Stock supply still biting

Supply of new and used vehicles has been a major issue over the past year, and continues to be, with problems in this area compounded by the coronavirus.

Jim Gibbons, outgoing chairman of the Colonial Motor Company, says it initially hinged on cancelled production with assembly-line output being cut back during the first waves of Covid-19. 

To start with, it was seen as a good thing when stacked against concerns of large volumes of inventory arriving and having to be funded, he told shareholders at the company’s annual meeting on November 5.

However, “very quickly supply became a constraint” with microchip shortages the first issue first to hit the headlines, “but gradually the whole inter-connected international supply network unwound”.

Gibbons, pictured, says the new-vehicle market is now dominated by supply problems with no end in sight. “What was considered normal has changed, everyone has the same problem and consumers are now prepared to wait. 

“The used-car market is also experiencing supply shortages. After an initial burst, there are now few ex-rentals available and less trade-ins. Used car yards look empty simply because vehicles are sold before they get onto the yard.

“Now sales and profitability in any given month is not a reflection of that month’s activity. Instead, it’s a measure of that month’s shipping arrivals. It’s very uneven between specific products, different brands, different months. 

“As time goes by, some delayed production does arrive. In simplified terms this month’s arrivals get delayed, but the delayed supply from some months back finally arrives.

“The lockdowns that began in August this year have added further complications. The medium-term impact is difficult to precisely quantify. Does consumer confidence hold up, does supply keep coming? The impact of lockdowns in 2020 was severe, both financially and mentally. 

“Second time around in 2021, while still difficult, was far more nuanced. Lockdowns and very lumpy supply have had a major impact, especially when looking at short time frames. But demand has remained strong.” 

Future products 

“The reality is that we can only sell what is available to us,” says Gibbons. “Good franchise relationships are long-term partnerships, where both respect the contribution of each with neither party only cherry-picking the best from the other. This applies to products. Some are easy to sell, others not so. 

“All our major suppliers are investing heavily in future products. There are a range of technologies that have better emission outputs, but the headlines revolve around fully electric vehicles, or BEVs as they are known.”

The government has announced two separate schemes, the clean car discount and standard. There will be change, but it’s a bigger subject than simply substituting petrol vehicles with BEVs, says Gibbons.

“New Zealand has a large fleet of private vehicles with one of the highest densities of cars per thousand people in the world. The average age is over 14 years and it’s getting older as we keep old cars going rather than scrapping them. Half of the vehicles coming in now are new, half are second-hand imports from Japan. 

“EVs do some things better than conventional vehicles, but it’s not a seamless swap. They are ideal as a second vehicle for a person living in their own suburban home with good off-street parking where daily distances are not large and recharging while parked up is available. It’s different in rural New Zealand. 

“Future products must have lower emissions than what we have now. BEVs do not fit every requirement. What is better, staying with old high-emission vehicles because full battery EVs don’t do what is required, or bringing in better but not perfect products? It will take time for necessary social changes to work through.”

Gibbons outlines the clean car discount, better known as a “feebate”, as a scheme that will encourage consumers to buy lower-emitting vehicles. 

“The framework is simple to understand. The scheme is open to criticism with implementation details, but consumers will know the tax or rebate that applies to their choice.”

However, he describes the clean car standard as fundamentally flawed. “Given our distance from point of manufacture, the large number of second-hand imports and complexity of product development timetables, it’s simply incredulous to expect importers to be able to balance their sales over 12 months to meet pre-determined and rapidly falling averages.

“They will have to build in pricing reserves to balance the risk. The result will be arbitrary and unpredictable price movements, resulting in confusion and resentment.” 

Projects update 

The building industry is suffering constraints and delays, which is impacting on projects Colonial has under way. 

“In simple terms, they now cost a lot more than initially budgeted and take longer to complete than initially expected,” says Gibbons.

Two long-running projects, Capital City’s new hub in Lower Hutt and Team Hutchinson Ford’s greenway project, are nearing completion. Both have extended over several years and should have been finished many months ago. 

The rebuild of MS Motors Ford workshops in Nelson is also nearing completion. This follows the fire there in January 2020. It’s a leased facility, but the impact on the business from delays is the same. 

Gibbons notes: “Projects, small and large, now face major cost increases and delays. The company needs to maintain its profitability to keep up with cost increases.”

Company finances

The 12 months ending June 30, 2021, added up to an “exceptional year”. Colonial’s trading profit after tax was $27.9 million – up by 13 per cent on the previous year in 2018 and up by 61 per cent on last year.

“However, there was a component of luck involved,” notes Gibbons. “Our financial year happened to start after the 2020 level-four lockdown had ended and before the 2021 level-four lockdown started. 

“A record year was never predictable, but gradually month by month, it all added up. Actually, it got better in the second half. The initial expectation in July 2020 was we were experiencing a short-term bounce, that demand would soon taper off. Instead, good export prices and massive economic stimulation created a frothy market.”

Looking ahead

Gibbons says month-by-month swings are considerable. Underlying demand for vehicles, especially light and heavy commercials, is strong. Forward orders of heavy trucks are robust, reflecting confidence in the underlying economy. 

“But the expectation of more disruption is also strong,” he adds. “The first quarter of this year is ahead of the same period last year. If there are no further major shocks, we can expect to see a strong run for the short to medium term with a little extra push coming from the desire to buy ahead of the April 2022 taxes.”