Andrew Marsh, Engineering Director at ezimethods.com, gives his opinion on the effects of a possible scrappage scheme on the auto industry and how, for vehicle dismantlers, the scheme could prove lucrative depending on what Government offer to scrap old vehicles … but could there also be something else around the corner?
Lockdown, pent-up demand, re-starting. Yes, these phrases pepper the steam of news and suggest, by the way, an electric vehicle future. We know most EU states have settled on a combination of support for domestic automotive manufacturing, employee support and started the roll-out of subsidies for new vehicle purchases. Let me be blunt – if HM Government limits such schemes which are currently under discussion to pure electric vehicles, the take-up will be small.
Why? If customers are offered just £6000 direct from HM Government and an additional £3000 from the dealer network, new car sales limited to pure electric vehicle (EV) or even plug-in hybrid vehicle (PHEV) sales will improve but will not dominate. Quite honestly, vehicle manufacturers have already planned production volumes for EV and PHEVs, and will not be in a position to magically switch to significantly greater volumes overnight. Not only are such vehicles built as a break-even or even a loss, the combined grant package of circa £9000 does not breach the gap between the full list price of a conventionally powered vehicle (including mild hybrids, or ‘MHEV’) and the ‘dream ticket’ EV / PHEVs.
Where does that leave us?
The only way to produce an avalanche of vehicles which will be scrapped prematurely will be to offer incentives far greater than HM Government – or indeed, most Governments – have either discussed or offered. Then there’s the irony that this bulge of destruction is hardly green, and a handful of EVs will not offset the environmental impact of this – indeed, a single new EV sale will not offset the destruction of a single-vehicle.
There is however another trend which is driven by pure economics – Personal Contract Purchase (PCP). These have become a concern for HM Government in that lending which is covered by Financial Conduct Authority Regulations but is not fully understood by the UK and has grown to the point it has become a significant economic activity in its own right. That certainly got the Bank of England as well HM Government to pay attention, but the ‘C’ word has distracted attention.
The Finance and Leasing Association (FLA), requested financial help for ‘non-bank’ lenders. PCPs are used as the most common way to buy not only new vehicles, and their reach has extended into second-hand vehicles too. The FLA members provided PCPs for 91% of all private car sales during 2019, and even in April 2020 lent £608 million. However, their membership has received requests for delayed payments – for all finance products of which ‘motor’ counts for around 20% of the value, due to COVID-19, in the 12 weeks up to 29th May 2020 – from 1.623 million customers, and agreed to 1.424 million of them.
Quite simply, as we come out of the lockdown some parts of the economy will collapse, and PCP payments will not be met. The upshot will be to push down the vehicle valuations (that’s a whole different story) which means a gaggle of vehicles which might find sales at the lower end of the second-hand market will effectively become worthless.
Vehicle manufacturers have had huge financial costs to meet the current European exhaust tailpipe emission limits, and that’s driven by vast fines for those that do not comply. Add to this the loss of at least 6 months of trading due to COVID-19, the result is many companies don’t know how they will survive. This will lead to one or more vehicle manufacturers failing, and their product line will temporarily, or even permanently lose spare parts supply. For those who can remember, the collapse of MG Rover in 2005 or Saab in 2012 will illustrate what can happen, even when spare parts were claimed to be ‘secured’. The reality was only fast-moving regular service items were supported, with many parts typically used in collision repair becoming unavailable very quickly.
HM Government has already spent heavily subsidising the workforce and many other aspects of the UK economy in the absence of economic activity to the point the debt so far exceeds that acquired from the second World War. The author remains unconvinced that pure electric vehicles will be the main objective of a scrappage scheme because of supply limitations and the inability of HM Government to splash even more cash than is currently suggested.
So, scrappage in the UK is likely to arrive (it has already been used in 2019 to shift slower selling models), but will have a modest effect on end-of-life volumes. The more interesting factor to watch is how PCPs fare, and how fast vehicle valuations fall over the next years as a glut of new, unsold products tries to reach an impoverished customer base.
In any event, for vehicle dismantlers, it’s going to be win-win as the economy recovers and we head towards 2022. Hold on tight!