thegarageblog.co.uk : Difficult times ahead, but still bargains to be had.

I know I’ve mentioned the ‘economic downturn’ (I’ve long stopped calling it a credit crunch) in previous posts, but until recently, it’s had barely any noticable effect on our business. The newspapers are full of stories about the state of the global automotive industry and how many car-makers are dangerously close to bankruptcy. The UK manufacturing facilities for the global car companies are all either on extended Xmas shutdown, or were already on part-time working. There are numerous huge fields around the country, full of unsold new cars, and some dealers have even resorted to drastic measures to shift the cars they have, such as offering 2 cars for the price of 1.The values of used cars have been hit harder than ever, with many new cars losing 50% of their value in 12 months, rather than the 3 years it used to take.

With the banks and finance houses tightening-up their lending criteria in the aftermath of the financial crisis, the customers that would have bought new cars on credit are having to keep their old cars longer. People that already have cars on finance agreements that are ending soon may well experience difficulty in obtaining finance for a replacement, as the lenders make their criteria harder to meet. Many lenders have lost a fortune on car finance due to the almost immediate negative equity that virtually every car is in from day 1 of a credit agreement. It’s fine if the owner makes all their payments on time and completes the agreement for the whole term, but if their circumstances change, things can be very different. Let’s say that you bought a new car on finance over a 4 year period. Assuming the car is £15000 and you have a 10% deposit, you’d be financing £13500. Even it it was an interest-free deal, it’s still be £281 a month for 4 years. So, after 1 year, you’d have paid off £3372 and still owe £10128 but would still have the car. The problem is that the car is now worth around £8000, so you still owe more on finance than the car’s worth. If you were suddenly made redundant and could no longer afford the monthly payments, it’d be very difficult to ‘get out’ of the agreement without either handing the car back (and paying the deficit) or just stopping the payments until it was reposessed. The finance company would then be forced to sell it for as much as they could get (usually much less than its worth) and then pursue you for the difference! Either way, not a happy chain of events to experience, and unlikely to do your credit rating much good.

So, the whole car market is in turmoil and all around, franchised dealers are posting huge losses and many have already gone into receivership. The ones that are still trading have been laying-off staff in all departments in order to cut costs. The trouble with a main dealer is that it’s effectively a luxury, that is very expensive. You don’t have to buy your new or used car there, and you don’t have to have it serviced there as many cheaper alternatives exist. The typical franchised dealer has huge overheads to pay, and as a result has to charge much more for its services. When times are good, they’re selling loads of cars and the service department is fully-booked, they’re very profitatable indeed. In a depressed economy like now, they literally haemorrhage money and can sometimes face bankrupcy very quickly.

Of course, some dealer groups are going to be much harder hit than others. One disadvantage of being a ’single franchise’ (i.e. a Ford or Renault dealer only), is that if your particular brand of car becomes less popular, you haven’t anything else to sell. For a major brand like Ford, it’s not too much of a problem as they have a model for every taste. From the little Ka for the budget buyer, through the Fiesta and Focus, to the Mondeo. They even have a new small 4 x 4 called the Kuga, as well as the C-Max, S-Max and Galaxy peple carriers. All in all, there’s a car for most budgets and tastes, and the brand image is far from ostentatious. You’re unlikely to offend anybody driving a Ford, even a 4 x 4 model as they just ‘blend in’ to the scenery. On the other hand, a dealer that sells only Jeep vehicles has a much harder struggle. The entire range is perceived as being a bit environmentally unfriendly and maybe a bit ‘brash’. The smallest and cheapest model in the range is the Jeep Patriot 2.4 petrol, which costs nearly £16000 and the most expensive being the £31440 Commander 3.0 Diesel. As a result, there are fewer and fewer buyers, and therefore fewer Chrysler/Jeep dealers still trading profitably. In fact, a couple of our local Chrysler/Jeep dealers have already gone and our nearest is now around 30 miles away.

The values of cars such as the Jeep Cherokee have dropped so much, that last week, a friend bought this lovely 2004 model with just 30,000 miles for under £3000. Remember that just 4 years ago, this cost almost £20,000 and just last year you’d have been lucky to find one for under £6000. With petrol prices back at under £1 per litre, a car like this can make a great used buy and won’t cost a fortune to run as long as you don’t cover huge mileage. The only downside is the increased cost of servicing if you use one of the remaining Jeep dealers! A typical ‘major’ service for a Cherokee at a franchised dealer will cost around £500 compared to around £280 at an independent garage like ours. Although tyres cost around £75 each compared to say £45 for a Ford Focus, apart from the increased fuel costs, it won’t really cost that much more than an equivalent Focus or Mondeo.

A rugged 4 x 4 like this with only 30,000 miles on will have many years of life left in it, and is a bit more interesting than the average little hatchback. You couldn’t even but a similar-aged Fiesta for the same money!

If you’re prepared to go for something a little less conventional, there’s some real bargains to be had. Besides, even if all the Jeep dealers in the UK go bankrupt, you’ll still be able to get the spares from America on eBay, and they’ll often be cheaper!

Fortunately for us, some of the customers that used to have their cars serviced at a franchised dealer are now looking to cut their costs, and are now turning to garages such as ours. As I write this, we’re just a few days from Christmas so the vast majority of customers when faced with a choice of a car service or a Playstation 3 for the kids, will generally choose the latter. I honestly can’t remember a less-busy week since we began trading, but the numerous breakdowns that the AA and RAC bring-in will keep us going until January. It’ll be interesting to see what 2009 will bring, and how long the market takes to pick-up. In the meantime, if you are looking to change your car in the new year, I reckon that prices have pretty much hit rock-bottom so if you have got some money left, there’s probably never been a better time to buy!