Steering the way

Assessing the shifting forces shaping the UK motor retail sector.

UK motoring is in a state of flux as a result of various factors – shifting government policy, rapid tech advances, new market entrants, changing customer expectations and the drive toward more sustainable vehicles. Motor retailers have had to navigate numerous challenges over the past few years such as varying shifts from franchise to agency models, higher interest rates, changes to GAP insurance, stock availability and price adjustments - we’re confident they will continue to manage ongoing and emerging issues with similar resilience, as they evolve their businesses.

Donna Barnes

Head of Motor, Retail and Wholesale, Barclays Corporate Banking

The road ahead for motor retailers

16.6% Battery electric vehicle market share to June 2024, with June being highest monthly market share since December 2023 at 19%. Ref:1

64% of UK motorists say cost is a barrier to buying an EV. Ref:2

35%Petrol cars predicted to reduce to 35% by 2028 .Ref: 3

The drive towards electric vehicles

According to Department for Transport statistics, the transport sector accounts for 25% of the UK’s greenhouse gas emissions, with cars responsible for 52% of that total. Electric vehicles (EVs) and other alternative fuels are of course expected to play a key role in reducing emissions.⁴

The Society of Motor Manufacturers & Traders (SMMT) report that although still relatively low, sales of EVs are expected to remain on a long-term upward trajectory. Battery electric vehicles (BEVs) experienced 18% year-on-year growth from 2022 to 2023; when combined with hybrids (PHEVs), market share to June 2024 was 28%⁵. To benefit from growth in this market, retailers and original equipment manufacturers (OEMs) often have to navigate a variety of challenges, including consumer sentiment trends, price points and changing government policies, as well as ensure their teams have the necessary skillsets required for the transition.⁶

Who is buying EVs?

The market share for battery electric vehicles (BEVs) rose to 16.6% year to date in June 2024¹
Demand is being driven primarily by business fleet buyers – while private consumer demand continues to fall⁶
Despite the UK government’s Z-EV mandate which aims to fine OEMs for missing EV targets, consumer demand is low in comparison. Less than one in five new EVs were bought by private consumers to June 2024¹; 64% of UK motorists say cost is a barrier²
Purchasing decisions are also being influenced by the speed of change in the EV market, the practicalities of running EVs and expectations that prices will continue to fall, impacting vehicle resale and residual values.

What could encourage the transition to EVs?

Congestion charges and road tax exemptions, along with support for home charging stations, have already encouraged some consumers to transition to EVs,⁶ but the SMMT says that more action is needed
Given how salary sacrifice schemes and tax incentives for company EVs have driven demand in the fleet market, providing similar incentives to private buyers could help shift the dial significantly⁶
Cutting VAT temporarily on new BEV cars, treating EVs as ‘non-expensive’ cars for excise duty purposes, as well as improving the charging infrastructure across the country are all actions that could help to make a significant difference.⁶

Despite the variety of EVs on offer with over 100 models currently on the market and more affordable, longer-range new entrants arriving soon – as long as the cost of EVs continues to be high relative to internal combustion engine (ICE) vehicles, many consumers will be less likely to transition. Continued higher interest rates and cost-of-living pressures are compounding the issue in the short term.

Karen Johnson

Head of Retail and Wholesale, Barclays Corporate Banking

Falling EV prices

Economies of scale and improvements in various manufacturing processes are resulting in lower production costs for OEMs³
At the same time, an influx of new entrants into the UK and European markets is having a significant impact on pricing³
With demand for EVs waning in China, many Chinese OEMs have expanded into Europe and the UK, offering consumers more choice and more attractive prices³. Although the imposition of tariffs is causing further development with some considering manufacturing in Europe.

Keeping an eye on government initiatives

Various government initiatives, are helping to drive the transition to electric and alternative-fuelled vehicles
These include the zero-emission vehicles (ZEV) mandate, requiring OEMs to supply ZEVs in line with a set timetable or face fines, with targets for BEV % share of vehicles sold increasing year on year³
The Conservative government’s decision to push back the 2030 ban on the sale of new ICE vehicles to 2035 unsettled the industry⁷. The effect on consumers’ purchasing decisions will be varied, but may be further impacted by the Labour Party’s plan to revert back to 2030.

The automotive industry and its supply chain have crucial roles to play in helping to support cleaner air initiatives and reducing emissions to protect the environment, improve the UK’s carbon footprint and hit its sustainability targets

Marco DeBenedictis

Head of Structuring & Sustainable Lending, Barclays

Implementing the agency model

Is it time for an alternative operating model?

With increasing competition and changes in consumer behaviour, many OEMs have been considering switching from dealership franchise to the agency model⁸, providing more control over inventory, pricing and transactions.

Several manufacturers – including Mercedes-Benz and Volvo – have already adopted the agency model, with many others working on their transition plans. But the transition is not without it challenges and some OEMs are taking a more cautious approach – for example, Stellantis has pushed out its transition date to 2026.⁸

It's interesting to note that certain brands such as Kia and Suzuki, and newer entrants like MG and BYD, are sticking with the franchise model for now.⁸

Weighing up the pros and cons

The agency model potentially brings benefits to OEMs, customers and to retailers: Giving OEMs a direct relationship with customers, use of customer data to support sales, marketing, and product development, increase pricing consistency and transparency for consumers. The agency model also has the potential to streamline operations, and remove costs from the supply chain.⁹

However, while the agency model could reduce financial risk for dealers, they may be left with fewer opportunities to drive profitability. Many dealers say the considerable value they add to the traditional car sale process could fall away under the agency model. It may also require significant capital investment by OEMs to deal with customer service and customer complaints – traditionally the domain of dealers – and to manage excess inventory.³

The impact on income streams and working capital from fixed fees per sale or service provided, versus traditional commissions and bonuses from this shift in operating procedures, needs to be managed effectively. Barclays has a key role to play in supporting our clients to transition their businesses, where applicable to agency models and also for the sale and servicing of alternatively powered vehicles.

Donna Barnes

Head of Motor, Retail and Wholesale, Barclays Corporate Banking

Significant changes for the industry

Never in 20+ years of advising dealers in the UK automotive space have I seen so much uncertainty and change at one time. We have interest rates at a level we haven’t experienced for years, agency model being considered by OEMs, significant consolidators buying up the market, new brands entering the UK and of course the Z-EV mandate. Whilst we are seeing a lot of change on the horizon, one thing is for sure – the UK dealer network is made up of very resilient business and those that embrace the change will succeed.

David Kendrick

Head of Automotive and Corporate Finance Partner, Cooper Parry

A steer from Cox Automotive

Cox Automotive^{^} is the global leader in connected automotive solutions for manufacturers, fleets and retailers.

Four-year forecast spotlights change ahead in new and used car markets

The UK car market is set to undergo a radical change by 2028, according to Cox Automotive’s latest long-term new and used car market forecast. A dramatic decline in new diesel cars and a reduction in petrol registrations will profoundly impact the used market.

The forecast^{^}—which includes fuel-type breakdowns for the first time—indicates that in the period 2024-27, the EV share of registrations will grow 160% compared to 2020-23 volumes to 2.3 million units or 28% of sales. Hybrids will represent 25% of registrations, with two million units sold.

Diesel's share will shrink to just 3% over the four years, with 62k units registered in 2027, while petrol's share, with 3.5 million registrations over the four years, will fall 12% to just 35% by 2028.

The registration of the millionth EV in the UK in Q1 was an important milestone in the transition to zero-emission motoring. But with two in every five new cars joining the UK car parc this year forecast to be EV or hybrid, and with that proportion destined to grow rapidly in future years, dynamics in the used market over the next four years will arguably rival the complexity and impact of those experienced during the pandemic.

Philip Nothard

Insight Director, Cox Automotive

This change comes on the back of a new car market that contracted by almost a third in the four years between January 2020 and December 2023, compared to the equivalent period 2016-19, a loss of 3.1 million cars. The composition of the UK car parc has also changed. In 2016, EV claimed just 0.4% share, and hybrid took 3%. By 2019, this had risen to 1.6% and 6%, respectively, and by the end of 2023, their share had each shot up to 17% and 20%.

In the period 2016-19, ICE cars made up 95% of new car registrations. That number fell to 71% in the period 2020-23, a loss of 4.6 million cars. The ICE decline accelerated throughout this period, dropping from an 83% market share in 2020 to 64% in 2023. Cox Automotive forecasts a further drop of 35% between now and the end of 2027, meaning just 784,000 new ICE vehicles will hit the road in 2027 versus the 1.2 million recorded in 2023.

Philip continues: “It’s almost impossible to overstate the shift in the UK car parc over the past four years and how that change will continue to accelerate. Today's parc for cars aged 0-4 years differs significantly from 2020 and will contrast even more so in 2028.”

When looking at the used market, we must always have one eye on the new, which is experiencing significant volatility right now. And, despite recent positive economic headlines, the cost-of-living crunch remains very real for many people. Interest rates remain high, and with a new government only just finding its feet, consumer appetite for anything perceived as a risk is low.

Philip Nothard

Insight Director, Cox Automotive

You can find Cox Automotive’s Insight Quarterly publication here^{^}.

¹https://www.smmt.co.uk/2024/07/new-car-market-hits-million-motors-milestone-at-half-year/^
²https://coxautomotive.h5mag.com/insightreport2023/the_rise_of_evs^
³https://www.grantthornton.co.uk/insights/automotive-industry-trends-and-predictions-for-2024/^
⁴https://commonslibrary.parliament.uk/research-briefings/cbp-7480/^
⁵https://www.uhy-uk.com/insights/uk-electric-vehicle-sales-statistics-so-far-2024^
⁷https://www.uhy-uk.com/insights/automotive-sector-outlook-2024^
⁸https://www.bdo.co.uk/en-gb/insights/industries/retail-and-wholesale/motor-150-report^
⁹https://coxautomotive.h5mag.com/insightreport2023/the_new_dealer^
¹⁰https://www.fca.org.uk/news/press-releases/firms-recommence-gap-insurance-sales-following-fca-action^
¹¹https://www.coxautoinc.eu/news-and-insights/radical-change-incoming-cox-automotive-reveals-first-four-year-fuel-type-forecast/?utm_medium=hub&utm_source=barclays^

Your next steps: