UK car market: Stuck in reverse

Thanks to the annual spring change in the vehicle registration plate, March is traditionally the big sales month for the UK car market. But not in 2009. Nearly 138,000 fewer cars were sold last month than in March 2008, as sales plummeted by 30.5 per cent year on year, the Society for Motor Manufacturers and Traders (SMMT) said yesterday.

The figures for the year-to-date are no cheerier. More than 200,000 fewer vehicles were sold in the first quarter, amounting to a decline of 29.7 per cent on last year.

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There are no glimmers of light. Car buying has now been dropping for 11 consecutive months, leaving major marques and their entire supply chains to cut back on hours and lay off staff. Every part of the market is in tatters. Private sales were down 28.6 per cent last month, fleet sales down 31.2 per cent, business sales down 44.7 per cent.

Paul Everitt, the chief executive of the SMMT, said: "Some parts of the motor industry are surviving on fresh air. We did anticipate that life would be tough in 2009, but we had hoped March would see a bit of a shift. Instead we are just bumping along the bottom and things are certainly not getting any better."

Each new, grim number adds to the pressure on the Chancellor to dole out some assistance in the Budget later this month. Lord Mandelson, the Business Secretary, has not been idle. The £2.3bn loan guarantee package launched in January is now finally up and running, and the success of Jaguar Land Rover's £270m application is expected imminently. But the guarantees are only available for longer-term research and development schemes linked to the environmental agenda, and do little to help with the acute demand shortages besetting the industry.

The biggest problem is simply that people are not buying cars. And the industry's best hope for assistance is a scrappage incentive – providing motorists with a cash subsidy for trading in old cars for newer, green models. The SMMT first raised the possibility in early February, and is recommending a scheme offering £2,000 to trade in a car from 1999 or before that has been owned for more than 12 months. So far the government has been tight-lipped, although sources close to the negotiations see the fact that it has not been entirely ruled out as a cause for optimism.

Other European governments have jumped faster. France, Germany, Spain and Italy all have incentives, with some spectacular results. In Spain and Italy, where the cash figure is lower, falling demand has merely stabilised. But more generous packages in France and Germany have seen sales shoot up to, respectively, plus 8 per cent year-on-year and a whopping plus 20 per cent. But the UK proposal has some serious detractors. Only 14 per cent of the vehicles made in British factories are sold here, and 86 per cent of the cars we buy are built abroad. So not only will taxpayers' money go to help foreign car companies, but the subsidy for purchasing foreign-made cars will also undo the benefit of the weak pound to UK manufacturers, claim critics. Even the 14 per cent figure is misleadingly high in the context of scrappage incentives. Because the scheme is aimed at decade-old bangers – likely to be driven by the less well-off but to be traded in for spanking new models – the impact will be felt in the cheaper small-car market. Of the UK-manufactured models, only the Nissan Micra and the Mini fit the bill, and the Mini is too expensive to be a common choice.

Proponents of the proposal maintain that too myopic a focus on models built in the UK is to miss the point. The global car industry is a perfect illustration of the need for a co-ordinated stimulus touted so vocally by world leaders at last week's G20 summit in London.

Not only are UK manufacturers already directly benefiting from incentives in place on the Continent, but component makers – such as the major engine factories at Bridgend, Dagenham and Hams Hall – are also feeling a boost. "The biggest impact will be felt from a co-ordinated, international implementation of these types of scheme," Mr Everitt said.

"Last week Gordon Brown was talking about the need for further stimulus, but at the same time we are the only major European nation that doesn't have a scrappage scheme. Given that we export 75 per cent of what we produce, we are taking the benefits from others' support, but we are not prepared to make these efforts ourselves."

Nor should the effect of a boost in demand on the UK's dealership network be underestimated.

There are about 4,500 dealerships, employing around 600,000 people in the UK, and about 25 per cent of a car's retail value goes to the distribution network.

A more subtly designed scheme could harness the specific characteristics of the UK car-buying public to push demand towards British-built cars, according to some experts. With the vast majority of movement taking place in the used-car market, a better plan in the UK might be to allow buyers to trade up within that secondhand market. This would act as an escalator, pushing the person who has a nearly new vehicle to trade up to a mid-size, UK-made, new car.

Garel Rhys, at Cardiff Business School's Centre for Automotive Industry Research, said: "As it is currently proposed, a scrappage scheme will help the dealers, the insurance companies and the credit providers, but it won't help the UK car factories unless it recognises the fact that the link between the UK market and the UK industry is incredibly weak."

Meanwhile, the recession is throwing existing sales trends into harsher relief. All three major French marques – Renault, Citroen and Peugeot – are still performing well below the market, while South Korea is seeing on-going results reflecting competitive pricing and good model ranges, from the likes of market-beaters Kia and Hyundai. "The situation is particularly worrying for the French brands because they have the biggest bias towards the small and medium models that should do well in a downturn, but they are not performing well," Professor Rhys said.