The Irish motor industry is in a bit of of a pickle, …or should I say a stew?

              
The overall decline in the registration of new private cars in Ireland is so stark that at times I wonder if I am comparing like with like when observing the trend in new private cars licensed over several years! 

Ireland is not the only Western European country in poor shape.  Car sales throughout Europe, apart from Germany, have declined by over 19% to 4.9 million units.  Overall sales in Spain in 2009 are down 38.3% and overall sales in the UK sunk by 25.9%. 

Germany is the only jewel in the car sector.  Sales there increased this year by 26.1% to 2.1 million vehicles!

Worldwide production of cars is 30% greater than 2009 demand – reflecting the 25% drop in global demand this year.  Audi executives believe that the need to update vehicle technology and models will mean that car makers will not recover pre economic crisis profit levels for the foreseeable future, even if sales volumes recover.

The only ray of optimism in the global car market has been in China where car sales in August 2009 were 90% higher than in August 2008 and are likely to reach 7.3 million vehicles this year.  This trend is spurred by a more broad-based improvement in consumer confidence.

 

Audi vehicle deliveries worldwide

The Irish downturn can be put into a wider European and world context by comparing the delivery of Audi cars in the first half of 2009 with those during the first half of 2008 as benchmark indicator:

Deliveries to customers	Jan – Jun 2009	Jan – Jun 2008	% Change
Germany	113,882	122,404	-7.0%
Australia	5,612	5,103	10.0%
Austria	8,999	8,520	5.6%
Belgium	16,618	18,197	-8.7%
China	66,866	60,509	10.5%
France	24,914	27,993	-11.0%
Holland	7,574	7,893	-4.0%
*Ireland	1,893	3,152	-39.9%
Italy	30,199	30,461	-0.9%
Japan	7,579	7,893	-4.0%
Russia	7,404	8,660	-14.5%
Spain	20,039	30,348	-34.0%
Sweden	6,193	8,196	-24.4%
Switzerland	8,133	8,367	-2.8%
United Kingdom	46,684	57,983	-19.5%
United States	37,845	45,023	-15.9%
Other countries	55,544	65,517	-15.2%
Audi cars worldwide	465,978	516,219	-9.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

However, I think that an authentic acid test of how the economy is performing is to review spending patterns. If they change dramatically in overall terms, as is the case in Ireland, how are the demographic sub-sets responding? 

Four car brands are especially popular in Ireland among those with some discretionary spending power.  They are Audi, BMW, Mercedes Benz and Volvo. 

These brands, combined accounted for 8.5% of the 150,485 new private cars sold here in 2002.  The new private car market expanded by 2006 to 173,273 vehicles and these four brands increased their combined share to 10.6%.  This year an economic hurricane has mutilated the Irish new car sector.  Total units sales for the Jan-Jun six-months were 42,365 but the interesting nugget is that these four car brands have maintained a 10.4% share of this most depressed market.

The demographic cohort that is more likely to purchase these brands include:

• Self-employed individuals, including proprietary directors
• Those receiving dividends or other distributions paid from profits to shareholders of a company resident in Ireland 

New Private Car Registrations during Irish boom

	2002	2006	Change	% Change
Audi	3,060	4,232	+1,172	+38%
BMW	4,147	6,137	+1,990	+48%
Mercedes Benz	3,734	5,159	+1,425	+38%
Volvo	1,807	2,763	+956	+53%
All private cars	150,485	173,273	+22,788	+15%

Source: Central Statistics Office

Income Trends of Likely Buyer Cohort

Turning to the presumed customer cohort, the following illustrates their changes in number and income using income distribution statistics provided by the Revenue Commissioners:

 

Ireland	2002	2006	% Change
Gross income of self-employed, including proprietary directors	€12,822.10M	€20,824.05M	+62%
Number of self-employed, including proprietary directors	251,893	289,321	+14.8%
Dividends and other distributions from profits of companies resident in Ireland	€263.6M	€586.3M	+121%

 Source: Revenue Commissioners

Income tax from self-employed individuals declined by 30.5% in 2008.  The recent spending trend by Irish consumers on ‘personal transport and equipment’ is captured by the recently published edition of National Income and Expenditure:

National spending trend
on ‘Personal Transport and Equipment’

	Expenditure on ‘personal transport and equipment’	% Total personal expenditure
2008	€3,738M	3.18%
2007	€4,282M	3.70%
2006	€3,950M	3,74%
2005	€3,565M	3.69%
2004	€3,068M	3.44%
		Source: Central Statistics Office

 

           

Impact of downturn on 2009 sales

Units sales for the first six months of 2009 are a symptom of a society overburdened with property related debt – either as a purchaser, developer, renter, speculator, wealth hoarder or, merely, incurable optimist.  Put at its simplest – bankers lent excessively to all facets of the property sector and there is no spending, or borrowing capacity left for anything else. 

	Jan-Jun 2009
Audi	1,893
BMW	1,125
Mercedes Benz	1,425
Volvo	485
All private cars	42,365

 

But the 2009 sales of some other high-end brands are also severely pinched:

	Jan-Jun 2009
Alfa Romeo	182
Jaguar	328
Land Rover	271
Lexus	388
Porsche	61
Saab	418

 

Supporting economic dynamics in Ireland

 

	Dec 2002	Dec 2006	Mar 2009
Non-mortgage household debt	€10,642M	€16,984M	€18,336M
Unemployment	84,900	91,800	222,800
Live Register	166,142	155,389	321,271
‘At work’	1,857,000	2,166,700	1,965,600

 Source: Central Banks and CSO

The number on the Live Register at the end of July 2009 has risen by 31% to 435,735 since last March.  An unemployment rate of 12.2% at the end of July 2009 will not revive any new car sales.

 

Double-digit downturn worldwide 


The BMW Group sold 338,190 cars in the second quarter of 2009 and 615,454 in the first half of 2009.  This represented an 18.1% decline in the second quarter and 19.5% decline in the first six months.  BMW made a profit of €121 million in the second quarter, a decline of 76.1%.  Group brands include BMW, Mini and Rolls Royce.

Audi sold 570,388 cars (including Lamborghini and certain VW brands) in the first half of 2009 – an 11% drop over 2008.  Rupert Stadler, the Audi chairman remarked that given the degree of instability in the car market, he predicted a decade of major change that will encompass technologies and structures.

Ford have been attempting to sell its Volvo car unit for some time. One of the interested bidders is the Geely Automobile Holdings from Hong Kong.  This company started out in 1986 as a refrigerator manufacturer.  It evolved into the motorcycle business in the mid 1990’s and by 1998 started to make cars – exporting its first vehicle as recently as 2003.

Ageing buyers abandon luxury brands

Aside from the recession, car buyers in major markets are ageing rapidly.  Those aged 60, and over, represent less than 30% of car buyers but research by Credit Suisse suggests that this cohort will account for 40% of the luxury car buying group by 2020.  They prefer smaller, cheaper and easier-to-drive vehicles.  Profit levels on smaller cars are lower than is the case with larger cars.

Also in The Crimson Observer …

May: Irish motorcycle industry holds the road’

June: Irish motor industry in a dramatic nose dive’

Irish motor industry in a dramatic nose dive

The bankruptcy of General Motors and Chrysler and the avoidance of bankruptcy by Opel through a proposed sale of Opel and Vauxhall to the Canadian corporation Magna International, one of the world’s largest car component companies, prompts me to reflect on the ups and downs of the Irish private car sector. When I lived in Massachusetts in the late 1960’s the output of Detroit defined American values and GM had a 50%+ market share. I returned to live in Boston in 2000 for five years and not a single sedan made by the ‘Big 3’ manufacturers featured in the ten best sellers; although the steady loyalty of my best friend to Saab bucked this trend. But the recession has killed these companies who were incapable of producing cars that consumers wanted. The worldwide production capacity is 86 million vehicles per year but demand has dropped by 70 million to 56 million in 2007, with further declines subsequently.

Both Ford and Opel have been consistent top sellers in Ireland. However, a decade of exuberance in the Irish private car sector has come to a very abrupt halt. This is what has happened:

Pre 2009 Trends

There were 1.88 million private cars registered in Ireland at 31 December 2007. Our population expanded by 16.8% between 1996 and 2006 but the number of private cars registered for the first time increased by 43.6% during this decade. The number of helicopters registered in Ireland increased from 34 to 146, many of them worth €10 million, or more. These were typically owned by the property development caste, a ruthlessly ambitious, rough-hewn cohort almost totally devoid of a classical education.

Our motoring tastes also became more sophisticated and more expensive during this decade as illustrated in the following analysis of engine cubic capacity and the breakdown of new registrations:

YEAR	Up to 1300 cc	1301 - 1500 cc	1501 - 2400 cc	2400 cc+
1997	33.0%	31.7%	33.0%	1.9%
2007	15.0%	31.0%	47.6%	5.7%

We drove larger and more expensive cars and the era of multiple cars per household arrived.

It is also interesting to compare the dispersal of the country’s population and car ownership

	Dublin	Rest of Leinster	Munster	Connaught	Ulster (Part)	TOTAL
2006	1,186,159	1,106,780	1,172,170	503,083	266,733	4,234,925
	28%	26%	28%	12%	6%
Private Cars	498,839	501,633	555,497	219,035	107,657	1,882,661
	26%	27%	30%	12%	6%
Cars to PopulationRatio	2.4	2.2	2.1	2.3	2.5	2.2
Persons / Kilometre2	100	48	28	33

Connaught and Ulster car ownership exactly matched population dispersal.

One third of the increase in the country’s population between 1996 and 2006 settled in the rest of Leinster, mainly in the dormitory towns within a 80-kilometre radius of Dublin and the more rigorous commuting pattern associated with this is reflected in car ownership trends. The residential element of Dublin city expanded which eliminated a requirement for a car to commute.

The most popular brands in Ireland at the end of 2008 were Toyota (13.9%), Ford (12.5%), Volkswagen (10.7%), Opel (8.4%) and Nissan (7.6%). 65% of all new cars purchased were in the €15k to €30k price range.

The market shares of the larger (2400 cc+) luxury cars in 2008 were:

Segment Market Share	New	Used Imported
Total Volume	6,379 units	5,308 units
BMW	17.7%	24.9%
Land Rover	16.2%	5.9%
Mercedes Benz	12.6%	13.8%
Lexus	10.0%	2.07%
Audi	9.6%	5.1%

The registration of used imported private cars increased from 41,554 units in 1997 to 58,719 units in 2007 (43.3%). The downturn in the top end of the private car sector is especially clear in the case of Land Rover sales - 928 new vehicles registered in first four months of 2008; 79 registered in the first four months of 2009. 175 used imported cars were registered in the first four months of 2008 and 110 imported used cars were registered in the first four months of 2009.

Trade in used cars originally registered in Ireland also increased through this decade. Approximately 27% of all registered vehicles changed owners in 2001 and this figure increased to 39% in 2007.

2009 Trends

There has been, according to data issued by the CSO, a decrease of 68.4% in new private cars registered so far in 2009

	New Private Cars	% Change
April 2009	5,558	-68.5%
April 2008	17,587	-46%
April 2007	21,427
Jan – Apr 2009	32,692	-65.5%
Jan – Apr 2008	95,028	-7.9%
Jan – Apr 2007	103,177	Source: CSO

This coincides with a 21% drop in Irish retail sales and an overall increase in the 12 months to April 2009 in the Live Register of 104%, which measures short-time working as well as unemployment.

The impact of this in Dublin and each of the provinces is as follows in the case of private cars in the categories of 1501 – 2400 cc range:

	Dublin	Leinster (rest of)	Munster	Connaught	Ulster (part of)
Live Register Increase	+100%	+98%	+104%	+110%	+111%
1501 – 2400 cc sales decline	-100%	-98%	-104%	-110%	-111%
Jan – Apr 2008 Ratio of car buyers to indigenous population	1/91	1/92	1/103	1/117	1/134
Jan – Apr 2009 Ratio of car buyers to indigenous population	1/240	1/247	1/280	1//316	1/325

The foregoing illustrates the scale of the downturn in rather stark terms.

Last year, I in every 91 of the population of Dublin bought a new car. This year, 1 in every 325 of the population of Ulster bought a new car in that range whose share of the overall marker had grown from 33% in 1997 to over 47% in 2007.

This represents a volume downturn nationally from 42,413 units in this category in the first four months of 2008 to 15,904 units in the first four months of 2009.

The downturn has been especially severe in Carlow, Cavan, Clare, Donegal,Galway Laois, and Offaly

The impact of this trend has contributed to a decline in Value Added Tax receipts of €1.04 billion (27%) between April 2008 and April 2009 as well as the closure and rationalisation of many dealerships. There has also been a €2 billion drop in personal credit in Ireland.

The Irish motor industry is on Skid Row

The Irish motor industry has somersaulted onto Skid Row ensnared by the barbed wire of constrained credit, high and increasing levels of unemployment, shrinking family income, higher income taxes and fundamentally altered buying patterns. The car buyer is sovereign again and demands value and a high level of customer service.

Sales of new private cars in Ireland in the first quarter of 2009, 27,140 units, were one third lower than in the first quarter of 2007, according to CSO data. But the real twist in this saga is the soaring increase in imported used car. The average annual number of used vehicles licensed for the first time in Ireland between 2000 and 2004 was under 17,500. But the number of used card licensed for the first quarter of 2009 was 15,455 – almost 57% of the number of new cars bought and licensed in the country. A used car, for Revenue assessment purposes, is a vehicle over six months old. Years ago Irish buyers had a penchant for used cars imported directly from Japan but the current trend is underpinned by imports closer to home.

No sector, apart from property, was more central to the thrust of the Celtic Tiger than the motor industry. Sales of private cars between 2000 and 2008 exceeded 1.49 million units, equivalent to an average of 165,000 per year. Sales of prestige and cars with an engine capacity greater than 1600cc increased as a percentage of the total from 21% in 2000 to 32% in 2007. This was quite an accomplishment for a country with a population of 4 million.

Unit sales of private cars for the 9 years to 2000 were 901,700. Average annual sales of private cars in the early 1990’s were under 72,000.

There are obviously value considerations supporting these developments but price is only one aspect of value, service and customer response to this is the other.

Bad Dealer Service in Dublin

Last week I had a conversation with a colleague, Orla, about her recent car buying experience. She and her husband, George, are car buffs and take exceptional care of their vehicles. Orla wanted to buy a new BMW. Her first step was to visit the Dublin-based BMW dealer from whom in 2005 she purchased a new BMW and who serviced it. The patronising attitude of the salesman appalled her. He insinuated that there appeared to be a shading inconsistency on the bonnet, perhaps caused by a collision. The car had never been in a scrape but Orla was quickly coming to the opinion that this salesman was attempting to engineer a proposition which would be more attractive to him than to her. Orla decided that there were no circumstances that she would buy a new car from this dealer.

She travelled to Isaac Agnew Belfast and the outcome of this exploratory visit was that she purchased her new, but 6-month old 2008 BMW, there. The transaction was conducted in a professional, painless and convenient style and there were gestures of goodwill too.
George and Orla travelled by train to Belfast the day they collected the car. They were met at the station by the dealer’s representative and when Orla collected her new car she was also presented with a beautiful bouquet of flowers and a full tank of petrol. Orla is a happy customer driving a car with a higher specification than she could afford in Dublin. But is her approach to buying a BMW isolated?

Frankly, no! BMW sold 2,529 new cars licensed for the first time in Ireland in the first quarter of 2007. The corresponding figure in first quarter of 2009 was 736. Some 1,208 used BMW’s were imported into Ireland in the first quarter of 2008 which means that there were 3,707 drives of BMW’s new to them in the first quarter of 2008. There were 1,889 used BMW’s imported into Ireland in the first quarter of 2009 which means that there are2,625 drivers of BMW’s new to them in Ireland – 29% fewer than a year earlier. But 71% of these purchased their BMW elsewhere.

A similar trend to this prevails in Ireland in the case of Audi, Lexus, Land Rover and Volkswagen, to mention just a few.

The BMW Quarterly Report to 31 March 2009 reveals that its automobile division had a 21% downturn in sales compared to the same period in 2007 and delivered 49,808 fewer vehicles in Europe (169,520 in Q3 2009 compared to 219,328 in Q3 2007). Apart from BMW vehicles, the Group also sell Mini and Rolls Royce cars.

Good Dealer Service in Dublin

I have a friend, John, in Glenageary who is now retired but once worked in an industry allied to the motor business. When John intends to buy a consumer durable the depth of his research beforehand amazes me. His background evaluation is methodical and thorough. He taste in cars varies and he has never been persistently committed to one make. He has driven Triumph, Fiat, Nissan, Mazda, Opel, Volvo and Peugeot over the years.

He now drives the first 2009 registered cars that I noticed this year but it was the third week of January when it appeared. His choice this time is a Skoda Octavia which he purchased from a local main dealer who offered a proposition that pleased him greatly.

Skoda is a minor player on the Irish car market but this brand has maintained its 4% market share this year and last. There were 116 used cars imported in the first quarter of 2008 and 2,220 bought and licensed here. This year there were 257 used Skoda imports and 1,194 sold and licensed here in the first quarter. There are 1,451 driver of Skoda’s in Ireland that are new to them in 2009 and 17% of these bought their Skoda elsewhere, compared to 71% of the 2009 BMW drivers.

Would this not mean that the Skoda dealer is more successful winning the trust and confidence of their buyers than their BMW, Audi, Lexus, Land Rover and Volkswagen counterparts? I don’t know but many of these car manufacturers dumped the local dealers and started to sell directly in Ireland in recent years. Perhaps the Irish car buyer prefers the old dog for the long road!

US Auto Industry meltdown

The Irish Times ‘Business This Week’ section last Friday reported the ‘end of the road’ for Chrysler as it filed for bankruptcy protection. I recall being in Cape Cod Massachusetts on 21 July 1969 at what is now the Highland Museum and Cape Cod Light when Neil Armstrong and Buzz Aldrin landed on the moon. At that time Americans defined themselves by the models of true-blue Michigan manufactured car they drove as well as exulting in the accomplishment of Armstrong and Aldrin. The throaty roar of the Ford Mustang was the icon of aspiration!

It amazes me that the Japanese car manufacturers’ ever gained a foothold in the American market. Toyota made its debut in 1957 and Honda in 1963, while Soichiro Honda, the founder of the famous brand was still active in the business. I lived in Boston between 2000 and 2005. There was not a single car listed in the ten most popular manufactured by one of the top-3 traditional US manufacturers. The big-3 have seen their share of the US vehicle market drop from 85% to 43%.

When Charles Wilson, the president of General Motors appeared before Congress in 1953 in connection with him becoming Secretary for Defence (1953-57) he was asked if there was a conflict of interest. He responded that “what is good for America is good for GM and vice versa”. The market capitalisation of GM in 2000 was €50 billion. The market capitalisation in March 2009 was under €830 million – slightly less than the current market capitalisation of AIB.

The downfall of these titans is attributed to poor strategic decision making. Swaggering, but baseless confidence, hubris, lack of courage, foolish decisions made and critical decisions avoided are features of this. Will the Irish motor industry learn from this or will inertia prevent them from doing so?

The Irish Government is also feeling the pain. Excise duty receipts for the first quarter of 2009 are €450 million lower than the first quarter of 2007 and VAT receipts are €600 million lower for the same period.