18 October 2020

It may be a controversial view, but I believe the hot topic to concern ourselves within the automotive retail sector is not Covid-19, but the final negotiations around Britain’s trading relationship with European Union following from 1 January 2021.

I do not want to belittle the situation around Covid. Lots of people died earlier in the year of Covid and some prematurely. This was a tragedy.

However, the key matter to my mind which will dictate the fortunes of the sector in the next few years is the negotiations over future trade with the European Union. We will know within a matter of weeks whether we are going to have some sort of free trade arrangement, which will mean a continuation of the current situation of tariff free trade.

For those motor retailers with European-based car production, this is no small matter since a 10% hike due to tariffs will clearly have an impact on demand. Higher prices lead to lower sales and always will.

Of course, those motor retailers selling new cars made outside of the European Union such as Japanese and Korean manufacturers may very well be at a distinct advantage as free trade agreements may mean their exports to the UK are tariff free and are at a competitive advantage.

We may very well see in such circumstances, big shifts in market share in the UK new car market.

The situation is of course complex since most manufacturers have some production in the European Union and some elsewhere. If a trade deal does not materialise retailers will soon come to feel the impact of where cars are made. Jaguar Land Rover, Nissan, Toyota to name but a few have UK production which again should give them a market advantage in the home market. You can imagine the boardrooms of motor retailers, analysing to death, where cars are made by model being of quite some interest!

Should we enter an Australia-style deal, the other negative aspect of this trading arrangement, otherwise known as ‘no deal’, would potentially be a continued weakness in the performance of Sterling against world currencies, particularly the Euro.

The biggest impact of the referendum result was the precipitous fall of Sterling. This led to an immediate derating of the share prices of the UK automotive retailers, for example, and for pretty good reasons.

New car pricing and volumes in the UK are heavily correlated to Sterling strength with the Euro. The City got it right in that profits were very much under pressure in the sector as Sterling weakness drove lower margins for manufacturers and retailers alike selling new cars in the UK.

But here is the rub. As we sit here this weekend with Boris going on the television talking up no deal, the chances are that sense will ultimately prevail and the European Union’s usual last-minute panic in negotiations, will result in a deal actually being announced in the next six weeks. This would be the single most important moment in the UK automotive retail sector in the last five years. It will determine how we are going to do our business and whether we going to see some radical shifts in the market from the ending of current trading arrangements.

The SMMT is certainly taking this view with some apocryphal statements to the press this week talking about the “devastating impact on the sector, on the economy and on jobs in every region of Britain”.

Are they right? Well life in our industry will be much simpler if we just had a continuation of the tariff-free trading we currently enjoy and if Sterling increased on the back of a deal and the ending of uncertainty.

From an automotive retailing perspective, we would see substantial changes in the event of no deal as alluded to above. It would not, however, be the end of the sector.

People would wake up on 1 January and the next day would go out and buy a new or used car.

People would still have their car serviced.

The sector has coped with 10% changes in currency for many years and tariffs would be accepted and worked with over time. There would be changes in market shares and indeed potentially market size for sure.

A rise in new car prices due to tariffs would probably have a beneficial impact on used car prices over time and the sector does very well when it’s normally depreciating assets actually goes up in value as we have seen of late!

We are now at the moment the referendum result in 2016 was always going to end up at. A standoff. A fork in the road.

While people may be concerned about Covid, and indeed at a personal level the effects can be devastating, I would postulate that the outcome of the trading negotiations are far more important for the next five years for the future of the industry.

Let’s not get fixated by cases, lockdowns, testing levels et cetera and miss the importance of what is going on between London, Paris, Brussels and probably most importantly Berlin.

The next six weeks are crucial.

Robert Forrester

CEO

Vertu Motors PLC