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INDEPENDENT ANALYSIS FOR THE MOTOR INDUSTRY
PRESS INFORMATION NOVEMBER 2004
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INDEPENDENT ANALYSIS FOR THE MOTOR INDUSTRY In
Market Facts and Business Information (MFBI) was formed in 1987 as an independent specialist market research and analysis company providing strategic marketing and research services to the automotive and related industries. automotive analysts to provide a wider range of research products and services to the automotive industry. August 2004, MFBI became part of Trend Tracker Limited, a new larger company set up with other leading
DROP IN USED CAR FINANCE DRIVES OVERALL DECLINE
While Britain’s new car market has grown by 32% over the past ten years, with record sales in recent years fuelled by low interest rates and lower car prices, the retail finance market for new and used cars has declined by 5% since 1999, from 2.18m transactions then to an estimated 2.06m for this year, says the latest, 2004 edition of market analyst MFBI’s THE RETAIL CAR FINANCE MARKET IN THE UK.
Mixed fortunes
However, the value of the retail finance market has continued to grow over the past five years, by 15% in absolute terms from £15.05bn in 1999 to a current £17.38bn, though in real terms after inflation, market value growth has been a much lower 3%. What growth the motor finance sector has enjoyed has been due to an increase in the average value of new and used car advances from £6,915 in 1999 to £8,435 in 2004. The average value of new car loan advances has risen 13% from £8,685 five years ago to an estimated current £9,780 today, while the increasing popularity of younger
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cars in the used market has driven up average used car advances faster, by 21% from £6,170 to £7,475 over the same period. Nevertheless, it is the used car market which has done most to reduce the overall value of the retail car finance market in recent years, having declined by 27% in volume and 12% in value overall, despite the increase in average loan values.
Increased competition and market shares
Although the past five years have seen new entrants among direct lenders increase the choice of loans available to car buyers, including supermarkets, utility companies, it is the point-of-sale (POS) sector that has witnessed the fastest growth in car finance sales, increasing the value of their market share (now 78%) by 21% since 1999 to £13.49bn. MFBI estimates independent lenders’ combined 2004 car finance share to be approximately 22%, worth £3.89bn. Most of the growth of the POS car finance sector is attributable to carmakers’ use of their captive finance operations to offer low or 0% interest deals to new car buyers, and the declining role of independent finance houses in new car finance has forced consolidation in the supply side of the market. The three biggest, bank-owned independent finance houses – Black Horse Motor Finance, Capital Bank and GE Capital Woodchester – now account for about 45% of the POS retail car finance market. These companies and their smaller competitors have faced a continuing fall in the number of outlets available to them. Including the 10,500 high street outlets owned by banks and the 5,900 franchised dealer outlets now in operation, and used car dealers, there are currently around 31,590 physical outlets where personal or hire purchase loans are available – 12% fewer than in 1999. That declining trend in outlet numbers may accelerate if the take-up of Internet loan application facilities increases from a current 21% of all personal loan sourcing reported by THE RETAIL CAR FINANCE MARKET IN THE UK.
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Report rubbishes mortgage equity withdrawal as a major factor in car finance
While many commentators have suggested that mortgage equity withdrawals fuelled by rapidly-rising house prices have helped the continued buoyancy of Britain’s new car market, consumer research commissioned for the MFBI report shows that this source of finance accounts for a major finance element of just 1% of car purchases. A much more significant proportion of mortgage equity withdrawals has been used to finance buy-to-let property investments and second homes, especially abroad. Personal savings were used for some 58% of car buyers over the past two years, especially in the used car market, where personal loans from direct lenders compete more directly with savings than with dealer finance. MFBI suggests that the increase in the value of used car purchases, as later used cars and nearly-new cars grow in importance, offers increased opportunities for personal load providers. Seventy per cent of used cars are currently bought for £4,000 or less, but this sector of the used market is shrinking as the affluence of car buyers grows.
Market Forecasts
MFBI forecasts that the retail car finance market will decline over the next five years (along with declining new car sales) from 2.06m advances this year to 1.75m in 2009. The value of the market will fall by 3% from this year’s £17.38bn to £16.89bn, despite a forecast 14% increase in average combined new and used car loan advance values from this year’s £8,435 to £9,650 in 2009. Point-of-sale and direct lenders’ combined finance penetration of car sales is forecast to drop from a current 74% to 68% in 2009, and the lenders’ penetration of the used car market, already accounting for no more than 14% of purchases, will fall to 12%, as interest rates rise, consumer expenditure falls, and lenders - especially in the mortgage market - face an increased risk of arrears and defaults. As base rates rise over the coming five years, and direct lenders’ APRs rise with them, discounted finance deals from POS providers could come to compete successfully with personal loans, if POS providers are able to use the retention of their title to cars financed to keep arrears under tighter control. 3
MFBI suggests that while the use of extended loan terms could buoy up flagging car sales volumes, their medium-term effect in extending replacement cycles could have the reverse effect on the car market
Opportunities and threats in the retail finance market
As independent finance companies’ margins come under pressure from declining numbers of advances, the largest of them will look to increase their use of automated transaction management and reduce staff numbers. Smaller competitors may increase their conversion rates by offering more added value services and securing more business through manual rather than computer-based credit scoring. Car dealers could be faced with reduced finance margins as POS providers seek to cut distribution costs, and some may consider competing head-on with direct lenders, especially with online offerings, and even cutting out dealer intermediaries altogether. Direct lenders are expected to increase their share of the retail car finance market. At the same time, the banks that have interests in motor finance will be able to build pan-European POS finance networks if they choose to exploit the new freedoms of the 2003 European Block Exemption Regulation to acquire and expand dealer groups. Notes for editors The data referred to in this release is just part of MFBI’s latest, 2004 edition of THE RETAIL CAR FINANCE MARKET IN THE UK, a comprehensive research survey of the sector published this month at £750.00. For more analytical information on this report, e-mail the report’s author, Robert Macnab, at rmacnab@trendtracker.co.uk or telephone 0870 421 4356 About MFBI Market Facts and Business Information (MFBI) was formed in 1987 as an independent specialist market research and analysis company providing strategic marketing and research services to the automotive and related industries. In August 2004, MFBI became part of Trend Tracker Limited, a new larger company set up with other leading automotive analysts to provide a wider range of research products and services to the automotive industry. 4
These reports are comprehensive and provide a detailed strategic analysis of specific markets, providing a quantitative analysis of market demand and an analysis of opportunities and threats for specific groups of suppliers in each market. The sectors that MFBI is analysing through published reports on the motor industry include; Mechanical car servicing and repairs Used vehicles New and nearly-new vehicles Car body repairs and refinishing Car finance and insurance The future of block exemption and car retail systems
For more information about these and other services offered by Trend Tracker Limited contact Brian Taylor on 0870 421 4355. E-mail btaylor@trendtracker.co.uk Current websites www.pram.org and www.mfbi.org - ENDS -
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