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Compact Car Market In United Kingdom

In recent years the small car/compact car segment has crossed 40% of the car market in UK. The emphasis on being single, having smaller nuclear families and women maintaining independent lifestyle has been the main driving force behind this trend.

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Definition / Scope

A compact car is basically a small sized family car that is larger than a subcompact car and smaller than a mid- sized car as per United Kingdom classification. Such cars in Europe may include Ford Focus, Vauxhall, Audi A3, Citroen C4, Mercedes- Benz A-class etc. This term compact car is typically a North American term denoting an automobile smaller than a mid-sized car but larger than a subcompact car.

Global Car Classification:

Globally various governments and nations have classified vehicles based on numerous parameters like their construction, weight, fuel emission, purpose of use etc. As per size  globally a compact car is a small family car or a car in the C-segment. As per United States Environment Protection Agency (US EPA), any car with total passenger and cargo volume being equal to or less than 100-109cu ft is a compact car. For example: Ford Focus, Honda Civic, Mazda3, Toyota Corolla etc. Microcars are however the cars with engine capacities under 1 litre and are a divide between motorbikes and cars. Example: Tata Nano from India.

While other small cars may be classified as super-compact and city cars, compact cars could be referred to the hatchbacks or shortest saloon cars with engines of up to 2.5 liters. As per EuroNCAP they are called small –family cars.

Compact cars are the bestsellers when it comes to auto manufacturers[1]. Small sized cars attract larger consumer base owing to the intention own a car with limited resources. As per Forbes compact saloon segment is growing at a fast pace globally with one of the largest consumer base being China.

Market Overview

  • UK has manufactured more than 1.5 million cars in 2013 and likely to grow to 2.07 million by 2017.
  • 2.67 million new cars have been registered in 2013
  • 59.3 million GBP turnover generated by automotive sector each year
  • 1.2 million vehicles exported in 2013.
  • 7,31,000 employees and 100,000 jobs to be created by 2020 in this sector in UK
  • The EU has 49% of  UK built exports in 2013.
  • There are around 2500 automotive component manufacturers in UK.
  • The top 5 sellers in cars for 2013 have been Ford Fiesta, Ford Focus, Vauxhall Corsa, Vauxhall Astra and Volkswagen Golf.
  • Private car registration is 47.5% of the car market in UK.
  • In the compact car segment: Hyundai 10 and Volkswagen up are the market leaders in Mini while  Ford Fiesta an Vauxhall Corsa are leading in

Super mini and Lower medium segments

  • On an average a  car on road in UK is a Supermini, 7.6 years old and silver.
  • Slough is the most fuel efficient place  in UK.
  • The CO2 emissions and energy usage from the manufacturing sites have reduced by 20% in last decade.

Key Metrics

Metrics Value Explanation
Base Year 2017 Researched through internet


Market Risks

When it comes to any automotive market there are a number of risks which over the time have been cause of concern for car manufacturers like emission criteria, decrease in the small car segment, regulatory and environment threats etc.

The major risks can be pointed down as follows[2]:

Competitive risks:

Since the manufacturing sector of automotive very competitive and is already over capacitated, the suppliers are constantly facing price pressures to keep up the value for money to the end consumer. There is definitely geographic competition with low cost labor markets like East Asian countries - India, China, Eastern Europe and the like. Hence the manufacturers need to focus on leading technology at low cost. All this has resulted in trade buyers to be selective, hence the private equity units are the main options for corporate disposals.

Owing to the competition Nissan has planned the production of new hatchback model in Sunderland facility UK from this year. Then there has been 100% electric Nissan leaf launch in 2013 and construction of battery plan as well. ( ref: SMMT.co.uk/ uk-automotive supply chain)

Vauxhall has planned to invest over 120 million GBP to produce the advance version of Astra in its Chesire plant thus crating more jobs. Vauxhall has also planned to increase tis local supply content of  this plant to 25% in order to increase the plant’s competitiveness. (ref: SMMT.co.uk/ uk-automotive supply chain)

Environmental Consideration risks:[3]

In recent years the sale of economically viable cars have increased due to environmental regulations across the globe and especially so in UK. This is also the result of improved public awareness about the environment and growing air pollution in cities. Thus the manufacturers have to focus on the kind of materials used, spend their money on R&D, the engines and end of vehicle life (ELV).

This is a challenge and a risk in terms of supplier decision, production and usage of the materials. Another challenge is to have the right kind of information and decision making capability based on environmental rules and regulations that would finally affect the consumer. Any changes in supply might effect the same. The manufacturers would need to share this kind of information among the environmental groups and NGOs too.

Recent changes:

Recent changes have taken place in the automotive sector especially in the compact car segment in UK in terms of CO2 emissions and it has reduced considerably. Average new car CO2 emissions have fallen for the 16th consecutive year and is around 128.3 gm/km last year i.e. 2013.

Inspite of new cars on the road increased considerably along with distances traveled, the CO2 emissions have reduced. However the automotive industry in UK has a target to reduce such emissions by 2020 to 45% from the year 2007. Now thats a challenge for all the small car manufacturers since it incurs additional costs in terms of materials and efficiency. In 2013 there was an increase in alternatively fueled cars as well due to such considerations. Consumer information combined with motor taxes and environmental laws pose a risk to the manufacturers as they have to abide by the standards. The Automotive Sector Strategy designed last year aims to produce low-emitting  vehicles as the entire UK market shifts towards low CO2 emitting cars.

Though very small in percentage the Alternative Fuel options are on the rise and pose a challenge to many Compact cars that are already designed to work on petrol. UK is already experimenting with the alternative models like the electric vehicle models. In the year 2013 itself there were 12 purely electric vehicle models in UK(ref: SMMT registration Database). The lowest CO2 emitting have emissions equal to 80-90gm/km equivalent ot that of AFV. This is way lower than the usual petrol models available on road now.

The above chart by SMMT clearly shows that over the years the segment in UK that has reduced considerably in CO2 emissions is the luxury segment. However the Compact segment including mini, super mini and lower medium cars has more or less reduced levels of the emission.

This shows that as per CO2 emission critera this segment is saturated with performers both within the segment and outside the segment. Eg: risk from the Luxury segment. However most private buyers tend to buy the compact segment cars with petrol versions while the fleet owners tend to buy diesel ones.

Thus its a challenge to cater to growing consumer demand keeping the CO2 emissions in check. The hybrid cars that have come out include Nissan LEAF, Hybrid Toyota Auris, Mini, Honda Civic etc. The automotive industry is committed to reduce other emissions as well like Nitrogen oxides, CO emissions etc and by 2015 Euro 6 standards would become mandatory in order to cut those emissions thus posing a challenge to the huge compact car segment in UK. All this being said, some cars registered in 2013 are already Euro-6 compliant.

Supply Chain Cost Risks[4]:

Due to a dynamic global automotive environment, its difficult for the manufacturers to answer the growing demand, keeping the quality high and optimize their profits at the same time. The OEMs need to supply products throughout the life cycle of the new models regardless of UK’s supply chain capacity to deliver. For example Nissan has doubled its capacity base from 300,. 000 owing to close network with the suppliers.

Risk from Emerging Markets:  

The rapidly booming markets like India and China have ample opportunities to provide low cost labor and increase sales. However back in UK the manufacturers are fighting over the best suppliers in order to stay in competition from international as well as traditional suppliers. Thus there is a fight to gain market share even in compact segment from the international markets.

There is a growing significance of the small car segment in emerging markets owing to the way consumers think today. Due to falling economies even the western world is focusing on compact car segment. There is also threat from used car market that is quite prevalent in Germany and North America as the buyers in these markets are shifting to low cost compact cars in their countries.

Thought there is an increased opportunity for UK car manufacturers to cater to these market, economies of scale and cost structures wont be easy to follow. India and China OEMs have gained market share in other markets already like Russia and Middle East. Thus UK OEMs need to rethink their business strategy to sustain the low budget manufacturing techniques of such markets. (ref:Ronaldberger.com/media/pdf/Ronald-Berger- The Next Wave Emerging market)

Regulatory Risks in Compact Car Segment:

As per Box Exemption regulations of 2003 dealers now get greater independence from manufacturers, thus increasing inter brand competitions and regulating the prices of the segment. This poses a challenge as to how to manage the retailing in a better way.

Besides this there are other regulations now like the manufacturers have to comply with the end of life disposal of the cars and the disposal has to be environment friendly hence that poses a challenge to the cost effective segment i.e compact car segment as larger portions of the cars now need to be recycled. Thus manufacturers have to invest in authorised treatment facilities to ensure minimum pollution. The result would be increased expenditure on R&D and focus on enhanced sustainability.

Pricing Risks and Challenges[5]

The financial crisis in Europe had made it difficult for automotive firms in term of sales due to stricter loan facilities, lower consumer credit an bank financing. This resulted in direct selling to the consumers making easier for consumers to purchase cars now. Consumer buying behavior has also changed as the manufacturers tend to establish long term relationship with the consumers through monthly financing. Different pricing strategies need to planned out based on mass consumer especially so in compact car segment like

Specification based pricing strategy: In the compact car segment the prices do not vary too much over the years due tot the household income of the middle class being constant over a long period of time Hence the manufacturers need to improve the specifications of the car in order to boost sales so that margins and prices can be maintained. For example: Vauxhall has numerous models with different specifications and different prices. This market could be further divided into various psychographics like the youth would like inter car connectivity as a feature while the family person would still prefer safety to this feature.

Long lead times pose pricing risk: Pricing is used as a means to do away with the surplus or check the sales so that the volumes are controlled. Thus sub-optimal pricing at times is needed to balance supply and demand. The right kind of demand forecasting needs to be done so that the manufacturers can cope up with mass demand in this segment.

Top Market Opportunities

UK is one of the most attractive markets for small cars/ compact car market in Europe[6]:

  • Capacity Utilization in UK has been on target since 2012: In 2012 the automotive sector in UK was on target to recover the pre slump losses. This has been possible because unlike in other countries where the recovery has been slower( for example: Spain, France an Italy), in UK the plants have been making cars desired by the global market negating effects of weak demands in Europe, thus making UK a desirable market for suppliers.
  • Production base: UK has a stable production base for Volume car manufacturing especially in the subcompact and compact sector.UK exports approximately 55% of its production to non EU countries which is the highest proportion in Europe compared any other Euro country.Besides UK has the reputation of being high on quality production and performance engineering.
  • Supply Chain: Regional Growth Funds or RGF provides funds to automotive suppliers in UK. In 2012 Nissan got this grant worth 9.3 million GBP in order to manufacture its ‘ Invitation’ model.
  • Flexibility of labor and their costs:  As compared to other EU nations like Germany and France, UK has lower labor costs per hour. Besides due to a flexible tax structure the labor costs automatically comes down when compared to these nations.
  • Tax breaks would prove beneficial for car manufacturers:Since compact cars need to be more functional, reliable and hard working, lot of research and development need to go into revamping the cars as per ever changing needs of these consumers. Thus R&D tax credit would increase the spends on research and development in this sector.
  • Economic Environment : Economic stability has imbibed the global production houses to look at UK especially the automotive sector. This has been possible mainly due to less dependency on neighboring countries for funds, tax and tariff predictability, limited risks of environmental disasters and broader supply chain distribution.

Key Consumers of Compact Car Segment in UK:

The compact car market in UK accounts for more than 40% of the automotive market. The consumer lifestyle changes have shown a shift towards their preference of cars. The key consumers of this segment demographically speaking are the independent individuals, youth, nuclear families, living in cities. Small cars like Citroen DS3, Nissan and Mini have been quite successful in matured market like UK. Small car segment is essentially male dominated in UK( ref: ukessays.com- structure of UK car market) with an average distribution of 68% male and the rest 32% female. Customers of this segment needs a robust and reliable car with lot of inside space . Psychographicaly they are educated, independent working class, have a practical outlook and very well aware of value for money.

Geographic segmentation of compact cars in UK:

As per Driver and Vehicle Licensing Agency (DVLA) there were 34 million driving license holders in May 2002. As per cross-cultural research outcomes in the past the sub regions of this segment essentially focuses on main city of London where dealerships have been placed in order to utilize the maximum closeness to target consumers.

Market Drivers

Key trend 1: Lifestyles and Demographics [7]

In recent years the small car/compact car segment has crossed 40% of the car market in UK. The emphasis on being single, having smaller nuclear families and women maintaining independent lifestyle has been the main driving force behind this trend. Small cars like Citroen DS3, Nissan Juke and Mini are some of the current examples. As per Euromonitor by the year 2020 small car segments are going to reach 45% share of UK car market.

Key trend 2: Economic pressures are re-organizing the ownership trends[8]

Economic downturn in the recent years have effected the lifestyles of people living in UK and children tend to live in one household with parents, however owning a car is no more a luxury but a commodity. This has led to people asking for more after sales service, fixtures and the likes resulting in a shift towards the functional aspects of car ownership. This the additional services that are provided along with the core product i.e. insurance, free service etc get more brownie points. Owners of compact cars are more confined to cities hence less mileage occurs leading to more lifetime of these cars. Replacement of parts, and car repair has thus taken a back seat causing equipment manufacturers to bear some loss.

Key trend 3: Supply Chain is the key to profit:

The concept of local distribution and easy access is the key for all the car manufacturers especially in markets like UK. Thus investing in supply chain in turn attracts more customer retention. As the city cars tend to be compact and cheaper, manufacturers focus more on selling parts and accessories that would add to brand loyalty.

Other Key Market Trends

Global Automotive Industry and the history of compact cars:  

Post Second World War, the economic development and boom had made people want cars of intermediate size that were saloons. The first successful hatchback was Volkswagen Golf in the year 1974[9]. The success influenced many other manufacturers to launch the front wheel drive hatchbacks like Fiat Ritmo/ Strada, Citroen GSA etc of the 1970s. The 1980s began the versions that had above average space like Lancia Delta, Ford Escort MK III. With the beginning of 1990s small family cars had become popular class of cars in Europe. During 1997 Mercedes came out with small car segment i.e. A- class. According to 2011 sales, compact cars are the second segment in Europe after the subcompact one and Volkswagen Golf leads the segment, other successful European models being Ford Focus, Renault Megane Audi A3 etc.  The latest developments have been to build coupe cabriolets with help of components from these vehicles. Ex: Peugeot 308CC, Opel Astra twin Top etc.[10]

History of Compact Cars in UK:  

By mid of the 20th century UK was the second largest car manufacturers in the world and the biggest exporter of the same. (ref: SMMT ). By the 1970’s family cars or compact cars had started to become popular in UK with the likes of Ford Cortina. However cars like Citroen GS, Peugot 304 used to be imported. The rear wheel drive saloons were steadily being replaced by the front wheel drive hatchbacks. The hot competitors during that time for such versions were many imported cars like Renault 14, Honda Civic, Fiat Strada etc. The 1980s began the era for Toyota Corolla, Mazda 323 and Nissan Sunny. Ford revamped itself with newer versions during 1990s like Focus and replaced a decade old and popular Escort in UK. Megane replaced Renault 19  while Peugeot 307 came in during the beginning of 2000s as the competition increased.

Distribution Chain Analysis

(www.kyu.edu.tw-Declining British Car Industry- A case study of Rover group): As per Micheal Porter any unit gets a competitive advantage when discrete activities like sales, service, production and research etc are competitive. Companies create value by performing these activities that become valuable to the customer. As per Porter the value chain includes both upstream primary activities and downstream primary activities.

In UK the value chain creation in automotive industry would essentially include production, order processing and distribution, sales and advertising, service and human resources. These activities can be done either in a de-centralized manner by outsourcing or centralized i.e. in home or both.

According to SMMT(Society of Motor manufacturers and Traders)  there is a tendency to acquire more and more components locally especially components that have high technology and low carbon. As noticed before in UK the key factor to establishing its value chain in automotive industry is a robust supply chain.

UK has 30% of its automotive parts being sourced at home while the rest is outsourced which is way lower than that of other EU nations like Germany. This gap needs to be filled in by proper supply chain management. (ref: ft.com/uk). So far the UK manufacturing revival by the means of in sourcing has resulted in value chain performers like Ford and Vauxhall in the compact car segment in the first half of 2014. (ref: www.share.com/blog- can this be right-car sales lead UK recovery). According to Telegraph UK is now the lowest cost manufacturing destination in Western Europe. The suppliers number have been decreasing since 2005 however now UK suppliers provide greater stability as compared to before. Many manufacturers pay a hefty premium for heavy components like engine from abroad and hence prefer local supplies. Salary of engineering graduates have been increased. (ref: KPMG- An Assessment of supply chain opportunities in UK automotive sector). Vauxhall has incorporated such value chain initiatives by manufacturing in Ellesmere Port, increasing flexible labor rules, hiking salaries, flexible working hours and other favorable labor policies.

Competitive Landscape

Its a known fact that competition in an over saturated and mature industry like that of automotive would be a result of unit costs and innovations. Since 2002 UK automotive manufacturing sector has seen a decline due to  gradual decline in a mature sector with the rest of the world taking over innovtion and unit cost benefits. UK automotive sector is largely defined by household income, oil prices, mortgage option etc. Certain trends rule the UK car market when it comes to competition:

Market fragmentation

The market gets new players in new segments constantly like the compact car segment, the crossover segment is joined by luxury segment, executive segments and overlapping of segments. This has led to line extensions amongt the segments themselves. For example the B segment of Corsa and Fiesta has increased 16 models to 31 models now. (ref: the competitive status of UK automotive industry by Matthias Holweg)

Saturation

Due to an over saturated market the manufacturers tend to have large inventories to utilize their capacity resulting in growing inventories of unsold cars. (ref: the competitive status of UK automotive industry by Matthias Holweg).

Competitive Factors

As we noticed in the earlier sections it can be clearly seen that the key success factors for today’s compact car industry in UK are: (ref:automotive council UK: driving success- a strategy for growth and sustainability in the UK automotive sector).

  • Building a strong supply chain:  The supply chain needs to be stronger for the majority of components to be manufctured in UK. However Automotive Council in UK can provide UK suppliers with much bigger market share with their contribution.
  • Skills and Know how: The magnitude of future models and innovations demand more people involved in engineering and technically skilled jobs. UK needs to build up such talent pool within the nation that would attract the investors. More and mor young talent should be brought in who have fresh ideas and are graduates and post graduates in the field.
  • Business Environment: UK needs a stronger tax breaks and incentives to work on R&D so that it can cope up with global competition. Strategic partnerships need to be enhanced on a global scale. Due to the regulations of CO2 emissions there has to be investment in innovative low emission vehicle types especially as the traditional models get outdated.
  • Improving finance options: The key issue manufacturers or OEMs face these days is tooling finance without which the suppliers cannot support the vehicle manufacturing growth. Thus collaboration with banks is essential for financing the supply chain.

Key Market Players

(ref: creditplus.co.uk/ blog/ why BMW , Vauxhall and Ford are dominating UK car market:  Following recessions the buying behavior has changed from mid sized cars to smaller segments. A recent research from Euromonitor shows that by 2020 the compact car segment would reach 45% of UK car market. The car like Ford Fiesta is one of the top brands because it has fuel efficiency of 65.7 mpg for consumer looking for cost effective options. It has low running costs, styling and is practical thus appealing to the masses. Creditplus data has shown that Ford consumers are the average wage earners in UK.13.6% of their wages goes in financing Ford. This percentage is higher than that of Vauxhall which shows Ford’s popularity.

Vauxhall Corsa is next in line for low running costs, fuel economy and low CO2 emissions. Vauxhall customers choose this car due to price reasons and have lower wages than that of Ford customers. The consumers today being more price conscious and environmentally tuned are looking towards more fuel efficient small cars.

Market Share

(ref: autocar.co.uk/car-news) The car buying pattern is governed largely by house buying capacity and employement in UK. The market got fragmented due to such reasons into different car segments. Two of the biggest segments this year have been super minis and small family cars with growth rate parallel to the sector grwoth rate at 12% however the smaller segments of city cars grew more than 15% and the upper mid size segment suffered losses as it fell by 28%. Another change has been in the value and the prestige brand fragmentation. The market has clearly seen a considerable shift from the premium ones to the value brands. Thus the brands like Ford are trying to fnd a middle path where the prestige car owners get value for money.

Thus in the compact car segment Ford has clearly been the leader so far. The total market share of Audi, Skoda, VW and Seat is 19.8% while just the single brand Ford is 13.8%. At platform level Ford Fiesta leads in supermini segment followed by VW in small family car and large family car segments.

Strategic Conclusion

  • As per present scenario its clear that there has been a paradigm shift in UK automotive manufacturing. Till the mid of 20th century UK has been the second largest car manufacturer in the globe however recession shifted the trend and now most of the component was being outsourced with only 30% being manufactured  locally. The compact segment has become one of the largest selling segments in UK due to recent economic recession.
  • The consumer of compact car in UK today is mainly a price sensitive yet environmentally aware and educated youth who wants a balance between functionality and prestige. Many compact cars are now trying to find a middle path which fulfills that need gap of  a prestigous value for money car.
  • The market leaders in compact segment are mainly Ford and Vauxhall in UK followed by Nissan, BMW Mini, Honda etc. Vauxhall has enhanced its value chain capabilities by enhancing local production, cost effective procurement and favorable HR and labor policies that would attract employees.
  • The recent challenges the compact car segment in UK faces today are from the research and development in order to produce more environmentally viable, low emission models, regulatory pressures from NGOs and Government bodies that want low CO2 emissions hence more investment on R&D besides investing in new variants. There is another challenge from the battery car that is catching upin the cities and has already taken up 3% of the car market in UK. Nissan Leaf is one such example. The companies would have to revamo their existing models. The other challenge is from emerging markets like BRIC nations where compact cars are leading international competitors.
  • The future of compact car industry in UK thus lies in producing innovative, low emission vehicles, that is cost effective yet luxurious to the consumer. The manufacturing needs to be cost effective cutting down on costly outsourcing. The concentration should be into educating the youth to become engineers and post graduates in this field and investing more in R&Daccordingly.

References

  1. www.forbes.com
  2. pwc.co.uk/ automotive.issues
  3. SMMT Uk automotive supply chain
  4. SMMT Uk automotive supply chain
  5. KPMG Uk- Pricing the Automotive response
  6. KPMG- Capturing Opportunities Sept 2012
  7. Euromonitor International: Demographic and Consumer Lifestyle Trends Driving Right-Sizing in the UK Car market
  8. hanging automotive trends- established markets by Supply Chain Matters DHL.
  9. Lewin, Tony, Boroff, Ryan; Callum, Ian( 2010). How to Design Cars like a Pro. Motorbooks.
  10. Europe Full Year 2011: Top 318All Models ranking now available) Automotive news.


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