Sales of petrol and diesel cars to phase out by 2040. What next for the automotive industry?
Last Wednesday Government outlined plans to stop the sale of conventionally powered vehicles (petrol and diesel engines) by 2040. Knight Frank Automotive looks behind the headlines, asking how this will impact the car industry.
4 minutes to read
Reality Check - the announcement does not mean cars using petrol and diesel will be banned after 2040, only sales of those cars relying entirely on fossil fuels. Hybrids (using part electric motors and part petrol or diesel power) will still be compliant.
Car manufacturers are already well on the way to introducing hybrid vehicles to the mass market - Lexus offers every model with a hybrid option, and Volvo revealed last week that by 2019 its whole model range will be available with electric or hybrid drive technology.
"Despite the rise of electric cars in recent years, they still only account for around 1 in every 100 new cars sold in the UK."
Public demand is likely to have a more significant impact on how soon manufacturers act on the proposed legislation. The announcement is likely to accelerate the fledgling market in alternatively fuelled vehicles, which is already experiencing significant gains.
Demand for alternatively fuelled vehicles (which includes electric) rose 29% in June, the segment now enjoying a 4.4% market share. Conversely, demand for diesel fuelled vehicles has dropped, with new registrations down 14.7% last month.
The announcement could be seen as a timely shake up of the market, with increased footfall to dealerships as customers seek out the latest models, potentially bringing purchases forwards.
In this instance, the manufacturers that react quickest will benefit and so too their dealer partners provided the right products find their way to the showrooms.
Either way, whether powered solely by fossil fuel or not, the car – and the dealership – is going to be around for a long time to come.
And what impact on the fuel retail market?
Over the past ten years, drivers have continued to favour diesel fuel over petrol owing to the lower carbon dioxide emissions and better fuel economy.
" Fuel retailers and oil companies have already diversified away from relying on profits from fuel sales to making (considerably greater) profits from food and convenience goods."
Following recent press on the health issues associated with higher levels of Nitrogen Oxide (NOx) from diesel engines and the Government’s latest announcement last Wednesday, this trend looks like reversing.
Nevertheless, in the short to medium term at least, whilst certain road users trading in for a new car may now consider electric, the vast majority are likely to favour petrol or hybrid variants, keeping retail volumes relatively consistent.
It is worth noting that despite the rise of electric cars in recent years, they still only account for around 1 in every 100 new cars sold in the UK.
In the medium term, petrol and diesel sales will likely decline as we move towards alternatively fuelled vehicles, although this won’t happen overnight; conventionally fuelled engines still beat hybrids on long stretches and we are generally making fewer journeys but over longer distances - electric cars don’t yet compete on motorways.
In any event, fuel retailers and oil companies have already diversified away from relying on profits from fuel sales to making (considerably greater) profits from food and convenience goods on the irrefutable premise that people require re-fuelling far more frequently than their vehicles!
"Whether powered solely by fossil fuel or not, the car – and the dealership – is going to be around for a long time to come."
Indeed, modern larger forecourts typically have a minimum 50% of profit underpinned by non-fuel sales. Of course, they will likely still also be selling fuel in some form (electric, hydrogen etc.), even if that is not petrol or diesel.
In our view fossil fuel is likely to endure well beyond 2040; it will take some time after the legislation (assuming it is indeed enacted) for the c.37m vehicles on UK roads to be traded in for non-traditional variants.
Fundamentally, fuel filling stations are already evolving to provide a greater range of products and long gone are the days that their profitability relies solely on the sale of petrol and diesel.
The sites are by implication highly accessible and convenient and as such suit a range of potential uses should a scenario arise that we no longer need fuel in any form.
Interestingly, major oil companies are well aware that over time there will inevitably be a phasing out of fossil fuel, but remain committed to the sector, expanding with new-to-industry developments and signing up to long term occupational leases.
For more information or to discuss any topics raised within this article contact Knight Frank's automotive team.