2020 Automotive Sector Outlook - Helping you prosper - UHY Hacker Young
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2020 Automotive
Sector Outlook
Predictions for the year ahead from
our specialist automotive team.
Helping you prosper
Contents
02 04 06
Protecting your
Brexit puts the brakes business from FCA
State of the market on transaction activity action
08 10 14
Cost control – our The spark for Clearing the EV
Top 10 radical change hurdles
16 18 21
What lies ahead
VAT and PAYE – are for the sector: the Our automotive
you compliant? experts’ perspectives expertise
1
State of the market
Whilst there is little doubt that ambition to end the sale of all vehicles with
the UK automotive sector remains an internal combustion engine by 2035.
one of the UK’s most resilient and So, as we start to make our way through
important economic pillars, 2019 2020, the outlook remains uncertain with
was a tough year for the sector a number of changes evident across the
with the continuing burden of industry, ongoing profitability pressures
political and economic uncertainty and predictions about disruptive trends
finally having an impact. and the future of the dealership model.
However, there are many excellent dealer
The challenge surrounding the ongoing groups out there that have a history of
Brexit saga loomed over us as a key demonstrating strong resilience, and we
concern for most businesses across the are confident they will continue to do so.
country. For the UK automotive industry,
the stakes were particularly high, with the Roadmap to our Outlook
SMMT announcing that “Every minute of
During 2019, we saw a major change
delay could cost approximately £50,000
in the leadership of the PLCs, following
in gross value added to the industry, over
depressed share prices and new
£70 million per day (based on a five day
management at two of the largest
working week).” 1
groups in the country. 2019 also saw a
With consumer confidence heavily number of PLCs dispose of sites, a trend
knocked by political uncertainty in the lead we expect to see continue during 2020.
up to the general election, the pressures We discuss transaction trends and deal
were particularly evident in Q3 and Q4 values, including the impact of the PLC de-
of 2019. With 158,639 new car sales in consolidation and the continued appetite
November 2019, SMMT figures revealed for the value brands, on page 4.
that sales were down 2,018 (1.3 per cent)
With expectations of a challenging year
on the same month in 2018. That fall
for revenue growth in 2020, we focus on
was significantly less pronounced than in
the key areas to assist with controlling
October, when the market was down 6.7
costs and improving profitability on page
per cent. It was not all doom and gloom
8, we also take a deeper look at the rise of
for new car sales, however, with hybrids,
the electric vehicle and whether this really
plug-ins and electric cars continuing to
could spark radical change for the industry
grow in popularity and plenty of new,
on page 10, and our tax experts outline
exciting and more affordable models due
the key VAT and PAYE issues impacting
to launch in 2020.
on the sector on page 16. On page 6 we
As the year came to an end, we saw the hear from FCA expert, Robert Dedman,
Conservative party gain a huge majority who discusses the impact of the FCA’s
in the general election which resulted continued scrutiny on the sector and looks
in the UK leaving the EU on January 31 at how this could affect the dealer business
this year. Whatever your opinion of the model going forward – it is an essential
election outcome, a firm result is better for read for any dealer.
consumer confidence and the economy
In addition, we have asked a panel of
than the stand-off we have had for the
automotive experts, from both within
past two years. That sentiment was
the businesses and also advising them,
shared by the National Franchised Dealers
for their views on how the landscape is
Association (NFDA) who stated that it
likely to look for the sector through the
hoped the election result “will stimulate
rest of 2020 and beyond. In the words
the motor retail industry”, provide “clarity
of one of our expert panellists “There is
for business going forward” and act as a
no doubt 2020 will have its challenges,
stimulant for the sector. 2
but we believe those dealers who remain
Although much now depends on the focused will more than hold their own.”
resulting trade talks with the EU, which We couldn’t agree more. Read our Experts
are set to take place throughout 2020, Panel debate on page 18.
dealers are at least in a position to better
We hope you find real food for thought in
plan their strategies and budgets for 2020
this, our 4th Automotive Outlook. If any of
and beyond. Following an increase in new
the topics covered prompt any questions,
car registrations in December things were
you will find our contact details on page
looking positive, but January saw the
21 – our specialists will be pleased to assist
market fall once again as we exited the
and we look forward to hearing from you.
EU and the government announced its
1
SMMT 2019 UK Automotive Trade Report, June 2019
2
https://www.am-online.com/news/market-insight/2019/12/13/
2 nfda-hopes-conservative-election-win-will-stimulate-motor-retail
3
Brexit puts the brakes on transaction activity
Despite Brexit uncertainty having little impact on the level of transaction activity during 2018, it’s fair to say 2019
painted a very different picture.
By the end of the year we had seen a significant decline in the number of deals completed, as well as a considerable fall in deal values.
Whilst we had been predicting a downturn for some time, the results were in sharp contrast to 2018 which saw dealer profitability
maintained and the continued expansion of groups. This was not the case for 2019. With a lack of acquisition appetite, particularly
amongst the majority of the PLCs who were not in buying mode at previous multiples, there was a notable reduction in activity.
2019 at a glance - the headlines
• Deal activity almost 50% down, with 24 deals completed in 2019, compared to 44 in 2018 and 38 in 2017
• No ‘mega’ deals reported with huge goodwill sums, and a general drop in the average deal value
• De-consolidation from the larger groups – a number of the deals completed in 2019 have involved the larger groups
and PLCs disposing of non-core sites or businesses at the brand’s request
• Significant uncertainty within the PLCs – CEO departures for both Pendragon and Lookers and profit warnings from
both throughout the period
• International owners involved in 22.5% of transactions (18% in 2018), possibly due to the exchange rate benefit
and also a new entrant in AW Rostamani making bolt-on acquisitions.
Deal volumes and values trends In summary
There has been a significant
decline in the number of deals
completed in 2019 with deal
volumes almost 50% down year
on year, back to the levels of the
recessionary times 10 years ago.
Whilst deal values were within a
similar range to 2018, goodwill
multiples are softening and we
would anticipate this to stabilise
in 2020.
4
The big picture Uncertainty around property We expect to continue seeing strong
valuations and wavering lending demand for the right business, however
PLCs slimming down appetite it is critical to identify the strategic buyer
2019 saw a number of PLCs dispose early in a process to deliver maximum
of sites, whether that be manufacturer A significant proportion of motor
shareholder return. Opportunities will
encouraged or a strategic decision by businesses are heavily invested in freehold
continue to become available as larger
the board to focus on a smaller number properties which have appreciated nicely
groups trim their portfolios and smaller
of brand partners. Pendragon continued over the past decade. Over the past 12
dealer groups come under greater financial
to sell off a number of their Land Rover months we have seen larger variances in
pressure and scrutiny, therefore looking to
Jaguar sites, including the Stoke business valuations, in certain circumstances up to
exit. The de-consolidation of the PLCs will
to Rybrook and the Swansea business to a 30% differential between professional
bring opportunities for those well placed
Sinclair Group. Inchcape also disposed of a opinions. We would always expect a level
privately owned businesses with funds in
number of Volkswagen group businesses, of difference in opinion, but this gap
place to make strategic acquisitions.
including two Audi businesses to Motorline appears greater than we have ever seen
and four Volkswagen businesses to before and most likely driven by lenders The majority of buyers are likely to be
Group 1. Jardine sold eight Volkswagen being extremely cautious and valuers not international investors, with a small
and Skoda sites, plus two Honda wanting to fall foul of ‘over valuing an number of the PLCs and privately owned
businesses to Marshalls as they rationalise asset’ should something go wrong. groups also in the market. This is in
their portfolio. Finally, we saw Lookers contrast to the last five years where a
Shifting gears significant proportion of the purchases
close a number of ‘non-core‘ dealerships,
Although transaction numbers have were made by the larger groups, perhaps
including some of the Ford sites recently
reduced, this is no surprise given the signalling it is time for a change.
acquired as part of the Jennings acquisition
environment of political and economic
in 2018. As we move through 2020, we hope we
uncertainty that engulfed 2019. As we
will see manufacturers address the dealer
Continued interest from overseas enter into a transition phase following
profitability challenges and, with a more
the UK’s exit from Europe, there are still
Whilst the interest of international stable general economic environment, we
some areas of uncertainty. However
investors in the UK automotive market expect to see a gradual improvement in
greater political stability means businesses
has continued, it is fair to say those who both deal volumes and deal values as the
that are keen to expand will be able to
are not already in the market have paused year progresses.
make more confident decisions and those
in recent times to understand the full
looking at an exit can be confident that
impact of the governmental challenges
they can still take advantage of the £10m
and Brexit outcome. Whilst the exchange
Entrepreneurs’ Relief capital gains rate.
rate still looks attractive, and softening
multiples are making acquisitions extremely
good value in comparison to overseas
opportunities, we finally saw the climate Our predictions for 2020
of uncertainty cause concern with Based on our current discussions with clients and our wider contact base in the
international buyers. However, the likes sector, we expect the following trends and themes to emerge during 2020:
of Group 1, AW Rostamani and Motus,
• Greater international interest
who are already well represented in the
UK, continued to purchase businesses • Potential for distressed business opportunities to become available, with many
and grow their market share; perhaps lenders taking a pessimistic view on the retail market
suggesting those with established • Transaction activity from medium sized groups to continue as larger groups
management and a better understanding dispose of parts of their business and smaller operators look to exit
of the market feel more confident to grow • Businesses that have grown significantly in recent times may feel pressure from
their business in the UK, looking at the brands and funding partners to de-leverage through part disposal of non-core
longer term picture and potential returns. assets
Profitability pressures • Continuing appetite for the value brands; in particular Kia, which is seen to
offer a strong product range, reasonable investment levels and a very stable UK
A number of the premium brands such
management team
as BMW, Audi and Mercedes came under
profitability pressures in 2019. It has • An increasing interest from the likes of Toyota, Lexus and Volkswagen due to
become clear that buyers are moving their upcoming EV product lines
focus more towards return on investment • Further expansion in the area of used car stores/sites amongst the PLCs and mid-
as opposed to the brand logo above the sized groups
dealership door. There has of course been • Some diversification away from the typical retail model with franchised retailers
the continued impact on many franchises showing a growing interest in IT businesses, brokerage businesses, finance
from vehicle supply issues, whether this brokerages and low-cost used car operations.
has been linked to emissions, factory
shortages or inventory being diverted to
other markets. How long this may continue
for we do not know, although signs of
improvement are starting to show.
5
Protecting your business from FCA action
– the expert’s opinion
In early 2019, the Financial Conduct Interestingly, variable commission models gives it to hold people at all levels of the
Authority (FCA) published its highly (where the amount of work done by the regulated sector to account. So expect
anticipated findings on the motor broker dictates the commission paid) are to see more enforcement cases against
finance market. It quickly became not going to be banned, but the FCA has individuals to arise when there have been
said it will monitor these arrangements significant failings.
clear that the sector is a priority for
carefully to make sure they are not just
the FCA, which expressed concerns I also expect the FCA to do more to protect
discretionary arrangements in disguise.
that the industry’s approach to car vulnerable customers. They put out a
finance and associated products is a Although this is just a consultation, it is consultation on identifying and protecting
driver for large levels of consumer likely that the rules will be made later vulnerable consumers in July 2019, and
detriment. this year in similar form as the FCA has will feedback on those proposals later in
consulted on. the year.
With the regulator’s scrutiny showing no
Does Appointed Representative Finally, another area of focus for the FCA
signs of diminishing, it is vital all lenders
across the financial services industry is the
and brokers fully understand the consumer status effectively mitigate the
question of ‘culture’ and the impact of
credit requirements and disclose all the risks?
a negative culture in business as a driver
facts to potential buyers. We spoke to
It can do, but not all that much. Appointed for consumer detriment. This is likely to
Robert Dedman, Special Matters and
Representatives (ARs) are bound by the continue in 2020.
Government Investigations partner at
international law firm, King & Spalding, same rules as everyone else. It’s just that
the Principal firm is responsible for their What areas of non compliance
who shared his views about the FCA’s
compliance with the rules. have you found or are you aware
ongoing sector focus, highlighted some of
the key issues dealers should be aware of of in the sector?
So, you might think this means that being
and provided his top tips to help ensure an AR is a kind of ‘regulation lite’. Obviously I can’t talk about specific clients,
compliance. The insights shared are I think you do that at your peril. but turning the question on its head
invaluable and an essential read for slightly, I think the best businesses are
any dealer. Given the Principal is responsible to the
those which look proactively at compliance
regulator for their ARs’ compliance, they
issues, take them seriously when they
GAP insurance – what is likely to are required to have risk management and
arise, and make sure that any affected
happen to the ability to sell this control frameworks for overseeing them.
consumers are made good.
and similar products? Where the Principal is particularly risk
I don’t expect the FCA will look to ban averse, this can lead to some fairly intrusive That said, no business operates in a
point-of-sale GAP insurance altogether compliance processes and checks. It also zero-failure environment, so the key is to
unless it feels that the industry is mis- means that the AR’s ability to form its own understand where the greatest risks are,
selling those products on a very large scale. judgement about the risk appetite it wants and then to make sure these are prioritised
to have can be severely curtailed. for review by Compliance. It’s important for
However, if the FCA finds significant a business to consider how it can monitor
problems in GAP insurance sales – for And the FCA have some pretty broad
for potential problems and prioritise
example as a result of an enforcement powers to intervene in individual firms if
Compliance resource appropriately.
investigation, or thematic or supervisory needed. So, all in all, I’m not sure I’d say
Management Information (MI) is key to
work – it might well look to intervene that AR status is the solution to intrusive
this. Examples of trends in MI that could
in the sector again in a more targeted regulation.
indicate problems might include:
way. If it did, you might expect further
constraints around point-of-sale GAP
Are you aware of any particular • a spike in non-compliant GAP
insurance, although I would be surprised
areas the FCA will be turning their insurance sales
if the FCA reached straight for an outright attention to this year? • a significant, and unexplainable,
rise in the proportion or number of
ban on the insurance as economically the Given the findings of the FCA’s Motor low mileage PCP/PCH contracts at a
product serves a useful purpose when sold Industry Review, and the high profile location
appropriately. nature of the actions they have taken over • a spike in complaints at a location,
the last year, I expect the FCA to continue which might indicate problems with
Interest Rate corridors – are these to take a keen interest in the automotive the sales process, or
likely to be reduced further or industry, particularly if matters come to
eliminated altogether?
• significantly increased staff turnover in
light suggesting significant compliance a location, leading to larger proportions
The FCA issued a consultation paper late problems across the sector. of new staff.
last year in which it proposes to ban any The FCA is very focused on the embedding
arrangements between a lender and a of the Senior Managers and Certification
broker in the automotive sector where the Regime (SMCR). The FCA has placed a
lender pays commission set by reference to lot of emphasis on the ability the SMCR
the total charge for credit provided to the
consumer.
6
Are you aware of any particular Top tips for managing the risk
sub-sectors the FCA are focusing
on? For example, Independents, Robert’s number one tip is to make sure you take the time
larger dealers? to understand the risks in your business and then design and
implement an appropriate Compliance framework that takes
The FCA tends to focus on areas that have account of those risks.
the most consumer detriment. So they will
always tend towards more intensive action Below that, his top seven Dos and Don’ts are:
against the bigger players in the market.
1. DO make sure that your Compliance function is adequately
That said, when you look at the FCA’s staffed and independent enough that it is able to exercise
regulatory action in the automotive effective oversight.
industry last year, leaving aside the high
profile enforcement investigation, you will 2. DO ensure that the tone from the top of the organisation
see action taken by the FCA to close down makes clear that Compliance is central to everything the
a number of smaller firms as well. The business does.
regulatory toolkit, as we call it, isn’t just all
about fining and enforcement. The FCA
3. DO ensure that your Compliance function has access to a
also have a range of supervisory powers range of MI to help them identify compliance hot-spots.
which they can deploy if needed that can 4. DO ensure you have appropriate governance of Compliance
have a real impact on a firm’s business, matters, including regular reports to the Board about
from appointing a skilled person to review
compliance issues.
the firm’s compliance and requiring the
firm to pay for it, right up to taking 5. DON’T forget your regulatory obligation to be open and
away the firm’s permission to undertake co-operative with the FCA under Principle 11.
regulated activities for good.
6. DON’T forget to review your Compliance arrangements
regularly (and with external support as needed) to ensure
they are fit for purpose.
7. DON’T forget to keep your Compliance documentation up
to date, and to review it regularly.
About Robert Dedman
Robert is a Partner in the Special Matters and Government Investigations practice at
international law firm, King & Spalding. His practice is predominantly in financial services
and consists of advising clients on regulatory issues, conducting compliance reviews, and
supporting clients where there is the potential for, or an actual, enquiry or investigation by
the regulator.
As the former Head of Enforcement at the Bank of England/Prudential Regulation Authority
(PRA), Robert has nearly a decade of experience as a senior regulator and has a deep
understanding of how the regulator approaches the various issues it has to deal with.
In addition to his role at the Bank of England, Robert has worked in a number of legal roles at the FSA (as it then
was), including leading the legal team that set up the FCA and the PRA.
If you would like to speak to Robert about FCA compliance matters, you can contact him at
rdedman@kslaw.com or call 020 7551 7552.
7
Cost control – our Top 10
Driving the bottom line through profitable revenue growth is most likely the objective of virtually every business.
Dealers are faced with a daily pressure to improve profitability and increase margins and an essential aspect of
achieving this is a sustained focus on controlling costs.
Cash requirements can fluctuate significantly throughout the year and without constant vigilance, you could find yourself in
an uncompetitive situation with bloated overheads. We have outlined ten practical solutions to help manage costs, improve
operational efficiency and optimise profit.
1 2
Take full advantage of offers and
Does the role sell a car,
collect bonuses
part or hour?
From a cost reduction perspective, there is often too
Any motor retail cost base is little focus placed on seeking to reduce the net cost
heavily influenced by head count. of the new vehicle. This is due to the perception
In better economic times, we that there is little influence that can be placed in
often see additional roles being this area. Whilst this may be true for the initial
created, particularly in the larger invoicing of the vehicle, the same cannot be said of
businesses where layers of management bonuses, especially tactical. From an accounting and
and support teams can become part of process point of view, we still see a real difference in
the norm. Headcount budgets should approach to this critical area. On the one extreme, we
be created from a clean sheet annually see dealers place their trust in the sales manager and
to ensure that the ‘last year plus a bit manufacturer to ensure the bonuses due are correct.
of inflation’ doesn’t creep into the On the other hand, there are businesses that are
business. For larger businesses, central totally dedicated to understanding the nuances of the
headcounts get absorbed into dealer complex manufacturer offer with extremely strong
profit and loss via a management controls over the collection of the amounts due.
charge. It is important that there is an
appropriate degree of challenge over
these management charges as these can
be a real point of differentiation.
Minimise used and demonstrator
4
writedowns
Used cars are a depreciating asset and
3
Appraise the used car purchase and yet daily focus on the drivers of stock
part-ex processes turn is not always present. Focusing on
the basics in this area can have a positive
Another critical area is to ensure that
impact on stock turn. Are there reports in
used vehicle purchase prices are as low
place to review cars awaiting preparation
as possible. How much effort is placed by
and sold awaiting delivery? Are physical
senior management on the purchase of
checks carried out to ensure these reports are
used vehicles? Certainly our clients that are
accurate? On conclusion of the sale, how robust
dedicated to used cars (and make significant
are the discussions with the customer to ensure
profits) obsess over this area. In contrast, franchise
the vehicle is turned into cash quickly? Within
dealers will often delegate this task to sales managers
the larger used car supermarkets we see very
who are often, understandably, more focussed on
strong processes, such as the vehicle returning
achieving the new car target. The result can be poor
back on sale if not collected by the customer
buying decisions from convenient sources, resulting
within three working days. Whilst this may seem
in over paying for poorly specified and undesirable
extreme, there may be similar policies that could
vehicles. Equally the quality of the part exchange
be implemented that work with the particular
process is often questionable – how often do
dealer’s business ethos and customer base.
management sample check the physical stock to the
appraisal document to ensure the appraisal has been
carried out diligently?
85
Review employee vehicle car costs
One of the areas we would typically look at when carrying out an operational review is the comparison between self
registered vehicles and the required demonstrator and courtesy mix. The incremental vehicle count can be significant
and often symptomatic of difficulties in hitting the new car target. Regardless, the resulting writedown costs or reduced
margins have a significant drag on profitability. Many of these vehicles are driven by employees on costly company car or
alternative arrangements in addition to inefficient ‘static’ demonstrators. We would recommend a clean sheet approach to
defining the demonstrator and courtesy plan and frequently measuring the level of deviation from these plans. For vehicles
that are required, it is worth considering whether an Employee Car Ownership Scheme (ECOS) could work for the business.
6 7
Alternatives to self registrations Avoid VAT/PAYE assessment costs
via compliant processes
Self registered vehicles can be very costly in terms
of their upkeep. In the present market, meeting VAT and PAYE compliance appears to be a
manufacturer volume targets can be extremely continual focus area for HMRC on the sector.
challenging, necessitating the requirement to find Current focus areas, such as the assessments
alternative sales channels rather than relying on self into inadvertent provision of private fuel and
registrations. The natural starting point would be to discrepancies between DMS and finance
closely examine the existing enquiry management company self-billing invoices, have seen many
process to ensure the retail and corporate opportunity is dealers become embroiled in uncomfortable
being maximised. In addition, exercises to clear excess units and damaging VAT disputes. Due to the high
via low (or even negative) margin channels such as brokerage turnover of the businesses and the ability to go
can be explored and a cost benefit analysis carried out and back many years, the results of some assessments
compared to excess self registrations. can be eye watering, often running into six
figures even for relatively small businesses.
Focusing on compliance, including regular health
checks over common problem areas, can assist in
reducing this risk.
8
Technician efficiency – are they providing
true value for money?
The major cost in the service department is the
9
technicians. Most dealers have systems in place to Work with brands to optimise
monitor the efficiency of their technicians, but the network strategy from a cost
accuracy and quality of data collated is often poor, point of view
making it difficult to carry out a true assessment of their
performance. Time spent focusing on the controls over A significant amount of change has started to
the collation of this data, and then working with it, can take place over the manufacturer’s network
assist in driving additional hours, or reducing costs, in this strategy. A number now acknowledge
critical area. that a reduction in the number of dealers
represented (or a ‘hub and spoke’ model) is
required. Challenging the status quo and looking
to take advantage of this change of view (eg. by
10
negotiating the change in status of a business
from full dealer to satellite) can have a material
Make the most of buying impact on the cost base in the medium term.
clubs and other purchasing
organisations
Last but not least, there remain numerous
traditional areas of cost control that should
be reviewed as a matter of course to ensure
value for money is obtained. Many dealer groups rely on buying
clubs to increase their purchasing power and often these clubs
will carry out cost reviews on a ‘no win no fee’ basis, ensuring
that any investment in this area is self funding. Typical areas of
focus include oil, F&I commission and utilities as well as smaller
ticket items such as stationery and telephony costs.
9The spark for radical change
The ‘electric buzz’ is building momentum with an increasing interest Obstacles challenging future
from customers. The question is no longer ‘should I purchase an electric growth of electric vehicles
vehicle’, but ‘when’? The Government’s ‘Road to Zero’ strategy
The Automotive Future Forum is a small group of industry experts focused on providing declares that the sale of new conventional
the digital and physical infrastructures for new electric vehicle (EV) Original Equipment petrol and diesel cars will end by 2035.
Manufacturers (OEMs). They believe more change will take place in automotive However, there are several interacting and
distribution, ownership and mobility between 2020 and 2030 than in the last 100 years. conflicting concerns making it difficult
In this article, we hear from founding partners, Craig Fraser and Malcolm Earp, who for economic and automotive experts to
consider where the future of automotive mobility is heading. predict mix and volume of new cars over
the next five years. Over the following
points, we look at the key areas to
Where are we currently?
consider.
New car registrations in the UK for 2019 versus same period in 2018
1. Brexit, Trade Deals and Tariffs
Full year YTD 2019 YTD 2018 % change Mkt share Mkt share
2019 2018 A number of countries, including China,
have held off investment in the UK
Diesel 583,488 746,332 -21.8% 25.2% 31.5% pending Brexit uncertainty. With a clearer
Petrol 1,498,640 1,466,024 + 2.2% 64.8% 61.9% political position in place, we can expect
BEV 37,850 15,510 +144.0% 1.6% 0.7% to see several new entrants from China
and Asia competing for share in the UK car
PHEV 34,734 42,232 -17.8% 1.5% 1.8% market as the desire for electric and hybrid
HEV 97,850 83,528 +17.1% 4.2% 3.5% models increase.
MHEV diesel 32,217 3,833 +740.5% 1.4% 0.2% In China alone there are over 470
MHEV petrol 26,361 9,688 +172.1% 1.1% 0.4% companies producing electric vehicles. It is
the largest global car market and, in 2018,
Total 2,311,140 2,367,147 -2.4% Source SMMT
more electric cars were sold in China than
BEV-Battery Electric Vehicle; PHEV-Plug-in Hybrid Electric Vehicle; HEV-Hybrid Electric Vehicle; MHEV-Mild Hybrid Electric Vehicle in the rest of the world combined. With
The latest figures reveal how the switch to electric is translating into numbers and such a large home market, and as the
demonstrate the impact of: global centre of EV battery manufacturing,
China is likely to dominate the EV market.
• Greater control and substantive penalties; with fines set to increase in 2020,
investment is being pushed towards pure electric vehicles and hybrids.
• The introduction of ‘City Charges’, with ULEZ in London and others following;
creating a panic button for city drivers who own pre-Euro 6 powered vehicles.
These factors, particularly alongside the demonisation of diesel, are reflected in the above
table with new diesel falling a further 21.8% in 2019. We expect diesel to continue to
decline and the electric and hybrid mix to build momentum, albeit from a low base and
still taking a small slice of the cake.
102. Government legislation 3. OEM collaboration and However recent battery manufacturing
consolidation announcements show Europe producing
The UK government is a signatory to the 17% of global EV batteries by 2029 whilst
Paris Agreement 2015 on Climate Change The viability of OEMs making electric
China continues to dominate with a
and has already passed into law the cars and autonomous vehicles will come
forecast 69% of EV battery manufacturing
Climate Change Act 2008 which legislates under the spotlight and future profitability
in 2029 and North America at 8%.1
to enforce maximum CO2 emissions from will be dependent on collaboration on
vehicles. research and development. For some Many in the battery industry are working
car manufacturers, mergers and further on alternatives to the ubiquitous Lithium-
However, the recent demonisation of diesel
consolidation will become omnipotent to ion battery and are experimenting with
has dented this objective and across the UK
achieve the scale and power necessary to alternative chemistries like Sodium and
and EU we have seen vehicle CO2 levels
lower the production cost base to make Aluminium which have the advantage
increase since 2015, as customers change
buying electric cars more attractive. of more readily available raw materials,
to petrol vehicles which produce 20%
reducing the environmental damage
more CO2 than the corresponding diesel 4. EV Battery Supply associated with the raw materials for
vehicle. This has been further exacerbated
Purchase price consideration, charge Lithium batteries.
by an increasing trend towards heavier SUV
vehicles. downtime and driving range are still major Battery architecture is also under
obstacles to wider up take of pure electric development as current EV batteries
Penalties have been levied upon OEMs vehicles and there is a link in terms of the consist of 100s of pouch cells or 1,000s
to encourage CO2 reductions and, from economics and supply of these vehicles of cylindrical batteries with the power
2019, these ratcheted up to €95 per gram to battery technology, production and gathered from each cell. Scientists are
of CO2/km for each non-compliant vehicle availability. working on a more compact battery which
sold. It is estimated that OEMs in Europe
While it is anticipated that the cost of has the potential to double the energy by
will potentially incur €billions in penalties.
producing batteries will reduce through volume and could provide the extra EV
The results of this is a rush to launch the next ten years, the availability of the energy storage we need for the future.
hybrid vehicles. However, as they are more raw materials to make Lithium ion batteries
expensive to make, this is not a long- is a challenge for the European brands.
term solution, hitting OEM profits at a Until recently, the EU based OEMs have
time when they need to invest heavily in been slow to invest in battery making and
EVs. The winners in this are likely to be to secure the supply of battery material
Toyota and the Alliance (Renault Nissan Lithium, Cobalt and Nickel, enabling the
Mitsubishi) who already have well- Asian battery manufacturers to ring-fence
established ranges of hybrid vehicles and a materials.
long track record with consumers. 1
Benchmark Mineral Intelligence
115. Infrastructure/Energy The future is bright
The Energy Savings Trust forecasts that by The future of electric vehicles looks very
2030 there could be 8-11 million hybrid or positive. Look out for a ‘quantum leap’ in the
electric cars on UK roads, and over 25 million next five years as we see some very exciting
by 2040. This would equate to about 80% of products hitting the showrooms, from new to
overall cars on the road at that time. existing brands, with pricing becoming more
affordable as we reach 2025.
At present approximately one third of
households in the UK do not have a driveway The challenge will be for dealers to become
or garage and cannot install a home charge– mobility retailers, which will require a new
point. Currently there are more than 25,000 approach to the business model. The industry
charging points across the UK, and this will will undoubtedly need fewer dealer points and
have to increase substantially as the demand the representation will evolve with customer
increases. The requirement for short charge experience centres, and a highly developed
down-time will also increase, leading to digital channel supported by high street and
high power charging. Chargers are being shopping mall representation.
developed to charge at 1mw (1,000kw), with
On page 14, we look at the challenges dealers
the prospect of charging the EV battery for 75
are facing as they work to adapt to EVs and
miles of range in five minutes.
discuss how you can ensure your dealership is
The Government must lead from the front fit for the future.
and accelerate the number of charging points
available. Importantly they must also ensure
the electric grid has the capacity to power
the increasing demand in electric vehicles. It Want to know more?
has been estimated that charging 10 million
EVs on the road in 2030 will need between Visit www.uhy-uk.com/EVs-spark-
11GW and 20GW of extra capacity. However, change for more about the history of
smart charging and vehicle-to-grid technology electric vehicles and a detailed analysis
means EVs will be able to help smooth about the key areas impacting the
electricity usage through the hours of the day, future development of EVs.
National Grid says. They will be able to charge
mainly when demand is low and even feed
back into the grid when demand is high.
Authors:
6. Cars and future mobility
Almost all car manufacturers are making
Craig Fraser
a push towards electric and autonomous
Founding Partner,
vehicles, partly fuelled by intense competition
from new entrants like Tesla, BYD and NIO, Automotive Future Forum
but mainly driven by government pressure to t: 07802 188640
reduce carbon dioxide emissions and the drive e: cfraser714@btinternet.com
towards cleaner air quality.
We are already seeing large fleet and leasing
companies taking a more active interest in the Malcolm Earp
electric and hybrid vehicles available. 2020 will Founding Partner,
see a near doubling of the current product Automotive Future Forum
range with the arrival of the following EVs:
t: 07851 6676163
• Porsche Taycan e: malcolm.earp@m2tac.com
• Honda e
• Vauxhall Corsa e
• Mini Electric
• BMW ix3
• Peugeot e-208
• VW ID 3
• Polestar 2
1213
Clearing the EV hurdles
During a period of change it’s Omni-channel retailing based and connected services, the
about the survival of the fittest. As we enter a world of new players, new maintenance of the vehicles, and as
What is uncertain about electric technology, new subscription mobility product and services gurus.
vehicles (EV) is the rate at which services and new connected services, In addition, dealers will also need to
this change is going to take place, digital will play an increasingly important provide much of the logistics for the brand
but what is certain is the need to part in retailing. More powerful computers locally. One thing is certain; customer care,
get fit for the future. Automotive and applications will enable advanced communication, transparency and ease of
Future Forum founders, Craig virtual reality to demonstrate vehicles and engagement will be paramount features of
their applications. future mobility retailing.
Fraser and Malcolm Earp, consider
how dealers can get in shape. To support this, brands and their dealers
Making sure your dealership is Fit
will need to be where the customers are; in
Profitability challenges the shopping mall and the new interactive
for the Future
high streets of the future. These highly The following isn’t intended to be
According to Auto Trader, footfall at
interactive mobility shops will function comprehensive, but it outlines some first
dealerships has plummeted from 30
in attracting the customer to the brand level actions to consider in assessing
million visits in 2010 to 7 million in 2018.
and integrating with an advanced digital whether your dealership is fit for the
A combination of digitisation, improved
channel. Their purpose will be to show future:
technology and reliability presents motor
dealers with a major challenge regarding the potential customer the product and 1. Borrowings
future profitability. mobility services and ensure they are set up Any change will need investment and
to interact from their advanced personal dealers should be building plans to
EVs need considerably less servicing and digital devices from home, the office and significantly reduce borrowing. However,
have many fewer moving parts which elsewhere. Primarily they will be about this can’t be done without addressing
will adversely affect dealer after-market customer experience and engagement some of the key efficiencies.
profitability. Already we are seeing in rather than overt selling.
some Scandinavian markets, where there 2. Daily Operating Controls (DOCs)
has been a big switch to EVs, that dealer New skills Central to addressing the efficiencies
profitability has declined by circa 40% and New skills will be required in the networks of the business is a clear focus on DOC
is expected to fall further. replacing Sales Executives and Service systems, managing daily the performance
Advisors with two key customer facing of the business.
However, a move to subscription-based
functions: 3. Used cars
services should off-set the drop in dealer
profitability as dealers become like the 1. Sales Acquisition Managers responsible, Used cars is one of the major areas of
Apple Store; able to maintain a profitable with their marketing and digital teams, efficiency opportunity:
ongoing relationship with customers as for attracting new customers to the
their local mobility supplier. But this won’t • The retail or trade decision must
brand and the dealership.
happen without significant realignment of be made on trade-ins at the time
2. Customer Account Managers, of agreeing the deal and trade sale
the dealer business model.
responsible for managing the ongoing planned for payment within three days
relationships with customers and of the vehicle landing
for ongoing sales of subscription
14• Retail trade-ins should be prepared, Checking how ‘mobile friendly’ your web • End of term: customers approaching the
cleaned and on display within three site is could prove to be one of the most end of a lease, PCP or financing term.
working days. important improvements in efficiency. • Service not sold: customers bringing
• Demonstrators should be written Monitoring website traffic is a fundamental in their vehicles for service who didn’t
down to true market value as they are measurement and attracting internet purchase the car at the dealership.
transferred to used car stock, and this ‘hot-leads’ (those with a phone number) is
• Lease over mileage: customers forecast to
includes ECOS cars. literally gold dust.
be over the mileage limit of their contract.
• Used cars should be written down to Results from a study of over 2,000 dealers • Service defectors: customers who have
true market values each month-end. by customer engagement system, Calldrip, not serviced their vehicle in the past ‘X’
• Stock days should be determined by highlighted that responding to a hot months.
model and strictly adhered to. A first internet lead within 1 minute has a 31%
• Declined service: customers who declined
loss is always the best loss. closing rate, however responding after 20
service at their last visit.
minutes achieves the same closing rate as
• Used vehicle stock should be planned • Sold not serviced: customers who have
if responded to after 24 hours (6% to 8%),
based on demand analysis of your never been in for service.
so the first minute response is critical.
local market with the trading out of
• E.S.P.: customers whose manufacturer
surplus stock and buying planned 5. CRM prospecting
warranty is expiring.
stock to help maintain good stock Prospecting from the dealer data base is
turn. vital. However, it is important to handle A switch to car user-ship
• For most brands, aim for an overall replies promptly and with intelligence. A switch towards ‘car user-ship’ and
stock turn of between 30 days for CRM systems need to evolve so that a subscription services and a move away from
volume brands and 45 days for personalised ongoing relationship can ‘car ownership’ will be a key factor in future
prestige brands. be created with the customer, with a car buying decision-making. This change will
• Overage stock should be liquidated predictive database fully integrated and herald a new world of subscription-based
before it reaches 60 days. central to the future operation of all services which will fully integrate mobility and
customer facing staff. Here are several lifestyle.
• Use of equity: parity weekly analysis
criteria for personalised prospecting emails:
should be used to identify customers The mass adoption of EVs and eventual partial
on PCP or finance contracts with • Smart payment: customers who could autonomy will see significantly reduced service
potential good used car and potential lower their monthly payment on a and repair with much done online. However,
to change early to a new contract. new deal. a plethora of connected services should more
4. Digital • Equity: customers with vehicle equity than replace lost traditional profit centres and
based on the payoff. potentially could enhance profit, with ongoing
Digital engagement is one of the major
• Lower APR: customers who have a relationships with the customer base.
areas of efficiency improvement in UK
dealerships. A recent Google car buying high APR contract. If you would like to know more or would
study revealed that 60% of car searches • Cash payment: customers who like to share your thoughts with the
were conducted using a mobile device, bought with cash or with non-dealer Automotive Futures Forum, you can find
but many dealers’ websites were not financing. Craig and Malcolm’s contact details on
configured to mobile device format. page 12 of this Outlook.
15VAT and PAYE – are you compliant?
HMRC continue to focus on VAT • Making sure that the VAT on debtors not been getting this quite right. With the
and PAYE compliance within and creditors over six months old is average Mid-Tier assessments being in
the motor retail sector as major correctly accounted for. excess of £100k, if HMRC have not been
opportunities to generate • Partial exemption calculation to ensure to review your records during 2019, you
that all input tax is reclaimable. can be certain that they will be in touch in
assessments.
2020.
With VAT in particular, we have seen an A checklist would be sufficient to ensure
these general compliance issues are not The basis of the assessment is that HMRC
increase in the number of compliance
missed from your VAT return calculations. unsurprisingly deem the sales invoice for
checks taking place within our client and
the transaction to be that generated by the
contact base. It is often the case that issues
Other assessment points finance company’s software and not the
identified from a VAT perspective result in
• Reclaiming input tax on commercial invoice generated by the DMS. Therefore
an employment tax check in the following
part exchanges. when the e-invoice does not match the
months, further increasing the risks. The
DMS invoice exactly, particularly on the
total size of the potential assessments can • Zero-rated sales to disabled people.
sale of additional products which are
be very significant (often six figure sums) • Value manipulation; AKA bumped sometimes entered as one figure, HMRC
causing major distress for owners and transactions. are relishing raising assessments to recover
management. We have outlined the key
• Other zero-rated sales such as exports any under declared output VAT.
issues you should be aware of.
and removals.
This problem can only be resolved by
Key VAT issues • Correct treatment of plug-in grants. educating the staff who input data into
The typical VAT review by HMRC can With the exception of ‘bumped’ the finance house applications. However
be split into three parts; the general transactions and plug-in grants, the basis as dealerships often work with several
compliance issues that have been checked of these checks is around evidence and finance providers, each using different
for years, other assessment points and the the retention of the correct documents systems, this is a somewhat difficult task.
newer issues that are giving rise to material to endorse the VAT treatment of the Hopefully 2020 will see the finance houses
assessments. transaction. Where there is a lack of such work together with dealerships to improve
documentation, HMRC will assess for the software and help prevent this from
General compliance issues
VAT that has been under declared or over happening, but this does not help with the
• Private use charges being paid to assessments that are being raised in the
claimed.
HMRC to account for the private use of meantime.
demonstrator vehicles. The E-sig issue
We are aware that HMRC have agreed
• Fuel scale charges being paid to HMRC HMRC’s most recent ‘cash-cow’ is the issue resolutions with some dealerships on this
to account for the private use of fuel around e-Signature (E-sig) documents. matter. So if HMRC have not yet been in
paid for by the business. 2019 saw many assessments raised with touch, now is a good time to test your
• Accounting for deposits and credit dealerships across the country that have systems to see if you are affected.
notes correctly.
16Key PAYE issues fuel may be unaccounted for – so it is easy a company and the end client engaging
HMRC continue to focus on the motor to see why HMRC are so fond of this issue. those companies, as to whether an
sector with PAYE inspections. Fuel is employer/employee relationship exists in
Is a van really a van? truth, and will require checks to be made
without doubt the biggest risk area, but it
is not the only one, and the cost of dealing Looking beyond fuel, another significant by the end client to determine if they need
with a full scale HMRC inspection can be area of focus is the question of whether to be deducting PAYE from any payments
significant. Now is the time to get ahead a van really is a van. That may seem like made to them.
of things. a silly question, but when it comes to the
The main area where this will be relevant
definition of a ‘van’ for the purposes of
Are you fuel compliant? within the motor sector is the provision of
PAYE and employee benefits, you would
valeters who are often engaged via service
Fuel benefit has been an issue for a long be surprised by what actually constitutes
companies. HMRC have been particularly
time now. HMRC will always look closely at a ‘car’.
concerned about the dealerships that are
the arrangements dealerships have in place provided with valeters by third parties
In order to be considered a van, the vehicle
because, for them, it can be a very easy such as personal service companies or
must be of a construction primarily suited
‘win’ due to the way the rules work. intermediaries acting almost as recruitment
for the conveyance of goods or burden.
Where fuel cards are in operation in a This means that where a vehicle can be agents.
business, there must be robust systems in said to have multiple purposes it would no
You will need to ensure these
place to account for their usage in order to longer meet this rather narrow definition.
engagements are reviewed and that you
demonstrate that no company funded fuel have determined the correct treatment of
The perfect illustration of this is the VW
has been provided to employees for private the payments made.
Transporter Kombi, which as is hinted at
journeys. If your employees are driving
with the name has a combined purpose
demonstrator vehicles and use a fuel card
and is not a van as far as HMRC are
How can we help?
to take a customer on a test drive, are you Of course, whilst prevention is better than
concerned. With a near £40,000 list price
able to account for exactly how much fuel cure, we can also assist with mitigating
and CO2 emissions of up to 176g/km this
was used with the customer, and is the the impact of any current or historical (last
is a very expensive prospect in comparison
balance then recharged to the employee four years) assessments that HMRC have
to the flat rate van benefit charge.
after they drive that vehicle home? raised. In recent months we have assisted
Without extensive mileage logs it can be IR35 changes clients with a number of issues and have
nothing short of impossible to ‘prove the There is a change coming in April 2020 found that, in certain circumstances,
negative’ and demonstrate to HMRC that relating to the use of ‘personal service negative equity based assessments can be
not even a single drop of fuel was available companies’ which many will have heard challenged.
to your staff, and that really is all it takes. referred to as IR35 legislation. We would therefore recommend anybody
Situations like this can quickly lead to six These rules look at the relationship who has received an ongoing or historical
figure settlements – regardless of how little between those supplying their services via assessment to get in touch to see if we can
assist.
17What lies ahead for the sector:
the experts’ perspectives
We asked a panel of industry 2019 was a challenging year for overhead base due to the size of the
experts for their insight on the the industry, what key issues do facilities they are trading from, meaning
outlook for the automotive sector you put this down to? they are relying on all departments to
through 2020 and beyond. Here contribute to the overall profitability.
All of our panellists were in agreement He went on to say “with a number of
are their views on some of the
that the overriding challenge affecting the franchises we have seen limited to non-
issues being discussed at our industry was a result of the political and existent contributions from the new vehicle
meetings with the sector’s business economic uncertainty that engulfed the sales department, leaving a large hole in
leaders and advisers. UK. There was a real consensus that this the P&L.”
Commenting on the market were: caused a decline in consumer confidence
and resulted in increasing nervousness The dealers on the panel, Sir Peter Vardy,
about making large purchases. Mike Allen, Chairman of Peter Vardy Group, and
head of research at Zeus Capital, believes Steven Eagell, shared concerns that
the uncertainty driven by Brexit and the certain manufacturers chasing market
David Kendrick share have forced dealers into regular
UK general election had an effect on new
Head of Automotive, car demand throughout the year, adding preregistration activity and transacting
UHY Hacker Young that “buyer confidence was also adversely low margin business through the renewal
impacted in the used car market through of PCP agreements too early into their
various phases of 2019 as well.” lifecycle. Steven explained “this has a
knock-on effect for used cars as they may
Vehicle supply issues were also seen to be be overpriced, and their monthly payments
a key concern for manufacturers, either will be too near the equivalent new car.”
Paul Daly due to emissions issues and shortages of
Automotive Partner, compliant product or where vehicles have With diesel demonisation still in full force,
UHY Hacker Young been diverted to alternative countries the lack of affordable electric vehicles was
due to the exchange rate benefit. David also seen as an issue and it was felt that
Kendrick, UHY’s head of automotive, consumers need more help and education
explained “we have seen significant on making their next car purchase decision.
challenges with supply throughout the Sir Peter commented “the original proposal
year with a number of brands - the biggest that it would all be sorted by 2040 was
Sir Peter Vardy a good suggestion. Manufacturers could
affected being Volkswagen Group.” UHY’s
Chairman, automotive expert, Paul Daly, agrees, cope with the target and the infrastructure
Peter Vardy Group adding that “the ongoing weakness of the could be in place. But politicians issuing
pound means there are lower profits from sound bites that 2025 was the in fact the
UK sales for manufacturers. At the same date has scared everyone. It has panicked
time you have a European market that is manufacturers and paralysed customers.“
still growing quickly and the net result is
that we no longer get first call on the most Cazoo launched in December 2019,
Steven Eagell
popular vehicles here in the UK.” Steven vowing to “transform how eight
Chief Executive Officer,
Eagell, Chief Executive Officer at Steven million used cars are bought each
Steven Eagell Group
Eagell Group, flagged that the challenge year by putting the entire process
is not only due to the lack of supply, but online.” What are your views
that many retailers have also struggled to about this?
adapt their processes in order to manage
customer expectations due to longer lead Whilst all acknowledged that the new
times. entrant appears to be a well funded
Mike Allen and credible business with an impressive
Head of Reseach, Mounting cost pressures were also cited management board, our panellists did not
Zeus Capital as a key concern, particularly regarding see Cazoo making a substantial impact.
people, property and system costs in light Having seen the launched website, David
of greater FCA scrutiny. Paul explained that said he is “struggling to see what is
“wherever I go I am seeing sustained cost different to any other online click and buy
base increases. These are often not under platforms that dealers offer currently.” He
the control of the business and result added “the vehicles are well presented
from bullish investment decisions, often and the process is user friendly, however
imposed by manufacturers, made in better the seven day cooling off period and part
times. In addition, staffing costs seem exchange appraisal may cause this model
to be continually expanding and eating some difficulties. The dealers I have spoken
into profits.” David added that a number to don’t seem concerned about Cazoo
of dealerships now have a significant being a significant disrupter.”
18You can also read
