Winners and losers

Friday 29 May 2009

It’s been a miserable Christmas for tens of thousands of people who work in the motor trade, from the Land Rover engineers wondering if they’re ever going to get a chance to develop new products, all the way down to the kid who makes the tea in the showroom. And on everybody’s mind, the same question: how much worse will things get before they improve?

I’ve always regarded myself as an optimistic kind of guy, and I’ve also lived through enough downturns to know that, although the car market is always one of the first victims of an economic crisis, it usually bounces back stronger than ever.

This time, though, I’m not so sure. And the ultimate problem is a simple one – for years we’ve been producing far too many cars. Even in the good times, with demand booming, car makers struggled to make profits. Indeed, for all the return made by a typical manufacturer the company would better serve its shareholders by liquidating itself and investing the cash in a high-interest bank account.

But now things are tough, and the situation is becoming desperate as the massive over-capacity in the European car market is laid bare for everyone to see. Not only do we have dozens of idling car factories, we’ve also got disused runways filled to the brim with unsold motors.

Not that we needed a crystal ball to see this one coming. Indeed, it’s been obvious for years that the new car market in the UK has been supported by a combination of cheap finance, the generous discounts that manufacturers give to fleet customers and the willingness of punters to cash in some of the rising equity value of their houses to put a nice set of wheels on the driveway. And now the bubble has burst. Credit has dried up, house prices have started to slide and the new car market resembles one of those graveyards chosen for the climatic shootout by the directors of 1960s Westerns.

For some manufacturers, the crisis is undoubtedly an opportunity. Car sales will bounce back – the average punter changes their car in the UK every three years and there’s no doubting that the sort of sensible, bread-and-butter buyers who make up the majority of retail sales will still be in the market for something new and shiny when their current motor first suffers an MOT failure. Similarly, the vast mega-fleets will continue to grind their way through hundreds of thousands of new cars a year. But these are cars that are getting chosen as tools, not toys. Leading onto my blindingly obvious prediction for 2009, that the so-called ‘premium’ brands are going to suffer from an absolute pasting.

Over the last 20 years the likes of BMW, Audi and Mercedes have risen from being bit-part players to major forces in the car market, with the 3-series regularly featuring on the list of the 10 most popular cars in Britain. It’s been a quiet revolution – upmarket brands used to be reserved for the seriously well-off, but now they are everywhere. Take me as an example: two decades ago my company car was a Vauxhall Carlton, now it’s an Audi A6.

The problem is that punters don’t have to fork out extra to get themselves a nicer car and a more expensive-looking keyfob, it’s something that they choose to do in the same way they decide to shop at a more upmarket supermarket, or deck themselves out in designer clothes.

And when times get tough – or even if you just fear that they might do – most people’s first reaction is to cut back on luxuries. Which brings us to the next problem, the fact that (whisper it) premium cars haven’t been worth anything like the supplement that their manufacturers have been attempting to charge for them for several years. Back in the late 1980s a Mercedes was built like a tank and a Ford would fall to pieces well before its tenth birthday, both facts reflected in their relative pricetags. But these days that’s no longer the case. Yes, you might think that a BMW 3-series is better-looking than a Ford Mondeo, or even slightly better to drive. But I defy anybody to make a convincing case that the Beemer is actually better engineered or better constructed than the Ford, because it just isn’t. But while the most basic Mondeo costs under £17,000, you can’t get into an (equally basic) 3-series for less than £21,000.

I’m not just picking on BMW here, or boosting Ford as the working-class hero. It’s the same story if you choose to compare an Audi A4 with a Vauxhall Insignia, or a Mercedes C-class to a VW Passat. However you turn the argument, you end up with the fact that people have been willing to pay substantially more to make the neighbours feel jealous.But for me, things are going to get more interesting at the bottom end of the market. Rewind those two decades again and the likes of Hyundai and Kia were pretty much joke brands in the UK, their bought by bargain-seeking geography teachers and the sort of elderly customers easily swayed by a salesman’s patter.

But now both Hyundai and Kia are making decent, well-equipped cars, backing them up with bombproof warranties and undercutting rivals by impressive margins. I’d be very surprised if 2009 didn’t prove to be a bumper year for both of them – and within a couple of years I’d anticipate seeing at least one of their models replacing the BMW 3-series in the list of the top 10 best-selling cars. And one final thought. Renault has been struggling in the UK worse than most, but in Europe the company already has Dacia, its own bargain brand. With decent equipment, competitive pricing and a solid warranty behind it, I reckon that the bargain basement Dacia Logan would be flying off the shelves if Renault was to introduce it over here.