Inside The Industry - ARTICLE - May 2022 

Inside the Industry May 2022

 

Serious Threat From New European Emissions Regulations 

Industry bosses are locked in intense negotiations with the European Union over the new Euro 7 pollution rules which are due to come into force perhaps as soon as 2025. Because agreement has not yet been reached most manufacturers have said there is now not enough time to complete the required engineering work that quickly. One of the big changes is that cars will have to meet the new regulations in all driving circumstances including for example full throttle acceleration and towing uphill. The brief handed down by the EU to it’s officials is believed to be very demanding and excludes for example any consideration of the economic aspects including customer affordability. It’s therefore feared that smaller and cheaper cars will have to be phased out as it won’t be possible to make them for a price customers are willing or able to pay. This would result in factory closures and mass redundancies.  

It is also likely that introduction of very stringent Euro 7 regulations would speed the move to electric cars, and indeed that may well be what the EU are seeking. However for these to be affordable for many customers increased subsidies will be required as well as massive investment in the recharging network, alternatives not attractive to cash-strapped governments. 

It is believed that negotiations are ongoing at very high levels, industry chief executives and prime ministers are said to be involved. We should know more by July. 

Why Are New Car Leasing Costs Rising So Much?  

Many motorists who fund their cars on a personal lease (and that is very many now) are getting an unpleasant shock when they come to renew at the end of the agreed contract. Some are seeing the monthly cost of a like for like replacement almost double! Why should this be? It is actually very simple and inevitable. Over the last two years new car prices have increased often by 25% or more. On top of that as I’ve reported previously manufacturers have dramatically reduced the discounts they five to fleet customers including leasing companies. 

To see how this works in practice let’s look at a new car that two years ago had a retail price of £20000. It’s fair to say that on average that car would now have a retail price of £25000. Two years ago the discount to the lease company would have averaged say 25%, it is now average 12.5 %. The leasing company is allowed to reclaim the VAT on a new car purchase so in 2020 the net cost of that new car would have been £12500. Now it is £18229, £5729 or 46% more! 

Of course the monthly lease rate is decided by the difference between the net cost of the car to the company and the residual value they forecast it will be worth when sold in 3 years’ time. Forecasting residual values is a black art, I spent the best years of my life doing that and my head still hurts when I remember that. Let’s for this exercise say that this car is worth 35% of new retail price when sold after 3 years. The 2020 car would have a value of £7000, but the lease company must take the VAT content out of that sale price so they would actually get £5833. Having paid a net £12500 for the car the depreciation cost would be £6667 or £185 per month. The lease company then has to add interest charges, other costs and some profit so would probably charge very broadly say £250 a month. 

For the 2022 car they have paid £18229 net. If we use the same 35% residual value they would sell it for £8750 less VAT = £7292. So their depreciation cost would be £13541 or £376 per month. Allowing for interest, costs, and profit the rate charged might be £450 a month against the £250 for the 2020 car. 

There’s an old saying that numbers don’t lie, and sadly for the customers involved those I’ve set out are pretty accurate. Confronted with coming to the end of a car lease and being asked that sort of increase what can a customer do? First thing is to ask the lease company to extend the lease by a year or two. Then you can continue to pay 2019 prices for a while longer. It’s probably worth buying an extended warranty but the cost of that is small compared to paying a new and greatly increased monthly lease rate. 

Then of course not all manufacturers have reduced discounts and increased prices at the same rates, so some monthly lease rates have increased by much less than others. Therefore it pays to shop around. It is though almost inevitable that if the customer wants to keep their monthly payment at the same rate as they are paying currently they will be driving a much lesser car! And of course the same arithmetic applies however you fund you new car, running it is now much more expensive than it was two or three years ago.

 

The Best Way To Go Green

 

One of my Fleet Management Clients has recently set some ambitious targets to become carbon neutral pretty quickly. The employed some very professional (and no doubt very expensive) environmental consultants to advise them and I was asked to work alongside these people on the vehicle fleet aspects. The client is a large company with a fairly small number if vehicles which is why they use us rather than employing a full time Fleet Manager.  

I was very surprised and interested at what the consultants came up with for vehicles. Ahead of all the things I was thinking about like hybrid, electric etc they were very firmly of the opinion that the biggest gain would be for the company to extend vehicle life. The reason being the environmental impact of actually manufacturing a new car. They produced all sorts of complex statistics, some of which I understood, to back up their arguments.  

Last month I talked about fleets extending their life cycles from 2-3 years to 4-5. The recommendation of the consultants in this case was for the company to look at 6-10 years. So over 9 years instead of buying 3 cars or vans they would buy one! When many vans and trucks are run up to 300,000 to 500,000 miles why not? An interesting experience which certainly got me thinking. Of course the effects on the manufacturers and dealers if everyone does this are only too clear. 

Be Green Or Just look Green? 

There’s no doubt many organisations now want to at least look like they are environmentally conscious without always being so. Last week I was talking to the Disposals Manager of a large leasing company. They had just collected an electric van from a local council at the end of a 3 year lease and were surprised to find it had covered less than 300 miles in the period. Thye questioned this with the council as they needed to be sure the mileage was genuine before selling it on. Mileage was correct, the council explained that all they had ever done with the van was have it liveried to explain it was zero emissions and part of their green policies, then park it outside the council offices every day to emphasise the point. Cost to the ratepayers? About £10000 over 3 years. 

The same man also commented on the number of hybrid cars they got back at end of lease with the charging cables still in the original packing and totally unused after 2,3 or 4 years. Reason being many company car drivers choose a hybrid because the low emissions (if used properly) result in a much lower Benefit In Kind tax charge that a conventional petrol or diesel. Then the driver can’t be bothered with the fuss of recharging so simply drives on petrol or diesel at all times!

 

Change Of Chief Executive At Aston Martin

My regular reader may remember that early this year I commented on rumours that the position of AM boss Tobias Moers, drafted in from Mercedes in September of 2020 may not be entirely secure. At the time these rumours were furiously denied by Aston’s major shareholder and Chairman Lawrence Stroll. However Moers has now left with immediate effect. He was known to be an abrasive perfectionist. Mr. Stroll is known for micro managing, it’s even said he sits in on the debriefs at his F1 team on race weekends and overrules the engineers. Perhaps this was never a marriage made in heaven, and there was only ever going to be one winner.

 

Stroll has the ambition that Aston will one day emulate Ferrari so it is perhaps no surprise that he has appointed former Ferrari chief executive Amedeo Felisa as the new Aston Martin boss. Felisa has been a non executive director at Aston since last July but his appointment did come as a surprise as he retired from Ferrari in 2016 when he turned 70, and his new role may be thought a very demanding one for a 76 year old. Not that I would agree with that as I type this on my 72nd birthday!

 

Used Car Buyers Becoming More Selective 

As used cars have been in very short supply over the last 18-24 months many dealers have changed their stocking policies to ensure they could still fill their forecourts. Dealers 6 years who only sold cars up to 3 years old extended to include 4 and 5 year old models, Those who limited miles to 40000 extended to 60000. 

Now as the cost of living crisis starts to bite signs are that customers are becoming more risk averse and looking for newer and lower miles cars. The theory is that with family budgets stretched the last thing people want is an unexpected large bill. Long warranties are in demand for the same reason. 

VW Expects To Have To Fight To Be Elecric Car Number 1 

VW boss Herbert Deiss has admitted they will have a real fight on their hands to beat Tesla and become the world’s leading electric vehicle manufacturer by 2025. He admitted he was “very surprised” by what Tesla had achieved. He’s not alone in that, most industry observers are. That includes me, I never thought Tesla would be able to achieve the production volumes they have. Reiss said he never expected Tesla would achieve the growth they have so quickly. However he hoped that because VW had more brands and a wider variety of cars he felt there was a chance they would be number one electric car manufacturer by 2025 or “At the very least we’ll be second”. Achieving this won’t be cheap, VW are currently building six battery factories in Europe each one costing between 2 & 3 Billion Euros. 95% of the production will be to supply cars for the European markets.

 

Electric Car Battery Life 

As more and more electric cars hit the roads and they begin to age customers are more and more starting to question the cost of a replacement battery pack. Most manufacturers warranty these for around 8 years so this is very much a question used buyers are asking. With the cost of new battery pack being between £6000 and £15000 you can easily see why! So the value of a used electric of more than 5 or 6 years old will very much depend on whether ior not the batteries have been replaced and if not what the cost of that will be when the time comes. 

Customers Turn Away From Diesel

A recent survey showed that only 5% of private buyers in the market for a new car are interested in a diesel. Meanwhile 21% of those looking for a used car are looking for diesel. Within this there are strong regional differences. Big city motorists have hardly any interest in diesels while in rural areas they are still very popular. Canny traders are therefore moving cars around the country from where they are unwanted to where they are in demand. Many years ago I knew a trader who made a very acceptable living buying used automatics in Scotland where they were not popular in those days to London where they were.

 

Component Shortages Worsen 

Semiconductor shortages don’t seem t be getting any better and the lack of parts made in Ukraine only gets worse. Now China is going back into lockdown because of fresh Covid outbreaks there which is making a bad situation worse. The return of normal vehicle production levels seems as far away as ever, not this year to be certain, next year? Who knows. Audi last week suspended production of A4, A5, and A8 models “temporarily” and extended short time working until at least the end of May. 

More On Cazoo 

Last month I suggested that this company’s targets were so ambitious as to be farcical. Now the Cazoo have filed a report (late) to the Securities and Exchange Commission in New York . In it Cazzo admit that they have not been profitable since starting business in December 2019 and by the end of 2021 had accumulated losses of £664 Million in two years. They expect losses to continue as they continue to invest in further expansion of the business, and although the “believe” they will become profitable in the future “we cannot guarantee that we will become profitable, or achieve the levels of profit anticipated, or ever become profitable”. 

Nevertheless Cazzo continue to invest and expand, opening in Spain currently, and spend over £65M a year on marketing including high profile sports sponsorships. I always thought when you’re in a hole best to stop digging?


 Paul Gilligan

pg@gilliganvc.co.uk www.gilliganvc.co.uk

07785 293222