Paul Wyse, Managing Director of Smith & Williamson, Dublin, looks at the potential risks and benefits for those in the Irish Motor Sector.
A weakened government
The UK electorate voted to exit the EU on 23rd of June 2016. It seems that there was little if any planning done by the UK Government for such a result. The Prime Minister David Cameron resigned followed by subsequent appointment of Theresa May and the triggering of Article 50. A snap election failed to provide the overwhelming majority May hoped for and a weakened Conservative government with a precarious parliamentary arithmetic is battling at home to ensure support and is in a difficult negotiating position with the EU. Even now there is little clarity as to what Brexit will really look like. However, May has been quite clear in stating that the will of the people will be carried out and there will be a Brexit.
We are well into the negotiating phase and time is ticking on a very tight negotiating timetable. The UK economy continues to perform well in the short term however there is a perceptible softening.
Motor dealers need to be cognisant of their market and the key sectors purchasers themselves are employed in or are exposed to. This will help you understand your market dynamics and potential opportunities or indeed threats.
The Brexit vote resulted in an immediate devaluation of sterling by around 15%. This has had, and will continue to have, significant implications for Irish exporters to the UK, in particular in the agri-food sector which has a considerable proportion of its exports destined for Britain. Agri-food suppliers have seen a dramatic decrease in their margins and profits.
Similarly, the tourism sector is seeing a decrease in UK visitor numbers post-Brexit as the impact of the sterling devaluation has made Ireland and other EU countries relatively more expensive to visit. Consequently, hotels reliant on UK and Northern Irish visitors are having to review their budgets and pricing strategy for 2017.
Spurred on by lower sterling there are immediate and ongoing effects on the motor sector itself, where an increase in imports from the UK of nearly-new and new vehicles is affecting the value of second hand stocks, especially in premium brands.
A long road ahead for the UK
Markets will inevitably react to news about negotiations throughout the process. Longer-term impacts of Brexit will depend on the trading relationships the UK eventually establishes with the EU. There is an enormous amount of work to be done in the coming months and years to establish the terms of withdrawal from the EU. The UK will have to enter into a number of trading relationships internationally too, and this will take considerable time.
Top Brexit issues for Irish motor dealers
- Used car market: With the consequent devaluation of Sterling, there is now an obvious incentive to import and sell into the Irish market at more attractive margins. The obvious increase in UK second-hand and ‘nearly-new’ imports have, and will continue to, lead to a displacement in pricing in the Irish market requiring local market adjustments in the used car market.
- Second-hand stocks: Close management of stock levels, holding times and trade-in pricing are critical to dealership profitability. There is likely to be significant uncertainty and associated Sterling currency fluctuations at least until 2019. Remaining nimble and controlling stock costs and levels will be critical success factors for dealers
- New vehicle pricing: Manufacturers and distributors will now need to address imbalances caused by the precipitous devaluation of Sterling in the short term. Dealers could be exposed to direct UK new car import competition. In the long run, customs duties and excises on imports may be critical factors where vehicles are manufactured or sourced through the UK
- Consolidation: Systemic shocks, ongoing instability and currency fluctuations will more than likely result in some manufacturers and distributors favouring motor dealers with a minimum scale of operation. They may seek larger dealerships serving bigger geographies. Dealers need to have a strategy and plan to manage these relationships effectively.
- The grey market: Right now there is no certainty about the future of the grey market in importing UK second hand cars into Ireland. A hard Brexit and exit from the customs union could see a potential closure of this market and the consequential effect on the local market. Contingency plans are a must for dealers accounting for all possibilities.
- UK imports from manufacturers and distributors: The new car market is extremely competitive and where one car model is competing with similar models from other brands where the local Irish pricing is not positioned correctly this can have a significant impact in the short term until the pricing strategy is rebalanced. Dealers working with UK distributors or manufacturers will therefore need to provide feedback on pricing quickly. Importantly, distributers and manufacturers need to be nimble and come up with pricing or hedging strategies that work.
- Know your customers: Dealers should review their customer bases in particular the businesses and sectors employing their customers. For example if your clientele are employed in agrifood, as discussed above, you need to ensure appropriate stocking of models that meet their financial capacity. This should guide your purchasing and sales strategies.