For the past year, automakers such as Ford Motor Co. (F:US), General Motors Co. (GM:US) and Volkswagen AG (VOW) have banked on bargain-hunting Britons to buy as demand elsewhere in Europe tumbles. The strategy is poised to encounter headwinds as slowing growth and concerns over inflation threaten momentum.
“We’ve just about reached the zenith” of growth in Britain, Tony Whitehorn, head of Hyundai Motor Co. (005380)’s U.K. operations, said in a telephone interview. “The second half of the year will become much tighter.”
The U.K. Society of Motor Manufacturers and Traders is forecasting growth of 3 percent for 2013, less than half the pace of the first four months. With the pound down 8.6 percent against the euro since July despite a recent rally, foreign automakers are making less money on cars sold there and may be forced to reduce the generous discounts they’re offering.
“While we are seeing strong growth from a fairly low base, the economic backdrop remains challenging,” said Jonathon Poskitt, an analyst with researcher LMC Automotive in Oxford, England. He forecasts that U.K. car sales, pegged at 2.1 million this year, won’t return to their 2007 peak of 2.4 million until around 2018.
The U.K. was the only major European auto market to grow in 2012 and is climbing again this year, with registrations up 8.9 percent through April, trade association SMMT said yesterday. Ford’s Fiesta and Focus compacts have been the best-sellers, followed by the Corsa and Astra from GM’s Vauxhall unit and VW’s Golf, the SMMT said.
Britain’s growth is largely due to zero-percent financing, rebates and other incentives, according to Garel Rhys, head of the Center for Automotive Industry Research in Cardiff, Wales.
“Because the rest of Europe is so anemic, Britain has become a dumping ground,” Rhys said. “Pushing deals elsewhere in Europe would be chucking money down a black hole.”
Discounts in the U.K. averaged 16.9 percent in April for mass-market cars, with Renault SA (RNO), Vauxhall, PSA Peugeot Citroen (UG) and Ford the most generous, according to JPMorgan.
The incentives are even causing some consumers to trade up as low interest rates makes buying a car an alternative putting money in the bank.
Lyubomir Merdzhov was looking at a VW Golf hatchback but opted instead for a navy blue Audi A6 two months ago after securing a 10 percent discount.
“This was a much better deal, and it basically works out to be equivalent to a zero-percent financing offer” over four years, said the 34-year-old from London.
Across Europe the slowdown has accelerated this year, dropping 9.7 percent in the first quarter after a 7.8 percent decline in 2012. Once-stalwart Germany has become part of the drag, with sales down 8.5 percent in the first four months of 2013. JPMorgan says discounts in Germany were even steeper than in the U.K., an average of 23.7 percent in April.
The trend-bucking growth in the U.K. -- Europe’s second biggest auto market since it passed France last year -- is out of step with the underlying economy.
The European Commission lowered its growth forecast for the U.K’s gross domestic product last week to an increase of 0.6 percent this year from a February estimate of 0.9 percent because of concerns about inflation. In the first quarter, Britain narrowly avoided an unprecedented triple-dip recession.
The car industry has countered that with deals. Volvo Cars is promoting the XC90 sport-utility vehicle with zero-percent financing and rebates totaling 7,500 pounds ($11,700), or 21 percent off the 36,065-pound list price.
A Mercedes-Benz GL-Class SUV with leather seats, entertainment system and panorama sunroof can be had for 57,789 pounds, 15 percent off, according to Drivethedeal.com, a discount car site. Mazda Motor Corp. (7261) and GM’s Vauxhall are each offering zero-percent financing and as much as 2,500 pounds in rebates.
“Carmakers are simply bribing U.K. car buyers,” said Simon Empson, managing director of Broadspeed, an online auto broker. “As a rule, Brits will buy anything that’s decent and cheap.”
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