Rocky road ahead for the car industry

BUSINESS confidence among car retailers has fallen to its lowest level for almost two years, according to a survey released today to coincide with the start of the British International Motor Show in Birmingham.

The survey shows that more than half of all car dealers are less confident about business prospects now than a year ago - the worst result since February 1997.

More than half also expect profits to be lower, while a third are forecasting a decline in sales over the next six months, according to the poll carried out by the Retail Motor Industry Federation.

Despite the gloomy mood among retailers, the biennial show will be the usual glitzy affair with more than 30 new models on display in Britain for the first time, including the Rover 75 executive car and the new Jaguar S-Type, both of which are getting their world premieres.

But as the RMIF's survey indicates, once the show is over and the charabanc moves on from the National Exhibition Centre, few in the industry are in any doubt that the road ahead will be other than long and hard.

Rover's parent company, BMW, may axe a further 2,000 jobs in addition to the 1,500 job cuts announced in July, and from the middle of December Rover's giant Longbridge plant in the Midlands will shut completely for four weeks. Ford's Dagenham plant in Essex is already on a three-and- a-half day week because of falling export sales of the Fiesta.

UK new car sales are expected to exceed two million cars again this year, but demand has been slowing sharply since the summer and most forecasters expect it to turn down further next year. The chairman of Vauxhall, Nick Reilly, is forecasting a 5-6 per cent fall in sales next year.

Garel Rhys, professor of motor industry economics at Cardiff University Business School, says: "The next nine months will be very difficult. Everyone was hoping that we would only have lower growth but there is a real danger that could turn into something more serious, even a recession."

In response to falling demand and the seemingly perennial problem, in Europe at least, of overcapacity, manufacturers have been engaging in ferocious price competition. "The consumer is now not just king, he is absolutely despotic," says Professor Rhys. "Price premiums that manufacturers like BMW can charge are now half what they were 10 years ago."

The new car price war has fed into the second-hand market with a devastating effect, resulting in a dramatic fall in residual values of nearly-new models. But at some point, this is bound to tempt natural second-hand buyers back into the second-hand market, further undermining the new car market.

John Buckland, automotive analyst at Daiwa Europe, says that in the last two years the strongest growth has been in the private car market, which now accounts for 47 per cent of new sales. "A switchback, stimulated by much lower second-hand prices and consumer nervousness, does not bode well for private demand."

Meanwhile, other worries are beginning to weigh down motor manufacturers. The Commons Trade and Industry Select Committee is conducting an investigation into vehicle pricing following renewed complaints that cars can be bought 30 per cent more cheaply on the Continent than in British showrooms. The MPs will take evidence later this month from consumer organisations and motor industry bodies.

More seriously, the Office of Fair Trading has embarked on an investigation to determine whether a complex monopoly in the supply of cars is operating in the UK which artificially drives prices up. It has just written to 25 of the country's largest dealers requesting information.

Christopher Macgowan, chief executive of the RMIF, disputes that car prices here are excessively high and argues that exchange rates distort the picture. He says that until the pound's appreciation, prices in Britain were among the cheapest in Europe, when compared in sterling.

Parallel imports of new cars from Europe at cheaper prices only account for about 15,000 sales. Of more concern to manufacturers and dealers are government proposals to permit an explosion in the number of "grey" imports allowed into the country, mainly from Japan and elsewhere in Asia.

Under the Single Vehicle Approval Scheme, imports of these cars, which do not conform to EU or UK type approval, is limited to 50 a year of any model. However, a consultation document issued last week by the Transport Minister, John Reid, proposed scrapping these limits, provided the cars passed tougher safety tests.

The RMIF says that this could open the floodgates to as many as 200,000 grey imports a year, causing pain to franchised dealers and disorder in the new and second-hand markets.

Beyond these short-term concerns, the car industry throughout Europe has yet to tackle the more fundamental long-term problem of overcapacity. A report out today from KPMG's European Automotive Practice in Birmingham says that over the next three years Europe's car-makers plan to build 15 million more cars than there is demand for.

It also says that oversupply will inevitably lead to consolidation, meaning there will be fewer than 10 major auto-makers in the world in 10 years' time. KPMG's James Bentley says: "Many of Europe's 300 assembly plants are building cars and trucks that you and I don't want to buy. There are too many factories in Europe and more are being built."

Professor Rhys agrees. He says that unless Europe's car makers can find new markets to soak up their excess capacity, they will have to find other products to build in those factories, much as the US carmakers have done by switching production increasingly to 4x4 and utility vehicles.

"The alternative is that over a long time period the industry will go pear shaped. Manufacturers will start making more losses, then they will not be able to afford the investment and eventually they will fall by the wayside."

It is not a pleasant prognosis. But at least for the next 10 days, the industry will forget about its woes and enjoy the champagne receptions in Birmingham before returning to harsh reality.