automotive sector continues to grow.

David Borland, EY UK & Ireland Automotive Leader, comments on the Society of Motor Manufacturers and Traders (SMMT) new car registration figures for September 2023:

“The UK’s motor industry continues to deliver significant growth, with September seeing a 21% year-on-year increase in registrations and the 14th consecutive month of growth. As in previous months, the growth was largely driven by increases in fleet, which saw growth of almost 41%, but retail also had an improvement of almost 6%, which could be expected in a plate change month.

“The increases were also balanced across the powertrain mix, with hybrids in particular performing well. On the supply side, despite a 9.7% decrease in volume in August, the overall performance so far in 2023 points to favourable conditions for the UK automotive sector. The UK also overtook France this September to become the world’s 8th largest auto manufacturing industry.

“However, the UK government’s decision to move the Internal Combustion Engine (ICE) sales ban from 2030 to 2035 was a significant and unexpected move in the context of the UK’s Electric Vehicle (EV) transition. The shift in policy may have a negative impact on consumer demand for EVs in the short term, as well as potentially affecting demand from fleet operators as both groups work out what the changes mean for them. There is a risk that, with Original Equipment Manufacturers (OEMs), retailers and charge point operators all having invested significant capital in anticipation of a 2030 ICE sales ban, the policy shift could see supply outstripping demand – a concern given the fact residual values of EVs are already facing challenges. Automotive sector continues to grow.

“Meanwhile, the proposed Zero Emissions Vehicle (ZEV) Mandate trajectory and targets for cars starting in 2024 will be implemented as planned. This could cause a market imbalance that will likely manifest in Q4, as manufacturers manage the product portfolio to minimise non-compliance in 2024. Automotive sector continues to grow.

“In the used car market, values fell by 1.9% at the three-year, 60,000-mile point in September, marking the largest monthly fall since 2008. Although the industry is undergoing a realignment, falls in value have been consistent for the past three months. However, analysts predict higher used car sales volumes in October as fleet returns and part-exchanges become more plentiful. Indeed, the likelihood of used ICE values at least holding steady, if not increasing, appears high following the Government’s recent announcements – although the impact on used EV residual values appears less certain. Automotive sector continues to grow.

Manu Varghese, from EY’s UK & Ireland Advanced Manufacturing & Mobility Team, adds:

“The automotive sector in the UK received some positive news recently, as new investments were announced in Somerset, Oxford, Swindon, and Ellesmere Port. There is also continued interest from overseas investors in UK car dealers, with the UK considered a market that adapts well to new models and changing consumer habits. On the flip side, there is still concern over the impact of Brexit tariff barriers on the industry’s economic viability. To ensure further growth and investment security, the UK’s automotive sector needs a stable environment to operate in. Automotive sector continues to grow.

“The UK’s automotive sector has shown pleasing resilience in light of recent positive developments such as new factory investments and significant plans for battery production. Indeed, the future looks bright for the sector, with growing optimism that the industry will continue to thrive in the coming years, despite mounting challenges as a result of changing regulation. Automotive sector continues to grow.

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