Falling sales of diesel cars in Europe's two biggest markets pose a risk to carmakers’ financing plans

08 May 2017

08 May 2017 

As reported last week, registrations of new diesel cars in the UK and Germany fell by 27% and 19% respectively in April. The diesel share of the new car market was even lower in both markets in March than in April and in the first four months of 2017, the diesel share has slumped to just 44.1% in the UK and 42.3% in Germany. The weakening of diesel demand also poses a risk to residual values and in turn carmakers’ financing plans.

With taxes rising on diesel cars and cities even proposing bans, it is understandable that their demand as used offerings will weaken too and residual values will be affected. The BMW Group has already announced a weaker earnings outlook for its financial services division, partly as a result of the impact of falling residual values and other carmakers’ financing plans will invariably be affected too. If residual values fall dramatically, carmakers will naturally either have to take the earnings hit or increase the cost of finance which would potentially reduce demand for new cars and not just diesels.

Reuters reports that: ′The outlook is particularly uncertain in Britain, where car sales hit a record high last year fuelled by finance packages that now account for nearly 90 percent of sales versus around a half ten years ago, according to Exane BNP Paribas analysts.’ Analyst Stuart Pearson said: ′It’s a big potential problem if that carries on because it reduces the affordability of vehicles potentially quite significantly.’ He added: ′The question is how fast those residuals go down. In the U.S. we’ve seen them come down almost 20 percent now, so the UK may have only just begun.’

The Reuters article also referred to the fall in residual values in the US as demand has weakened after the rapid recovery from the financial crisis, forcing price reductions. According to the article, ′A similar fall in Europe would hit carmakers that have become increasingly reliant on their financing businesses. Residual values in Britain have fallen around 3 percent over the past two years, with diesel vehicles particularly affected, and the trend has been seen in other European countries too, according to some analysts.’

Evercore ISI analysts estimate that a 5% reduction in residual values could amount to a total cost of €1.6 billion for the leading eight European and US OEMs. Volkswagen is expected to suffer the greatest loss in earnings, followed by BMW and Daimler.

However, Graham Hill, car finance expert at the National Association of Commercial Finance Brokers, said that many companies would already have planned for a fall in residual values. He said: ′A car with an expected final payment of 10,000 pounds from the customer might, for example, be put into the finance provider’s books at 9,000 pounds.’


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