It will come as no surprise to anyone involved in the auto sector that UK new car registrations in May have dropped 89% versus 2019. This was driven by retailer and production facilities largely being closed for the month of May.
To provide some balance, other markets that were affected by COVID-19 before the UK have continued their sales recovery. Following the 4.4% year-on-year increase in April, China continued to recover with an estimated increase of 11.7% in May. On the continent, some markets have seen a similar but lagged recovery with Italy, France and Spain reporting year-on-year declines in May of 49.6%, 50.3% and 70.6% respectively. The US market year-on-year decline was 30.1% which was due in part to many states continuing sales through the lockdown period, coupled with significant manufacturer incentives.
As UK car-makers restart production, the industry may be hoping for a smooth return to normality. However, the capacity of factory operations will continue to be constrained by newly implemented social distancing controls and safety measures. Manufacturers are of course correct to prioritise the welfare of staff and reduce the prospect of a second shutdown.
As we’ve seen with the recent experience of manufacturers in the US, they will need to find ways to manage the stop/start of production. This will be due to limitations of part supply and addressing new cases of the virus for workers that have returned, with the need for balancing shifts and continual sanitisation.
Will retail rebound?
Dealers in England began their restart on 1 June, having implemented safer working with social distancing and revised working practices.
We expect a period of pent up demand to stimulate sales in June, but this is likely to tail off and footfall is likely to remain low during the recovery period. This continues the need for deploying digital sales channels and contactless retailing, evidenced by Autotrader reporting that on 1 June they saw the highest day for new car leads since late 2018.
A critical factor will be how the market is supported through incentives. As well as manufacturers considering how they provide support, there are calls from some in the sector for the UK government to give targeted aid. These calls may grow following the announcement that the European Commission is looking into a broader economic recovery plan, and with France and Germany reporting they will introduce packages of €8 billion and €130 billion respectively. Whilst many governments are likely to include a focus on sustainability and battery electric vehicles, it needs to be balanced with the impact this will have on original equipment manufacturers (OEMs) and suppliers producing internal combustion engine vehicles and products. Even with an increasing market share, battery electric vehicles are still only 4.3% of the UK market in the year to date.
Whilst continuing to wrestle with the many uncertainties, strategic workforce planning will be a major challenge for many businesses across the sector. Companies will need to consider how they can best deploy their staff as they return from furlough, considering the human component as much as the financial impact. This should also be done with consideration to their supply chain partners and how they can best work together in the highly integrated auto industry.
The unfortunate reality is that with the ongoing impact on new vehicle sales, supply will need to be balanced to meet demand, resulting in a need for manufacturers to reduce capacity, and dealers to optimise the network. This is already evident with announcements of significant reductions by OEMs and suppliers.
Companies will need to think about ways in which they can build in more financial and operational flexibility. The return to growth will be a challenge to companies to become far better at dealing with unpredictable shifts in the business environment. The sector should continue to take this as an opportunity to develop its long-term resilience.