Disruption, consolidation and cooperation in the automotive sector

Amid the turmoil caused by Covid and the global shortage of semiconductors, the automotive market is undergoing a period of structural change: some sectors are consolidating and others are seeing new entrants. Chris Farnell reports

In the dealer market, consolidation is not a completely new phenomenon, but an extension of a process that has been going on for decades, even as the market has grown.

“Going back to 1976, there were twice as many outlets of franchise dealers as there are today, so downsizing and consolidation continued,” says Peter Cottle, head of the company’s automotive sector. Growcap Ltd. “But the interesting thing is that there are half as many dealers, but the remaining 50% sell twice as many cars.”

Dealer networks

One of the most important deals recently has been the acquisition of Marshall Motor Group by Constellation Automotive Group, which also owns Cinch and webuyanycar.com.

“The only part of the path they lack is the financial services element, so expect them to buy out a financial company or enter into a partnership,” said Graham Wheeler, CEO. Advantage Finance.

While dealers themselves are consolidating, manufacturers are also looking to take more control of the front end of their sales pipeline. Seven years ago there were 4,500 “roofs” (dealers with more than one franchise selling under one roof). There are now about 4,100 roofs, and scientists say their numbers will continue to decline.

A number of OEMs want to reduce the number of their franchise partners, while dealer groups want to maximize efficiency by combining brands, where necessary, in one room.

“I worked at Rover Finance from 1992 to 1997, and Rover and Land Rover had 700 dealers in 1992, although in 1996 their number dropped to about 450,” says Cottle. “Given that most franchises now have 100 to 200 dealers, it just shows how the market has changed, and small outlets for many OEMs just don’t work, and not just for OEMs, but for dealers to make an adequate return.”

At the same time, many small dealers are buying up. Again, this is a less sudden development than the product of the relative youth of the automotive industry.

“Automotive industry is still relatively new. There are the founders of dealerships in the 1920s and 1930s, whose great-grandchildren now run the family business, ”said Kotl. “In the current environment, many small dealers say they can’t make a decent profit, so they sell their property and crystallize the business. There is a clear desire for small dealers to leave the industry. They recognize that the future will be harder for them, while larger groups can benefit from economies of scale. ”

However, Cottle describes it as a natural product of the industry, not the death of a small dealer.

“I know many who are run by extremely strong executives who keep up with the times, are so passionate about their company and provide the best customer service,” he says. “They can have a closer relationship with a community so well-established, and they tend to be a little closer to their customers.”

Financial limit

While the process of consolidation is observed on the part of car dealers, the car finance sector itself looks completely different.

The financial side of the industry remains an attractive prospect for new investors. Regulatory changes have had a greater impact on the dealership and brokerage business than on investors, and investors have much more control over what can be offered to consumers now that dealers cannot change rates.

“Car financing remains a profitable and attractive proposition, despite all the possible disadvantages of the overall car market. “The default levels in the industry were much lower than expected, as the credit crunch and increased automation of ‘credit decision-making’ helped reduce fixed costs,” says Cottle. “However, well-established car finance companies need to be very agile to compete in this world of fintechnology, and we have seen that in recent years a number of new players have entered the market and been successful. In some cases, well-known companies have rather clumsy technologies, so if you can find an unobstructed solution, these destroyers have a place to take action. ”

New players entering the market tend to be in the lower prime sector, while the main sector is still dominated by big names like Black Horse, Santander, Moto Novo and BNP Consumer.

“Thus, while we continue to see consolidation in the car retail sector, there has been an increase in the number of companies offering car financing, and the broker sector remains alive,” said Cottle.

The real way forward in the automotive finance sector may not be the consolidation or invasion of new companies, but cross-sectoral cooperation.

“We’ve taken a slightly different approach to our financial investors, where we welcome as many investors as possible to integrate with us either through their existing dealer network or by expanding their dealer base,” said Martin Potter, managing director of the company. Aston Barclay. “Over the last five months, we have added four key financiers to our automated process. We have entered into a tripartite agreement between ourselves, the clearing house and the financial house so that their specific dealers can immediately fund them with us when looking for shares. ”

The Aston Barclay network already includes such big names as Santander, Moto Nova and Vauxhall, but the company is adding additional financial houses.

“What’s very interesting is the number of players in the market with specialized sectors looking to collaborate or work together,” Wheeler says. “You may have a super-acceptable lender, a major lender and an almost prime or sub-standard lender attacking the market together. So if Advantage Finance had a lot of contenders of a quality we couldn’t afford, we could hand them over to a major lender, while we can underwrite, they can’t handle in terms of risk. This is a behind-the-scenes trend rather than consolidation. ”

The market is still undergoing change, and it is too early to say what it will eventually look like, but it remains a field of opportunity.

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