Sector Report from Bank Austria Economics:
Car sales heat up in 2015 and 2016
- After three years of negative growth, car sales rose by a nominal 3.2 percent in 2015 to EUR 26.1 billion, accelerating to 8 percent by April 2016
- In the long term, new record registration levels are becoming less and less likely
- Declining number of one-day registrations in 2016 signals an easing of rebates on new cars and, at least, a stop to ongoing profit erosion in the car sales industry
- Repair shop services in Austria are expensive by European standards
Austria's auto trade is recovering in 2015 and 2016 after three years of negative growth. Sales revenues in the sector rose by a nominal 3.2 percent to EUR 26.1 billion in the previous year, excluding repair shops and parts and accessories sales, as revealed in the current sector report by economists at Bank Austria. "Revenue from repair shops, which in the past has frequently been able to compensate for weak trends in auto trading, grew by just 0.3 percent in nominal terms in 2015, observes Bank Austria economist Günter Wolf. Growth in both sectors accelerated at the start of 2016, with revenue from car sales even achieving nominal growth of 8 percent by April.
The upswing will continue until at least the autumn of 2016. This is also seen in auto dealers' business confidence, which increased almost continuously in the first half of the year. Their optimism finds support in the sharp increase in demand for passenger vehicles, which has been driven by improved consumer confidence, higher real income related to tax reforms, and continuing favourable financing conditions. As of June 2016, new registrations were up by 6.3 percent, and re-registration of used vehicles had risen by 4 percent. The auto trade will probably be unable to sustain the high growth rates of the first few months throughout the rest of the year, and can expect to see a slight slowdown in vehicle sales no later than 2017; the main brakes on growth will likely be slower increases in household income and the fact that demand has again reached a high level in 2016.
New record registration levels are becoming less and less likely in the long term as well. At 550 vehicles per 1000 residents, Austria not only has one of the highest vehicle penetration rates in Europe (which averages 500 vehicles per 1000 residents), but also one of Europe's newest vehicle fleets, with an average vehicle age of 7.9 years. By way of comparison, Germany also has 550 registered vehicles per 1000 residents, but with an average age of nine years.
"The total number of vehicles in Austria will continue to grow, not least because of continued strong population growth over the next few years, and the continuing importance of cars in Austrians' daily lives," concludes Wolf from Bank Austria. However, the growth rates are likely to remain below those of the past fifteen years, when the number of registered vehicles in Austria increased by an average of 1.1 percent each year. By contrast, the number of vehicles increased by more than 3 percent per year in the 1980s and 1990s.
Strained profit situation in the auto trade
Auto dealers' profit situations have steadily worsened over the past few years, as seen in the declining return on sales at companies in the sample studied by the Austrian Institute for SME Research – from an average of 1.7 percent in 2011 to 1 percent in 2015. The primary factors behind this decline were sinking sales and revenue figures that led to increased competitive and price pressure, in turn putting dealer margins under pressure, especially in the new car segment. Sharp increases in one-day and short-term registrations are an indication of how much the gap has widened between newly registered cars and cars that are actually sold under new-car conditions. In 2015, 41 percent of all newly registered vehicles in Austria were deregistered again within 60 days, more than twice as many as just ten years ago. Only with the recovery of the automotive market in 2016 – in the first half of the year, the number of one-day registrations also declined by a fifth – did it become reasonable to expect, at least, a stop to the erosion of dealer profits.
Favourable vehicle acquisition costs
While the high number of demonstration vehicles and relatively new vehicles that are being sold below list price to private individuals are indeed slowing profits on auto sales, they are also lowering vehicle acquisition costs for consumers. In the past ten years, despite the trend towards more powerful and far more expensive vehicles, the costs of buying new and used vehicles for private households have actually gone down by 0.4 percent.
The main cost drivers were maintenance and repair services, which have become 42 percent more expensive since 2005. Fuel prices have increased by 19 percent, and automotive costs overall have gone up by 14 percent. Austrian households spent about 10 percent of their consumption budgets on acquiring and operating private vehicles in 2015, with about EUR 5.6 billion going on acquisition costs and EUR 11.4 billion on vehicle maintenance and operation – nearly the same amount as was spent on food and drink.
Repair shop services expensive by European standards
With the latest reforms to the Block Exemption Regulation, the central regulatory measure in the vehicle trade and service sector, the number of competitors in the service market has increased. However, the goal of lower prices at repair shops has not been achieved – quite the contrary. The cost of vehicle repairs and services has increased at an above-average rate in recent years. Bank Austria economist Wolf explains: "From 2013 to 2015, prices for vehicle repair shop services in Austria increased by an average of 3.1 percent per year, and by another 3.2 percent in the first half of 2016. Over the same period, average costs for services in the EU as a whole increased by an average of just 1.7 percent. The relatively fast rise in repair shop prices can only be partially explained by the increasing complexity of services and individual vehicle parts. In this way, the companies are also contributing to some extent to profit weakness in the auto trade."
Enquiries: Bank Austria Economics & Market Analysis Austria
Günter Wolf, Tel.: +43 (0) 5 05 05-41954;