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February 15, 2009updated 12 Apr 2017 12:00pm

Recession, crystal balls and alternative strategies

Peter Cooke takes a look at the possibilities of the 'out of the box'strategies coming to the fore in the current financial climate.

By Peter Cooke

Peter Cooke takes a look at the possibilities of the ‘out of the box’strategies coming to the fore in the current financial climate.
 
I probably spend too much time staring at figures searching for anomalies and explanations. However, I feel there may be some interesting little ‘out of the box issues’ emerging at present, offering lessors, fleet executives, dealers and finance providers some food for thought – if not immediate action.

Reports over the past couple of months or so suggest that residual values, as measured by average prices at auction, are looking healthy and buoyant. Interesting when one puts that in the context of apparent collapsing confidence and poor new car sales. Is there a logical explanation?

One issue may well be that dealers and their intermediaries held back before Christmas on buying stock for the spring season on the assumption that residuals might slip further, although there appears to have been some levelling out in the second half of 2008.

Equally, there may have been an assumption that plenty of stock would be available. Logical – yes. But is there an underlying strategic message that 2009-2010 will be years of the used car?

If new cars will take time to recover and build up again to satisfy natural demand, what might would-be buyers acquire in their place?

Used cars replacing used cars; a sort of Gresham’s Law of the quality of currency might be a parallel. A healthy used car market is a prerequisite for a healthy new car market.

Force fed

The other side of the equation is the challenge to dealers as to whether they have finance in place for would-be used car buyers.

While there might be 2 million people out of work, and a couple of million further with a concern about jobs, that still leaves over 20 million people in employment, many of whom may seek a replacement car over the coming months – and would like the finance to go with it.

Some might claim that a drop in new car sales might be a good sign, as the new car market has been force-fed for some years and the natural demand for new cars in the United Kingdom is lower than registrations would suggest.

Part of the excess ‘pseudo-sales’ might be considered to have disappeared, although one hears regularly of ‘amazing bargains’ which, in turn, can skew the market as they are sold through non-routine sources.

Could there even be an interesting situation developing – a strategic paucity of used cars? Given for example, in 2008-2010, a significant shortfall of new car sales, cumulatively 1.5 million units. Even after we have deducted the ‘pseudo-sales’ noted previously, there may well be in two to three years’ time a shortage of used car stock coming from replacement on fleets and through the auctions.

The principles of supply and demand would suggest that reduced used car stock will be sought aggressively and prices could well rise. How significant that price hike a couple of years ahead might be is open to conjecture. It may occur – or it may not.

To return to the present day, anecdotal evidence suggests that current lease rates have risen to help compensate for the fall in residual values on units put on contract hire three to four years ago.

Elsewhere, one reads of extending lease periods as leasing companies seek to minimise future risks by being able to depreciate to a more aggressive figure over a longer lease.

Tactical questions

There is a counter-argument which might hold equal sway and which could appear to be very logical. On the face of it, the shortage of new units going into leasing deals, or being bought as new and entering their primary operating life, is currently right down.

That means there could be a shortage of used cars of a certain age at some point in future. Residuals of those units should be very attractive. Would that mean that the forward-thinking lessor might go for market share and reduce current lease rates on new contracts?’

There are more risk management reasons not to pursue such a radical strategy – but is it totally untenable? Consider the laws of supply and demand and relate them to future used vehicle price of units of a certain age.

As I wrote earlier, maybe I spend too much time studying numbers and looking for trends – but do think about it.

Professor Peter Cooke, KPMG Professor of Automotive Management, University of Buckingham

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