Inside the Industry - December edition

Paul Gilligans latest update on the motor industry

Inside The Industry - December

Proposed PSA & FCA MergerTo Create World’s 4th Largest Carmaker

Lets get the intials out of the way first I think? PSA are Peugeot & Citroen who now also own Vauxhall and Opel. FCA are Fiat Chrysler Automobiles who in Europe own Fiat, Alfa Romeo, Abarth, Maserati, Lancia and a chunk of Ferrari. In the US they own Chrysler, Jeep, Dodge and Ram. They now propose to merge the whole lot into one company.

Idea is PSA are strong in Europe, FCA in North America. So to start with PSA get better access into North America. As ever when these deals occur the main driver is to cut costs largely by spreading the enormous costs of new vehicle development (particularly electric and driverless vehicles) over much higher volumes. This plan envisages cost savings of no less than 4 Billion Euros a year! It was also stated that there were no plans to close factories but you can believe that if you like, and the unions (rightly I think) don’t.

Although the deal is dressed up as a 50/50 merger in fact PSA is buying FCA because it had a significantly larger market value before the deal was signed. Of course nothing is done until it’s done. There are complications in that the French government owns around 12% of PSA and Peugeot family still have about the same stake. The Agnelli family still own 29% of FCA. So as well as winning regulatory approval there will be a need for these 3 powerful forces to get into the same bed?

My bet is that it will happen because if it doesn’t neither party is big enough to compete in the future. Big question is where that leaves Renault. It looked secure as part of the Renault/Nissan/Mitsubishi alliance but now that is in total disarray Renault looks very exposed and vulnerable. Once again the French government has a significant stake so perhaps sooner or later Renault will become part of the new PSA/FCA giant?

Aston Martin – Is The Darkest Hour Before the Dawn?

AM has faced a lot of dark hours in its history. Forget the Le Mans win (one only – 1959) and the James Bond glamour this is a company that has gone bankrupt seven times. Now while it fights to keep going until the new DBX SUV goes on sale next year it has announced some pretty terrible financial results. Sales of the current model range are down on last year and losses in the first 9 months of 2019 totalled £92M. AM have found the Far East market particularly tough with sales there now 34% down.

The dawn, if there is to be one, is the DBX. Certainly adding a luxury SUV to the range can work wonders, although Bentley is still losing money even with the Bentyga selling well. Then again just look at what the Cayenne and Macan have done for Porsche. Which is really the problem for Aston. They’ve announced the DBX will be priced from £158000. So firmly in Bentley, Lamborghini and soon Ferrari territory. With excellent cars like the Cayenne and the top ends of Range Rover and BMW X5 and X6 far cheaper. Aston need to sell 4000 DBX models a year for the grand plan to work. Will they?

Make no mistake Aston Martin are close to the brink. A few months ago they raised a desperately needed £120M on the bond market but had to agree a 12% pa interest rate. It’s unlikely they could go back for more so they have to have the cash rolling in from DBX sales early next year. I think the car looks fabulous inside and out, let’s hope at least 4000 people with close on £200k to spare agree with me next year.

AM may draw some comfort from what the Cullinan luxury 4x4 SUV has done for Rolls Royce. Although I love the interior of this car I’ve always been surprised that RR could make something that from the outside looks even uglier then the Bentley Bentyga. However that won’t matter to RR as I’m a touch short of the £300k it takes to buy one of these. For the first 9 months of this year Rolls have sold 42% more cars than they did last year. That’s 3777 cars of which 1780 so almost half were Cullinans. Some of this is new business is existing RR customers switching from saloons to the SUV but the end result is very positive. Let’s hope Aston get the same benefits.

Green Issues

Sadly I can’t seem to get away from these now. Latest news is that Bristol is to ban diesel engine cars and vans from a small area in the city centre and establish a larger charging zone for less efficient older commercial vehicles. These charges will be between £9 and £100 A DAY! Closer to home (for me anyway) in the Lake District the National Trust which owns about 20% of the area is discussing banning cars from some of the most popular areas. In this case the motive is largely congestion. I can actually see the benefit of this quite clearly IF public transport is greatly upgraded to fill the gap.

Thankfully some people are looking at other things than cars as the great polluters. I read recently that because of their sheer size, therefore the size of their engines, the fact that those engines run 80% of the time when cars run 2%, and that they use “dirty” fuel, the 40 largest cargo ships in the world pollute as much as many millions of cars do. There are almost 100,000 ships operating worldwide now and it’s being suggested that cutting their speeds by 20% would have a dramatic effect on pollution levels.

Meanwhile more and more well qualified voices are speaking out against the rush to electric cars because of the environmental damage caused to the production and later disposal of lithium ion batteries. We live in confusing times indeed.

Alfa Romeo Walk Away From Sports Cars

News that will shock Alfa enthusiasts: the company announced this week they were cancelling the planned 8C supercar and GTV sports car projects in order to divert resources to the development of two new SUV models. The 4C sports car has already been dropped and the Giulietta hatchback will go soon. Going forward the Alfa range will consist of the Giulia executive saloon and 3 SUVs. Alfa bosses explain they must go where the demand is, simple as that. Can anyone hear the cacophony of Tazio Nuvolari spinning in his grave at

something well beyond maximum revs?

New Car Dealer Numbers Must Reduce, But How Quickly

I don’t think there’s anyone left in the industry who doesn’t believe that the number of new car dealerships in the UK and the rest of Europe will reduce the only question now is how quickly. Most manufacturers are adopting a policy of natural wastage so when a dealership closes for whatever reason they are not replaced. Sometimes the manufacturer simply can’t find anyone to take over the area, sometimes they don’t replace the dealer to improve the business of the neighbouring dealerships. Many think this sort of policy isn’t moving the changes quickly enough. A major industry think tank recently issued a report saying that “substantial” car retail network reductions are required before remaining dealers can see a significant increase in their profitability.

Across Europe the number of new car sales points has declined by 16% in the past 10 years, a tiny 1.6% per year. In the UK the decline has been only 2% over 10 years. Expect many more to close in the next few years than the last.

Tesla Return to Profit!

When Tesla announced their Quarter 3 financials a couple of weeks ago they surprised the markets by delivering a return to profitability recording a surplus of $261M having delivered 97000 cars in the quarter. Cost cuts are as much a factor as increased sales and not unexpectedly the margin per car dipped as the cheaper Model 3 volumes increased. The company was happy to announce more good news coming. Their new factory in China is ahead of schedule and within budget and the next new model an SUV (surprise!) is also ahead of schedule with launch now planned for Summer 2020.

Ford of Britain Moves House

60 years ago Ford moved their UK Head Office to just outside Brentwood from Dagenham. Now that iconic site has been sold for housing (what else). The vast office building will become 250 flats and the even bigger car parks will have houses built on them. All the office functions have moved about 20 miles to the East to share the site of the Dunton Technical Centre. While Ford are putting a brave face on this as a great step forward the main benefit will be cost reduction. The property sale will put a lot of cash in the bank no doubt.

Ford’s recent history in the UK has been one of retreat. The Southampton van plant closed 6 years ago, the Bridgend engine factory closes next year, now the Head Office has been sold off. Good news is that apparently all these painful decisions are bearing fruit with the company at least moving closer to profit.

UK Car & Van Sales Decline, European Sales Rise

October was another poor month for UK vehicles sales. New cars were almost 7% down on 2018 and year to date the decline is almost 3% so the drop is gathering pace. Analysts think the main problem is uncertainty and a lack of confidence caused by election worries and the dreaded B****t. Certainly those who make individual decisions are backing off more, retail sales were down 13% in the month and small business over 30%! Only big fleet business (where the manufacturers and dealers don’t make any money) held up.

Equally worrying for those involved in commercial vehicles was an 11% drop in new van sales. So far this year van sales have held up at 3% higher than last year. The crash in October was there fore unexpected and an unpleasant shock. It was concentrated in the bigger van area (think big Transit or Mercedes Sprinter) where sales were a staggering 19% down. Once again small businesses being cautious?

Across Europe the picture is different. Latest figures available are for September where sales were up over 14% against last September. This has almost made up for a slow start to the year with year to date sales only 1% down. There were wide divergencies with in the month Sweden 40% up and neighbouring Norway only 5%. Critically the large markets of Germany, France and Italy were all well up.

Star performers in September were VW almost 58% up on last September when they were very short of vehicles. While the Golf continues to be their top seller it is VW’s strength in SUVs that is now driving their growth. Which perhaps explains Alfa’s decisions? Tesla sold 17500 Model 3s across Europe in September (more than Mini!) to make it the 11th top seller, amazing result for a car that starts at over £40000.

Pendragon & Lookers Still Facing Big Problems

These are two of the UK’s largest dealer groups. Lookers who operate form about 165 dealerships are facing an FCA investigation over how it has been selling financial products. In the summer the company warned it was facing “difficult trading conditions” but last week brought its Q3 statement forward by about two weeks to say that conditions since mid September had been “much more challenging than expected”. The shares which traded at £1.85 four years ago are now under 50p. The two most senior executives in the company have left abruptly. At least 13 of the dealerships (almost 10%) are to close before the end of the year.

Meanwhile rival giant Pendragon has reported a continuing decline in sales and profits and that it had completed the closure of 22 of its Car Store used supermarket locations. Pendragon sees green shoots as the drastic actions taken begin to bear fruit. For Lookers there may be more pain to come. Both are now searching for a new boss willing to take on the challenge.

GM Lose $3 Billion Dut To Long Strike

The industry used to be so strike prone that is was more newsworthy to report when there wasn’t a strike in the UK car industry than when there was. Thing have changed out of all recognition but in the US GM has just settled the biggest dispute for many years. In mid September 48000 of their workers went on strike and didn’t go back to work until late October. Thirty four factories in the US were closed and plants in Canada and Mexico were forced into part time working due to lack of components.

Production of over 300.000 vehicles was lost which GM say will knock £1 Billion of this year’s profit but the settlement they were forced to make will cost twice as much. An expensive four year pay deal was eventually agreed which included permanent staff getting an $11,000 dollar bonus (each!) just for agreeing the deal. In addition GM committed to invest $9 Billion in the US $7.7 Billion going into factory modernisation

Paul Gilligan

[email protected] www.gilliganvehicleconsulting.co.uk

07785 293222