Oversupply of cars to trigger price war, says UBS

A glut of cars on the market is to trigger a price war among manufacturers as demand fails to keep pace with supply, analysts have forecast.

UBS has estimated that global car production will exceed sales by 6pc this year, leaving an excess of five million vehicles that will require price cuts to shift.

A brimming order book for most carmakers means that prices are likely to remain high for the first half of the year, analysts at the bank said.

After that, sluggish economic growth and higher living costs will squeeze potential buyers’ ability to afford new cars, which is likely to hit prices as cars remain unsold.

Carmakers have already begun cutting the price of electric vehicles (EVs) as the soaring cost of energy and the expensive upfront cost of models means they are becoming increasingly unaffordable.

In January, Elon Musk’s Tesla cut the price of its cars by up to £8,000 in the UK, putting some of its cheaper models on an even footing with brands such as Skoda and Kia.

Meanwhile, the cost of second-hand EVs is also falling, with the average price of a pre-owned electric vehicle down by 13pc in the last year to £33,060, according to AutoTrader.

UBS said this trend is now likely to filter through to petrol and diesel cars as demand falls.

Analysts led by Patrick Hummel said in a note to clients: “Given the bullish production schedules, we see high risk of overproduction and growing pricing pressure as a result. The price war has already started unfolding in the EV space, and we expect it to spread into the combustion engine segment.”

Luxury carmakers, which are generally more resilient during an economic downturn than their mass market rivals, will be less affected and it will be makers of family cars which will likely suffer, the analysts said.

Overproduction has long been a brake on the margins for car companies.

Companies would set targets for production, rather than sales, and then expect dealers to shift the cars they made. Excess stock meant slashing prices, which was good for consumers since cars were more affordable.

Story continues

However, demand soared during the pandemic as households opted to drive instead of taking public transport, while lockdowns and staff shortages caused production to collapse.

This led to record profits for car companies as they were able to charge more for their cars. Toyota, Volkswagen, BMW, Mercedes and Vauxhall owner Stellantis all posted record profits in 2021 and maintained high returns in 2022. Renault went from an €8bn loss in 2020 to a €9bn profit in 2021.

But as the supply of components has slowly returned to normal, they are all rushing to maintain market share in the face of increased competition from Chinese carmakers.

Up to 30 new electric vehicle brands, most of them Chinese, are eyeing up the UK car market, according to an industry report seen by The Telegraph. Challengers have designs on the cheaper end of the market, preparing to sell mass market battery-powered cars to Britain.