EV price war could spread to older cars

The price war seen in the electric vehicle (EV) market is heading for petrol and diesel cars, raising the threat that retailers will have to slash prices and swallow the hit to margins. 

Analysts at investment bank UBS expect global car production in 2023 to outstrip sales by 6 per cent, or 5mn vehicles, as supply chain bottlenecks ease. This could see price cuts spread into the combustion engine segment of the auto sector in the second half of 2023.

“Given the bullish production schedules, we see high risk of overproduction and growing pricing pressure as a result,” they said.

This would prove to be an unfortunate headache for motor retailers who have become used to higher prices due to supply constraints over the last few years, heightened by the pandemic. Shortages of semiconductors and other supply chain travails have meant fewer vehicles coming to market and elevated prices for consumers.

This was evident in the robust fgures of UK-listed vehicle retailers Pendragon (PDG) and Lookers (LOOK), which both recently released results for the year to 31 December. Their annual revenues were driven upwards by higher vehicle prices, and profits remained robust despite slipping back against challenging comparatives.

Vehicle prices are rising

Last year, Pendragon's average used vehicle selling price rose by 19 per cent to £18,667 and its average new vehicle price by 15 per cent to £29,529. At Lookers, an average price rise of 12.9 per cent for its new vehicles was a key tailwind for the top line in the period.

While vehicle production for the first half of 2023 is supported by strong order books – Pendragon had a new vehicle order bank of over 22,000 at its year-end and Lookers flagged one of around 18,000 units – UBS pointed to “limited visibility” on the outlook for the second half of the year and said that expectations of continued pent-up auto demand is “not supported by the latest macro trends”. 

Easing supply chain pressures have been seen in higher inventory levels. Pendragon’s inventory rose by more than a fifth in 2022, with a £44mn increase in new car stock. Chief financial officer Mark Willis said supply pressures had eased at the back end of the year. Its used car stock value increase of £63mn was largely driven by higher valuations, so there would also be balance sheet implications if that is reversed this year. 

While inventory levels still remain below historic levels, Cox Automotive said that US inventory of 1.89mn vehicles at the end of March was the highest in two years. It added that the average new vehicle listing price fell every week in March to under $47,000 for the first time since December last year, but that the average price was still 6 per cent up on the same point 12 months previously.

Attracting demand

But there are signs that car supply is taking longer than expected to build up again, which supports a more bullish outlook for vehicle prices, even when higher financing costs are making purchases more expensive for car buyers. According to Cox Automotive, the average new auto loan rate in the US rose from 5.66 per cent to 8.95 per cent in the year to March 2023.

The Society of Motor Manufacturers and Traders (SMMT) said new car registrations were up 18.2 per cent in March on an annual basis, but quarterly registrations are still almost a third lower than pre-pandemic levels. Private vehicle registrations were up by only 2,000 units, with the overall uplift driven by fleet vehicle registrations.

Close Brothers Motor Finance director of sales Lisa Watson said the "rise in the number of new cars registered year to date shows the ongoing cost of living crisis and its rippling effect has not disastrously damaged consumer confidence”. 

A battle over pricing to attract demand in the traditional vehicles space would echo recent movements in the EV market. Big manufacturers such as Tesla (US:TSLA) and Ford Motor Company (US:F) have cut prices due to a supply and demand imbalance as costs have risen and prices have proven too high to bear for consumers. According to research from marketplace Auto Trader, the average price of a pre-owned EV fell by 13 per cent to £33,060 in the year to the middle of March. 

As well as debating how to approach a potential escalation of the price war, car dealers are also musing on how to deal with the growing number of Chinese brands entering the UK market. Lookers chief executive Mark Raban said these new brands provided "a big opportunity", although more cars at low prices might arrive at just the wrong time.