It is not uncommon for the motor industry to create headlines in one form another. There is always a new car that is faster, sleeker, technologically more advanced or more expensive than any other, but once in a while the motor trade also experiences a revolutionary change.
Historically we have seen, amongst other things, the creation of the contract hire and leasing industry as an alternative way for business vehicles to be funded, the introduction of the diesel engine into cars with all the benefits of lower running costs through improved fuel economy, and more recently the development and implementation of a new propulsion system in the form of the electric vehicle, which looks to offer even more favourable running costs and potentially also interesting new business models.
Now we are experiencing a different phenomenon, one that revolves around private vehicle ownership and the way in which consumers want to fund their transport. It is akin to the revelation that was the creation of the contract hire and leasing industry in the 1970s, and today’s Personal Contract Purchase (PCP) agreement allows the customer to offset a large proportion of the upfront cost of the car to the end of a pre-defined contracted period. In doing so, this enables the cost of ownership to be shown in a relatively cheap and easy to accept monthly figure whilst then offering the customer the ability to either buy the car at the end of the term or refinance themselves into a new vehicle via a new PCP deal.
The table below shows exactly how the PCP contract has changed the shape of new car financing over the past few years by representing the % of UK new car sales that are funded using a PCP deal.
The 2015 forecast of 85% of the total of privately registered vehicles being funded by a PCP deal shows not only an increase of 212% over the 2011 figure, but also demonstrates a complete domination of that market sector. The remaining 15% of sales will fall predominantly to the older generation who may be unable and unwilling to take finance at all, preferring instead to pay outright from their savings.
The question is, why has this change of ownership style come about? There are a number of potential reasons: The key instigator of this behaviour was the recession in 2008/9 and the impact this had on the world economic picture. Consumers have been forced to be very conscious of exactly how and where they spend their money and encouraged to micro manage expenditure to better match their income. As such, the thought of buying a family car at £16,000 or US$25,000 has become quite a frightening prospect and tends to scare people into thinking they cannot afford to spend that much money. However, quoted as a monthly figure of £299, for example, it becomes both manageable and appealing, and many people even forget that in reality they may never own that vehicle outright.
In addition, the shape of the new car manufacturing industry has also had an effect. With planned growth in production facilities agreed many years in advance, the volume of cars produced is set some years before they actually hit the road. Therefore, the drop in value of the European economies and European car markets has posed a problem for the increases in sales volumes forecast seven to ten years ago – and the legacy sits with us today. The UK has proven to be the only truly robust European market for sales success, facilitating the consistent growth in new car market sales figures.
Of course, it also helps that as a society we have become accustomed to paying for almost everything on a monthly basis. From home energy and credit cards to cell phones, it is rare that anyone pays a full bill every month, preferring instead to opt for the standard monthly direct debit route that allows clear and simple fund management, often whilst masking the true cost of daily life. Why not add a car to the monthly figures? The key fact here is that with every day that passes, it is this younger ‘direct debit generation’ that makes up more of the buying power in many markets worldwide. These are the people that now accept home ownership to be something they will perhaps neither achieve nor desire, and that the concept of outright ownership of anything other than personal effects is neither important nor necessary in life.
The other important factor is that todays’ younger buyer seems to have less interest in what they drive. The focus is so strongly on cost that whether they choose a Hyundai over a Kia or a Ford is becoming almost entirely mathematical. Many younger buyers take the view that most cars look the almost the same and will drive to similar and acceptable standards, and as such the purchase process is becoming less emotional and very much more financial – in other words, how it meets their monthly budget. Whilst this is largely anecdotal and relates specifically to the younger buyer of small cars at the moment, it is an important factor for manufacturers and finance companies to consider when looking at the future of vehicle design and marketing. The introduction of car ‘shops’ similar to the one recently opened by Hyundai in the Bluewater shopping centre in the south of England is an indicator that touching and driving a car before buying it is less important now; the rest of the market could well head in this direction in the coming years.
Also worthy of consideration is the way in which the company car sector is changing. In these days of increased taxation, the company car driver – in the UK, at least – is continually hit with greater costs for what in many cases is a benefit in kind. This is beginning to become less cost effective for those with low business mileage and minimal company use for their business-owned vehicle. Equally, companies are always looking for ways in which to cut costs, and it is becoming more common for employees to be offered a cash-for-car payment or similar incentive to give up their vehicles. There is also a trend for fleet managers and human resources departments to look at offering a mobility allowance for the employee to manage on a monthly basis to make sure that they have a choice in how they travel. For city dwellers, this allows the flexibility of taking a smaller car on a PCP deal or looking at car rental for instances where there is a need to use a car. It also allows the choice of entry-level motoring or premium comfort, with the key factor being that this will be a monthly allowance offering ownership flexibility to the business user, effectively turning them into a retail consumer focussed on a monthly expenditure.
In summary, it is clear that today’s younger generation is helping to change the shape of the new car market by welcoming the arrival of monthly payments for a large ticket item they will never own. This should not come as a surprise, as it has been evident elsewhere in the world in recent years. Equally, we should not be concerned but rather learn to embrace the challenges and benefits this will bring to retailing new and used cars, and valuing an asset that may be three years old before it is truly owned by a consumer.
Rupert Pontin
