Are UK car brands being squeezed by competition or exchange rates?

image_pdf

UK PC Market Segment Evolutiion YTD June 2009For years we’ve been told by marketing gurus that brands drive the car market. A good car with the wrong badge often fails while a poor car from a fashionable brand can be a success. But by underestimating a basic fact of economics, they may not be entirely correct: Exchange rates might be an underlying factor in each brand’s success.

UK Budget Shares 2003 vs 2008Take budget brands for example. Since 2003 the segment have grown strongly in the UK. Where they used to take 5% of the market, they now take almost 11%. But, in this image-free sector, not all have been successful. Because they sell on price, they are exposed to volatile foreign exchange rates. If the currency is strong where they build cars – and weak where they sell them  – the brand gets squeezed between rising build costs and falling selling income.

   Malaysian built  Perodua and Proton have both all but disappeared. Their decline can be traced in part to the Malaysian Ringgit strengthening 20% against the British Pound, so making their cars too expensive. UK Budget Volumes YTD June 2009Toyota-owned Daihatsu struggled to sell 6,000 cars a year. Even though the Yen was weakening against Sterling, Daihatsu were unable to capitalise on it, while segment winners   – Hyundai and Kia  – outstripped established brands such as Suzuki.  There’s nothing wrong with the cars but  the fact that the Korean Won has depreciated 22% against the British Pound since 2003 was also a great help. In fact, from its high point in April 2006 to its low point in October 2008, the Won fell 45%! Given their chequered ownership history Chevrolet, the rebranded GM Daewoo, also succeeded despite the odds. Again mainly Korean made. If the Won stays weak they could gain even more UK market share.

   The star of the sector Škoda remains a bankable brand, but it’s volumes are flat. Built in the Czech Republic, which sits outside the Euro-zone, its currency  – the Crown  – appreciated.40% against sterling since 2003 and 16% against the Euro.

In this price-driven sector  volatile exchange rates clearly help or hurt sales volume. Further up-market other factors come into play as well.

Between 2003 and YTD June 2009 the UK’s premium car segment grew by 20%. Just three German brands take 70% of the market: AUDI, BMW and Daimler.

UK Premium Shares 2003 v 2008In January 2003 the Euro was worth £0.65p. By late July 2009 2008 it was worth £0.97p. In effect a 34% drop in the value of sterling and a 34% financial windfall for German car makers. Since then it’s fallen back to £0.85.

   Although all German car makers had the same exchange rate benefit they fared differently in the UK market. AUDI was and is the winner in UK premium segment market share growth. Between 2003 and 2008 it grew at 8% pa,  faster than BMW and Mercedes combined. While pundits comment that Mercedes, which has lost segment share since 2003, will break into faster growth in future without Chrysler, BMW is thought by some to be in a weaker position. YTD June 2009 AUDI overtook BMW in volume and market share in the UK as it vies directly for BMW’s market  ‘space’  – sporting luxury.

UK Premium Volumes YTD June 2009   Fortunately for them, the Germans prestige brands are faced with weak rivals at the moment. So, if one loses some share to another,  the loser could make it up from one of the weaker brands. Volvo is up for sale; So is Saab which has lost over half its UK volume; Land Rover, saddled with emissions problems, has lost almost half its UK volume.  Jaguar has lost 20%. Lexus, although a winner in market share growth, is down 40% in volume so far this year.

   UK Mainstream Shares 2003 v 2009The impact of exchange rates in the mainstream market is not so easily defined. Winners and losers in the UK car market come from the Euro, the Dollar and the Yen zones and they build cars or source components globally. For example, Honda, Toyota and Nissan all have manufacturing facilities in the UK, Also, the segment is declining in volume overall compared to the premium and budget segments. But some trends do emerge.

   In general, over the last 5 years and taken as a group, brands from Japan have grown in both volume and market share. The gains for Honda, Mazda, Mitsubishi and Toyota outweighed the losses facing Nissan and Subaru. Up until the 3rd Quarter of 2008 Sterling strengthened by over 30% against the Yen, so imports priced in Yen had a growing advantage, which probably helped.

   UK Mainstream Volumes YTD June 2009The US car makers followed  a similar path. Gains by Ford and Vauxhall (GM) outweighed losses by Chrysler and Jeep. The British Pound gained 27% against US$ between 2003 and 2nd Quarter 2008. So they too had a pricing advantage until recently. Even now the $ is trading where it was in January 2003.

   The overall losers  – car makers from the Eurozone  – certainly did not benefit from any exchange rate advantage. From 2003 to 2008 sterling traded in the range of £1 between €1.40 to €1.50. It has weakened since, but so has UK car demand. Of course there’s no suggestion that exchange rates definitively separate winners and losers. Renault, FIAT and PSA all lost out in the last 5 years, but VW, smart and Seat didn’t. But, in an industry where profit margins are slim and unit costs depend on achieving high production volumes and strong cash flows, adverse exchange rates are a significant headwind and positive ones are the exact opposite.

image_pdf