Gareth Hession of JATO
Dynamics asks what happens to the price a dealer can demand from
consumers in the ‘greening’ of the automotive
market.
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The fundamental
rule of price determination is demand and supply. Everyone knows
that, especially those charged with forecasting residual values
within vehicle funding institutions. However, this basic rule is
often ignored when it comes to forecasting residual values for low
CO2 variants.
In recent years, the
CO2 performance of a car has become critical to its
sales success.
While environmental concerns
play their part in the decision-making processes of both
individuals and companies, it is the cost of fuel that has been an
even greater driving force in this trend, especially in tough
economic conditions with record fuel prices.
Added to this are the rates
for Road Fund Licences that are tiered dependent upon
CO2, which contributes to the running cost effect of the
related fuel consumption.
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By GlobalDataAll these factors affect new
cars and used cars – fleet purchasers and private buyers –
equally.
A further significant
element, one that doesn’t affect the market equally, is the cost of
taxation to both companies operating vehicles and to the drivers
enjoying the benefit of a company car.
Capital allowances, benefit
in kind, and National Insurance all contribute to the cost of
running a vehicle, and this can vary considerably depending on the
CO2 emissions of the vehicle.
The fiscal measures in play
skew the demand for low CO2 new vehicles and creates an
increase in demand for them in the fleet market. This is not rocket
science; after all, this is exactly what the measures are supposed
to do.
However, a problem arises
when the demand for low CO2 in the fleet market –
responsible for the purchase of the majority of new cars – is not
met in the private market, which dominates the used market. An
imbalance in demand is created.
While private buyers will
benefit from better fuel consumption and maybe a lower licence cost
when these low CO2 fleet vehicles reach the used car
market, the real world fuel differential is often not as great as
suggested and many simply do not research running costs
thoroughly.
The truth is that the primary
factor in the success of the used car on the forecourt always has
been, and will continue to be, cosmetic – what it looks
like.
So when a BMW dealer finds
that rather than having a good mix of 3-series to sell, half his
3-series stock is 320d Efficient Dynamics and he has hardly any
larger engine M-Sport Coupes, what happens to the prices he can
demand from consumers?
As long as the funding
opportunities continue to be with low CO2 variants there
is always likely to be an imbalance between the demand for these
vehicles in the fleet and private markets. While it may seem
counter intuitive to many, the answer may be to increase the
residual value of larger engine, larger wheeled cars and reduce it
for low CO2 vehicles. Whether the ‘greening’ of the
automotive market allows this to happen is another
question.
Gareth Hession is
vice-president of research at JATO Dynamics
