EU auto sales boosted by 25% discounts and financing deals

Consumer demand

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EU autos Apr14When is a car sale not a car sale?  That’s the question that has been bothering the blog in the past few weeks.

Of course, it wants to cheer the news that EU auto sales have seemingly recovered.  But as the chart above shows, the recovery is still very limited:

  • Q1 sales at 3.25m (red square) were 9% above 2013 levels (green line
  • But as the European Auto Association noted, “in absolute figures, the total of 1.45m was the second lowest result to date for a month of March” since records began in 2003.

And even this modest improvement raises a number of major question marks, as it seems that major discounts and financing schemes are the key driver for current volumes.  As the Financial Times notes:

“Heavy discounting and below-cost sales strategies are increasing year by year in Europe’s car market, artificially inflating the fragile recovery, while simultaneously lowering profitability across the continent’s lossmaking car industry

“Fleet sales, to corporates, are often heavily discounted. Sales to rental companies are at cost price, or lower, and the most lossmaking method involves dealers registering cars as demonstration vehicles, only to sell them on to customers, unused, at knock-off prices.

“Such tactics are highest in Germany, according to research by Dataforce, an automotive market research firm. In January and February, just 36% of car sales in Germany were pure sales to private customers.”

Many of the best-selling models offer 25% discounts, whilst Ford, Opel and VW’s Skoda offer 30% on their flagship models.  In effect, therefore, the market is following the US example:

  • Used cars have become relatively expensive
  • Average German used car prices are up 12% versus last year, as the decline in new car sales since 2007 has reduced used car availability
  • The use of aggressive discounts therefore often makes the new car cheaper to buy than an used car

In the UK, the second-largest market, the FT reports that rental-type financing deals are the key driver for current volumes:

Roughly three-quarters of new cars bought in the UK are paid for under financing schemes.  …This sees owners pay off half the price of the car in monthly instalments over 3 years, before typically trading in the car and its residual value for a deposit on a replacement vehicle.”

In reality, therefore, UK buyers are simply opting to rent their new car for an agreed monthly fee for 3 years, and have no real intention of ever owning it outright.  Or as the FT writes:

Britain is turning from a nation of car owners to one of renters.”

Most worrying is the impact of these discounts and financing deals on the underlying health of the market.  It seems that manufacturers are essentially running for cash, with no hope of generating an acceptable profit.  This is a very unhappy, and fundamentally unstable, situation for Europe’s largest manufacturing industry.

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