David Prosser: Britain's car dealers on the scrapheap

Outlook At first sight, the scrappage scheme is working wonders for Britain's automotive sector. Car sales have risen in each of the past four months and, we learnt yesterday, October was the best month of the year yet, with a 32 per cent increase in new registrations. The extension of scrappage announced in September looks, then, to have been another shot in the arm for the motor trade.

All, however, may not be what it seems. A report published today by the accountancy firm Ernst & Young suggests that Britain's car dealers are in serious trouble. The number of dealers going bust has doubled in the past year, E&Y reveals, and many of those dealerships that have survived have closed sites and cut jobs.

If Britain's car dealers aren't reaping the rewards of scrappage, we really ought to question its value. The big criticism of the scheme has always been that much of the £400m it is costing the British taxpayer is actually going abroad – a tiny number of the cars sold through scrappage are made by British companies, and while several foreign manufacturers produce their vehicles at plants in this country, the majority of sales under the scheme have been of imports.

One of the most convincing counters to the argument that scrappage is a subsidy from Britain to countries such as Germany and Japan, home to the largest manufacturers, has always been that domestic car dealers have been big beneficiaries too. But if the scheme has not prevented these businesses going to the wall, why have we bothered with it?

How, though, to square the circle of sales getting a boost from scrappage but more dealers going under? Part of the answer is that the boost has only come in the past four months, and that even though registrations have risen we remain way below the level of sales seen a couple of years ago. Or, to put that another way, without scrappage we might today be talking about even greater carnage among the car dealerships.

There are other explanations, too. One is that the dealers are being squeezed by both the manufacturers, who have had to cut prices as part of scrappage and are keen to pass some of that on, and by consumers who have felt able to push for a better bargain on the forecourt in the knowledge that they are a rarer breed. Dealers' margins have tumbled as a result.

Also, Ernst & Young points out that while sales of new cars account for 50 per cent of the turnover of a typical car dealer, they produce only 25 per cent of its profit. A much more important profit centre is aftersales – servicing and parts, in particular. This part of the business is really beginning to struggle. Cash-strapped drivers are proving much more reluctant to take their cars to the garage unless doing so is absolutely necessary, and the collapse in sales from mid-2008 onwards means there are now fewer new cars to look after in any case.

In fact, the only bright spot for Britain's car dealers has been the secondhand trade, where demand has been buoyed by value-conscious buyers and supply has been limited by steady falls in car production from last year onwards and owners then hanging on to newer vehicles for longer.

One of the great ironies of this recession has been that for all the talk about the collapse in car sales across Europe, not a single plant has closed down as a result. Scrappage, no doubt, has played a part in that, but what the scheme has not been able to prevent is devastation in the dealership sector.

Even worse, the car dealers' problems look set to continue for some time to come – and to get worse before they get better, according to Ernst & Young.

The falling sales seen during the first half of this year will provide a further knock to aftersales revenues, the scrappage scheme is due to finally come to an end next year, and the lack of credit in the consumer economy will in any case continue to inhibit potential buyers. Just for good measure, the one-off positive effect of demand and supply pressures in the secondhand car market now seems to be waning.

Not a happy picture all round, then. Scrappage may have mitigated the worst effects of the recession for car manufacturers, but for other parts of the UK automotive sector – the genuinely domestic parts – an almighty crash is continuing.