Senior motor executive's remarks shine light under bonnet of car sales figures
Sometimes in an industry, somebody stands up and calls it like it is. When they do, they cut through the hype and spin, and give everybody a dose of reality. It is informative and refreshing when it happens.
It happened this week when Ciaran Allen, sales manager with Motor Distributors Ltd (MDL), the privately owned importer of Mercedes-Benz cars in Ireland, spoke about the car market here.
He warned in no uncertain terms that the market was dysfunctional. He warned that it could be heading for real difficulty, caused by serious devaluations in the value of used cars.
A major fall in the value of used cars might be good for consumers, but it could have a major ripple effect through the whole motor sector because of the role that personal contract plans (PCPs) have had on the market here.
Firstly, Mr Allen claimed that manufacturer-controlled operations were distorting the Irish new car market by pre-registering thousands of cars on the last couple of days of the month.
Last-day sales are inferred to represent pre-registered car sales. This means the vendors boost new car sales figures for the month by effectively buying the cars themselves.
This allows them to inflate sales figures and boost market share. It also means they have to sell on those cars at a discount afterwards.
Mercedes estimates for the sector, according to Mr Allen, showed that in January 2017, up to 22pc of the total sales figure was taken up by sales in the last three days of the month.
He claimed that for February and March, that figure seemed to increase to around 40pc.
No doubt others in the industry will refute either the level of last-day sales or perhaps have a different explanation as to why it is happening and what it means.
However, if Mr Allen's assessment is correct, then it could have serious implications for the sector as a whole. Such a scenario would contribute to a downward pressure on car prices.
Some have suggested that up to 70pc of new car sales in Ireland are through PCPs.
These arrangements protect the customer by guaranteeing a minimum future value on the car when the customer changes it for a new one.
The big question is, what if used car values fall so much, that the lender or dealer loses money on the guaranteed future value?
Where it is a lender, then a large Irish bank would have to take the hit.
A great number of PCPs are being financed by the banking arms of the motor manufacturers themselves. In that case, the likes of Volkswagen Bank would take the hit.
These are big boys who can afford to take financial losses - up to a point.
However, if that value is guaranteed by a car dealer, whose business might not be big enough to absorb a series of those financial losses, they could be in trouble.
Some have equated the rise of PCPs with the sub-prime lending crash in 2008. Undoubtedly, the sums of money lent out internationally are very large.
The Bank of England has expressed concerns about motor finance lending, with its governor Mark Carney announcing its intention to force banks to set aside an extra £11.4bn (€13bn) by November 2018 to guard against potential shocks.
The Bank of England estimates that major British banks have total exposures to UK car finance of around £20bn (€22.8bn).
Yet the total amount of car finance carried by UK customers is around £58bn (€66bn), showing how much of it has come from other sources, including car manufacturers themselves.
Consumer car debt in Britain doubled between 2012 and 2016, with 90pc of new private cars financed through PCPs.
However, the Bank of England has estimated that even a 30pc fall in used car values would only hit the capital buffers of major banks by around 0.1pc.
Much of the risk is being borne by big lenders. However, it is not true to say there are no implications for customers if used car values tumbled. Those who take out a PCP expect the guaranteed future value of the car to be less than its actual value. So they have built up what the industry calls equity in the value of the car, which can then be used as a deposit on their next new car under another PCP.
If values in the used car market collapse, they might find that they do not have equity in their car when they trade it in and cannot raise the money for a deposit on another one. They can still hand back the car and walk away, but they won't own a car and might not have a deposit for another one.
At least they will have driven a nice new car for three years with minimum repayments. But that could be the end of the road.
Despite this drawback, as long as the PCP market is operated properly, the implications for customers should be contained.
The question is whether dealers are cutting slack to customers on the level of deposit required, which would bolster their sales, but could see them take on board some of that financial risk themselves.
New car sales in Ireland remain strong, but are now falling. Mr Allen's analysis of the figures calls those numbers into question, in so far as they may not represent ordinary demand-driven new car sales.
According to the SIMI quarterly report, in the first six months of 2017, new car sales amounted to 91,185 - a drop of 10pc on the same period in 2016.
The SIMI report put the fall down to rising housing, rental and health insurance costs and uncertainty surrounding Brexit. These can all affect disposable income and spending, as well as confidence about spending in the future. During the six months, new car sales declined in every county.
Meanwhile, imported used car numbers from the UK continued to rise. During the first half of this year, 46,000 used cars were imported, which represents an increase of 42pc on the same period last year.
The average price of a new car is coming down. In May 2017, it was 4.1pc lower than a year earlier, while the cost of motor insurance was up 8.4pc.
The recovery in the new car sales market since the crash years has been quite extraordinary. Some of that success has been down to improved economic conditions and the fact more people are working. It has also been buoyed by the fact that new cars cost less than they did a few years ago.
However, with 70pc of new cars financed by PCPs, it is clear this financial product has been a key driver. It is marketed as something that enables customers to fulfil their expectations. That is no bad thing, as long as the risks involved are contained and their expectations are realistic.
But the industry may become a victim of the success of PCPs, because the more cars it is enabled to sell, the more used cars will be in the market just a few years later.
For the lender or the dealer, where they carry some risk, they are not just selling a car, but taking a punt on the future value of used cars in Ireland.
The more success they enjoy with PCPs, the greater the risk of getting that wrong.