Update on the automotive sector

A year-on-year double digit decline in new car sales for March saw overall Q1 2022 sales fall 2% compared with the same quarter last year. After year-on-year gains in January (28%) and February (15%), new car sales in March fell by -14% compared with March 2021. The year-on-year decline in sales reported in March is cause for concern, given that it is calculated against a comparable period in 2021 when sales were negatively impacted by the effect of showroom closures as a result of COVID-19 restrictions. Moreover, March 2022 sales lag even further behind pre-pandemic averages and could be symptomatic of a wider malaise across the sector as pent-up demand built up over the last two years begins to dissipate. To compound matters further, March is traditionally the biggest month of the year for new vehicle purchases as it is linked to the release of new registration plates. As a result, the decline in new car sales in March more than outweighed the gains made in the first two months of the year.

Supply issues acted as a drag on sales volumes, as manufacturers continue to adjust to the global semiconductor shortages. Manufacturers’ confidence in securing chips was further dented in Q1 2022. This was due to the Russian military invasion of Ukraine which has reduced the availability of key raw materials and recent widespread quarantine measures in China which have triggered plant closures and raised the risk of ‘stranded’ semiconductors.

Throughout the semiconductor shortage, the used car market in the UK has been booming due to consumers’ willingness to switch to nearly new or quality used cars as an alternative. Rising prices, especially in the used car sector, have meant some manufacturers and dealers have been able to offset the impact of declining volumes on their bottom line. The average cost of a second-hand vehicle is now reported to be more than £20,000, with some ‘nearly new’ cars selling for more than their original price. However, the growing squeeze on the cost of living and surging fuel prices could see demand for used cars drop over the next quarter.

Despite the ongoing challenges faced by the industry, electric vehicles continue to perform above expectations. In Q1 2022, sales of new battery electric vehicles (BEVs) more than doubled (+102%) compared to with 2021. Meanwhile new plug-in-hybrid electric vehicles (PHEVs) saw double digit growth (12%). Across the first three months of the year, BEV and PHEV combined sales accounted for almost a quarter (23%) of all new car sales, compared with 18% in the same period last year.

Sustaining this rate of growth of EV sales ahead of the 2030 ban on polluting vehicles will be a challenge. However, the government’s Electric Vehicle Infrastructure Strategy announced in March adds important momentum towards achieving an all-electric future. The strategy, which includes a commitment to reaching 300,000 public charge points by 2030, will help alleviate anxiety among the one in three UK households who do not have off-street parking, making access to EVs more equitable in the future. The strategy combined with major private sector investments begins to remove some of the constraints to continued growth.

As well as the infrastructure strategy, the government also recently announced a consultation on the design of a zero-emission vehicle mandate for manufacturers. The mandate would require manufacturers to sell a certain proportion of zero-emission vehicles every year in the run up to 2030. Failure to meet targets would result in fines.

A 5 percentage point drop in consumer confidence and an underlying 23 percentage point drop in consumer confidence in levels of disposable income have forced some consumers to consider the affordability of their car repayments. According to our Tracker, compared with Q4 2021, there was a higher proportion of consumers wanting to downgrade their vehicles (+ 3 percentage points to 7%).

The rising cost of owning a car is a major contributing factor in the current squeeze on the cost of living. Not only do car repayments make up a major proportion of many consumers’ household bills, but the cost of running a petrol or diesel car has increased substantially this quarter, with fuel costs rising quickly. For example, the cost of petrol has risen above 160 pence per litre, while the cost of diesel is above 175 pence per litre.¹

The rising cost of car ownership has also contributed to a decline in demand. With consumers feeling additional financial pressure this quarter, the percentage of consumers planning to purchase a car in the next three months fell to 5% from 7% in Q4 2021 and a high of 8% in Q2 2021. This decline also signifies that any pent-up demand in the sector has started to dissipate.

¹Latest petrol and diesel prices | RAC Fuel Prices | RAC Drive

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^*Deloitte’s overall confidence index is the aggregate of six individual measures: levels of disposable income, levels of debt, job security, job opportunities and career progression, children’s education and welfare, and general health and wellbeing.