Reading last week’s concerned pieces about new car discounts, you’d think that being offered a decent slice off the manufacturer’s list price was something unheard of. But car makers have been offering discounts for years.
Back in 1991 I was writing how fleet buyers could get up to 30% off a Ford, Peugeot or Vauxhall and 15% off a Mercedes or BMW. In the early 90s the British car market was in the doldrums — much as it is now.
Discounting, like the car market, always goes in cycles. A stark reflection of supply and demand. But right now, the global car market is in trouble. A perfect storm of high interest rates, expensive energy, increased material and labour costs, reduced consumer spending and the softening of the Chinese economy, has left car makers desperate to move metal.
Some commentators are laying the blame on car makers having to electrify their model ranges for the slump in sales. While there’s an element of truth that legacy auto has been slow to produce EVs at prices consumers can afford, it’s not quite that simple.
In the UK the Zero Emission Mandate (ZEV) means mainstream car makers have binding targets to ensure that a proportion of their models are electric. This year its 22% and next year will be 28%. To hit the end of year targets the industry are now reducing prices of EVs. But they’re also offering discounts on combustion cars too.
Research by Auto Trader shows that in October 70% of EVs were offered with some level of discount applied. But 76% of diesel, petrol and hybrids were also offered for sale with a discount. The average EV discount was 12% while price reductions on ICE cars ran at an average of 8%.
All cars — EV, hybrid, petrol and diesel — are proving slow to sell and need discounts and marketing support to leave showrooms. But for some car makers, the problems go much deeper than just EVs.
Volkswagen, who are warning of factory closures, are running on slim profit margins, have high local labour costs and historically have relied too much on cheap Russian energy and the once booming Chinese car market. Its not just the German car industry that’s suffering — the whole German economy is struggling.
And while other German car makers may be doing better, they’re also offering discounts in order to buy market share. In a declining market car makers don’t just need to keep factories churning out metal, they also need to make sure they don’t lose their precious market position to cheaper models from competitors. They offer discounts to protect volume. It’s a very precarious balance.
What we’re seeing is a market correction because consumers aren’t prepared to pay list prices that they can no longer afford. Ex-Aston Martin CEO, Dr Andy Palmer said: “While OEMs will hate this level of discounting, this is reality and this is normal and the OEMs will course correct as a result by increased volumes and taking measures to reduce cost (or die).”
Palmer believes that if the industry doesn’t lower its list prices — and costs — some of the bigger players may not survive. Make no mistake, for the European motor industry, these are dark times. And while UK industry bodies are asking Government to support EVs with consumer incentives and greater charging infrastructure, the biggest barrier to greater EV adoption (and sales of both hybrids and combustion cars) is simply price.
Sales of used EVs have risen by 57% because prices are now at parity — or sometimes less — with combustion cars. That’s a clear signal from buyers that when the price is right, they buy.
Discounts are being used to galvanise a becalmed car market. Let’s be clear, we’re seeing demand destruction across multiple sectors where big ticket items just aren’t selling because of constrained consumer spending power and stresses from high interest rates. How long the motor industry can support the current levels of discounting on new metal remains to be seen. For some though, the road ahead looks very tricky indeed.
Quentin Willson is the founder of FairCharge
