Two things
have jumped out from the last three sets of motor finance
statistics published by the FLA.
First, it is becoming increasingly
difficult to say for sure whether business will be up or down in
any given month. The vast number of unknown factors in the
political and economic climate seems to be playing havoc with
consumer sentiment, and monthly volatility in sales volumes has
become the norm.
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After all, let’s not kid ourselves –
despite it having been mentioned in virtually every press release
circulating round the automotive industry in the last quarter, the
royal wedding didn’t have that much of an impact on whether people
went out to buy cars at the end of April or not.
April was generally considered to have
underperformed, while May was a better month than expected. I won’t
attempt to make a prediction for June’s figures.
Overall, the likelihood is that – if
the rest of the year continues in this vein – the net result will
be a year that looks pretty flat compared to 2010.
Funnily enough, this is exactly what
the more reserved voices in the industry were predicting way back
in the third and fourth quarters of last year, against a backdrop
of general optimism from more bullish commentators.
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By GlobalDataThe second observation that jumps out
from the statistics is the steady increase of finance penetration
into the general retail market.
This is great news on the surface, and
highlights the resilience of motor finance compared to other forms
of consumer credit. However, when viewed against the backdrop of a
flat retail market it has two implications that give cause for
caution.
The first of these is the obvious one
– any company that seeks to grow in this climate will have to do so
by building market share, rather than through keeping the same
slice of a growing market.
This means increased competition –
both between secured lending providers, and between secured lenders
and banks offering personal loans. At the moment, there is still
some wriggle room for providers to compete on price, but how long
is that going to last?
Interest rates will rise, and money
will become more expensive. Sooner or later, consumers are going to
have to feel the pain, and the longer this is postponed by lenders
hoping to pick up market share, the more those lenders risk
squeezing their margins.
Still, as the article on the next page
examines, funding circumstances vary dramatically from lender to
lender, and some may be able to hold out longer than others.
The second implication of the growing
finance penetration level approaches the same problem from a
different angle.
There has been a growing emphasis on
0% and other low-rate offers being offered by the captive sector as
consumer confidence has dwindled, in what seems like an attempt to
retain the stimulation of retail demand that was lost with the end
of the scrappage scheme.
Even more than competitive pricing,
this subsidy to flaccid consumer appetite will become more and more
unprofitable to maintain as money gets more expensive.
Low rates and unbeatable manufacturer
offers may be keeping the market afloat at the moment, but it may
well be that their sell-by date is approaching. To paraphrase one
of the speakers at a conference I attended last month: “Income will
be stretched, funding costs will rise, and operational expenses
will grow… you had better be running a profitable business now,
because it’s only going to get less profitable.”
What a shock consumers could be in for
if, after getting used to a proliferation of cheap car finance,
they are faced with a sudden withdrawal of offers by a market that
needs to fatten its 
margins in
the wake of increased funding costs. If that were to happen, it
could make for pretty bleak reading for the whole UK motor
industry.
The answer? It’s been said before, but
it bears saying again – lenders need to be competing on service.
The right products need to be offered by salespeople who know what
they are talking about, and customers need to be looked after in a
way that makes them glad they didn’t just get a bank loan.
In short, motor finance needs to be a
service-based industry, rather than a sales-based one.
Fred Crawley
fred.crawley@vrlfinancialnews.com
