With falling employment, stagnation throughout Europe’s major economies and low consumer confidence there is small wonder that new car sales continue to be nothing short of a bloodbath across Europe. In light of this fact the United Kingdom has registered 14 months of growth in new registrations, which begs the question of whether it is sustainable or not? Despite positive news that the market grew 1.7% year-onyear in April, Europe is still contracting; overall new registrations declined 7.1% in the first four months of 2013 to hit 4,026,946 units, which to put into context on a like-for-like basis means we are currently presiding over a car market that is operating at a level not seen since the 1980s. Therefore it is unsurprising that European car manufacturers have been struggling. Luxury brands have so far managed to offset revenue declines in Europe with significant gains in growth markets such as China and India, whilst budget brands have found favour throughout Europe in both growth and mature economies with those customers’ growing, and declining, disposable income. However those hit the hardest, much like Europe’s population, are those manufacturers that occupy the middle-ground – manufacturers whose business models revolve around selling high volumes at lower margins; such as GM and Ford. Looking at these two companies GM lost US$175 m and Ford US$462 m in Q1 2013. Furthermore, the situation is showing signs of contagion to brands previously withstanding the economic headwinds, such as Daimler, which recently issued cautionary notices about its ability to reach its annual targets. It begs the question how car manufacturers can sustain the imbalance between production and sales, especially in the toxic climate of blinkered political resistance to plant closures and a fear from manufacturers that if Europe’s economy begins to recover, the removal of capacity will result in the inability to satiate future demand. It is here that the UK’s recent success gains a European significance. When comparing the macroeconomic indicators of the UK to the rest of Europe there is very little in the way of exceptional behaviour, for example, growth in all the KPIs associated with measuring economic health are comparable. This therefore begs the question of why new registrations have performed so well over such a sustained period of time. It is at this point that the spectre of the UK car market being used as a dumping ground for Europe’s car manufacturers begins to crystallise. By isolating the controls to right-hand drive (thus protecting mainland Europe from any â€œleakageâ€) and flooding the UK market, manufacturers are able to offload produce and protect the residual value of their products in all other European nations with their left-hand drive format. The effect on residual value in the UK is disguised by the provision of finance deals which focus the attention of the buyer on the monthly price rather than the overall saving over an outright purchase: thus retaining the integrity of the sticker-price on the forecourt. Manufacturers’ motive aside, the UK economy is still in relative stagnation with real adjusted gross disposable income per household lagging behind similarly-sized European economies. Therefore the provision of cheap financing, much like the surge in sub-prime auto lending in the US, has played a key role in sustaining this new registration growth. Since 2009 the percentage of private new vehicles financed by personal contract purchase (PCP) schemes had risen from 33% to 47% by the end of 2011. Since then PCPs had grown a further 8% to hit 55% by the year-end of 2012. Furthermore, recent figures released by the Finance and Leasing Association (FLA) demonstrate that the number of new cars bought and financed in Q1 2013 via this method increased by 22% over the same period in 2012. Therefore it comes as no surprise that the current crop of PCP schemes now offer such competitive deals that customers are able to acquire a brand-new vehicle and, should they choose to return the car at the end of the contract, still save money over the conventional purchase of a cheaper â€œnearly-newâ€ version when considering depreciation, and if sold after the same period of ownership. Ultimately it is hard to reconcile that flooding one nation with subsidised produce, no matter how good a deal it is for the consumer, is a sustainable business model. Manufacturers are banking on economic revival in the short-term to offset the disposal of overcapacity; however this is akin to betting on the river card in a game of automotive poker. One fears that ultimately it will do nothing other than harm future business when contracts end, and a surge of vehicles hit the used car market, forcing motor vehicle values into a downward spiral. The fact of the matter is that for the European automotive industry to survive it has to downsize and address its perennial overcapacity, much like how the US industry has had to do. The consequences for those who continue to over-produce and undersell will be a fate far worse than restructuring.