The future of motor trade insurance is not shiny based on the fact the motor trade industry is bracing itself for yet another year of turmoil and closures.

EARLIER THIS month the south Dublin Volkswagen dealer Foster Motor Company handed over control of its sales operation to rival motor retail group MSL. It was the result of a five-month effort to save the retail arm of the Sandyford dealership. Foster will continue to operate the aftersales arm and 27 jobs were saved. Across the city another major dealership is reportedly undergoing a similar exercise to keep its business afloat.

The motor trade is bracing itself for yet another year of turmoil and closures, with new car sales expected to dip below 80,000 next year. The fear is that a retail trade built upon expectations of annual sales closer to 160,000 new cars will struggle to maintain its current scale in a market that doesn’t have the support of scrappage schemes or any imminent sign of a revival of consumer spending.  This will surely have an effect on motor trade insurance as stock levels will be kept moderate to compensate for these predictions.

The challenge is compounded by the fact that most of the major franchise dealerships made multimillion-euro investments in their businesses on the promise of the good times continuing. With new car sales of 186,540 in 2007, it seemed to make economic sense to some. The “glass palace” dealerships on the outskirts of many Irish towns were the physical manifestations of ambitious dealers and demanding national distributors.

With the changes in 2003 to EU block exemption rules on competition in the motor trade, car firms were permitted to set minimum standards for dealers. This ranged from the number of demonstration models they had to the size and colour of the floor tiles. The bigger the catchment area, the greater the investment required.

With sales of 180,000 new cars nationally, the business cases stacked up. At less than 80,000, the wheels come off. When the market fell to just 57,118 new cars in 2009, manufacturers didn’t always set aside their demands for improvements and investment.

Audi, for example, announced in February 2010 that it was terminating all its dealer contracts and reducing its number of sales and service outlets from 34 to 14 by 2013.

Newly appointed franchise holders were expected to invest between €5 million and €8 million in their new outlets. Other brands followed suit. There was an expectation changes to the dealer networks during the recession would leave the brands in strong positions once the economy recovered. Under most investment plans, that was expected to start in 2012.

Now, depending on which manufacturer you talk to, new car sales are estimated to fall from 88,000 this year to 75,000 in 2012. Any increase in the motor-tax rates in December’s budget is unlikely to help, nor will uncertainty over the review of the motor tax system promised for 2013.

The problem is that many believe the market is well below the normal replacement rate for the national vehicle fleet. According to Adam Chamberlain, marketing and sales manager of Volkswagen Ireland, annual sales of 120,000 new cars would be the replacement norm for a country with 1.9 million private cars on the road. However, as the last four years have shown, reality on the forecourts regularly doesn’t follow the forecasts.

Publicly the motor trade is putting on the same upbeat statements that echoed in the enormous show halls of the Frankfurt motor show this week. Privately, however, they are predicting more closures next year as the overstretched finances of some dealerships finally snap.

The challenges for the dealers seem in stark contrast to the global car firms they represent, all of whom are showing strong signs of recovery, profiting from growth in China and developing markets. Yet they too face major challenges, evident at the Frankfurt show.

Immediate concerns are the same as other industries: the euro crisis and fears of a double-dip global recession. But there are also fundamental challenges ahead, reflected on the stands at the Frankfurt show. How does it wean itself off its dependency on oil? Is the future electric, or through hydrogen power, or some other as yet undefined source? And will national governments and current fuel suppliers support the massive infrastructure spending required to transform the network of filling stations to supply the alternatives? Finally – and most important of all – will enough members of the public make the great leap? With multibillion-euro investments in research, backing the wrong technology will prove a costly mistake.

No one seems certain of the answers, despite the gleaming emissions-free concepts and promises on display in Germany. Even firms such as Nissan, which garnered plenty of publicity for the launch of its all-electric family car the Leaf this year, has found the public less than eager to abandon the traditional combustion engine. Nissan predicted sales of 500 Leafs this year while the previous government set a target to have 230,000 electric vehicles on our roads by 2020. Up to the end of August just 43 electric cars had been sold this year and Nissan has postponed production on its 500 orders until there is more certainty about Government grants in place for buyers of electric cars.

Like their frontline franchise dealers, car firms have made major investments on the basis of future projections that, in the current climate, seem to carry far more risk than previously thought. For all the hype of the Frankfurt motor show and its shining new models, major questions remain over the road ahead.

Source : Irish Times

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