As the industry approaches a
shortage of used LCVs, Professor Peter Cooke of the University of
Buckingham warns that the recovery of Britain’s SME economy may be
at risk.
Go deeper with GlobalData
Whether the economy is recovering –
and if so, how fast – is a topic we could debate for the rest of
the week.
While some international
organisations have predicted the UK economy will show the fastest
rate of recovery in Europe, others are more sceptical; there is
huge government borrowing, an elephant in the room called
‘government cutbacks’ and a general election result that has caused
considerable uncertainty.
From a motor finance view, however,
there is one tightly-focused segment which has, beyond the sector,
been largely ignored: LCVs.
The light commercial vehicle market
– covering units up to 3.5 tonnes – appears to have a life and
sub-culture of its own, and is split into two clear parts.
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By GlobalDataNew LCVs are commonly acquired in
mind-blowing numbers by a relatively small number of players – the
Royal Mail, British Telecom, utility companies, local authorities,
government agencies, courier companies, leasing companies and daily
rental organisations. Used LCVs, on the other hand, are acquired by
SMEs, sole traders and many other organisations that simply require
‘a toolbox’ or a means of providing local delivery.
Work being undertaken by the
automotive management team at the University of Buckingham,
however, has indicated that the next three-to-five years may see
considerable problems concerning the availability of younger used
LCVs – a problem that may hit the SMEs at the very heart of the
hoped-for economic recovery.
Well-trodden supply
chain
The paradigm in Figure 1
below summarises, at a high level, which organisations acquire new
and which generally acquire used LCVs.
The split here is probably
pronounced even more strongly than that between users of private
and fleet cars. Ask any SME director if they buy new LCVs, and many
will look at you with a totally blank expression.
This well-trodden supply chain
typically works through auctions of significant numbers of used
LCVs – hopefully minus their livery – to specialist used LCV
suppliers, which then pass the vehicles on quickly to SMEs and sole
traders.
However, the recession we are
hopefully recovering from has had, proportionally, a significantly
greater impact on the LCV market than on the UK car market.
Figure 2 (see below) below illustrates the slump
in the new LCV market.
A drop of some 100,000 new LCV
units in 2009, plus the drop in 2008 of a further 40,000, means a
potential shortfall further down the timeline of as many as 150,000
used units – and sales have yet to recover fully.
The immediate impact has been for
used LCV prices to rise as dealers realise there will be a
short-term and more serious longer-term shortage of younger used
LCVs in the marketplace.
The immediate reaction? A price
hike as shown in Figure 3 (see below).
The immediate impact of this
potential medium-term price hike may be that used LCV prices will
stay higher than the historic average, in order to balance supply
and demand.
In terms of used LCV buyers – the
‘powerhouse of the recovering economy’ – the future may not be
quite so rosy.
Those businesses which already have
used LCVs may baulk at paying enhanced prices for replacement
vehicles if their current units have a reliable life left in
them.
New players – often start-up
businesses – coming into the market for the first time, may have
real cash flow problems in terms of being able to acquire their
first LCV. They may have to settle for an older one than planned,
or use a less suitable car or estate car for business, if prices
drive them that way.
It is our expectation that few SME
players will be able to move up to a new LCV if used vehicles are
not available. The capital cost of an LCV is indeed prohibitive for
many small businesses. One hopes financial institutions will be
able to offer support at less than punitive rates.
Support on
offer
One might ask what support LCV
manufacturers may be able to offer to this stretched sector over
the next two-to-three years – the minimum time of the famine. Will
there be a rush of car-derived LCVs or other smaller, but very
basic, LCVs offered, with attractive finance deals? Would these
deals be focused on conventional new LCV buyers, or would they
focus on the SME fraternity?
Given the hike in used LCV prices
alluded to earlier, maybe this will be an exercise to remotivate
the supply chain and help to free up used LCVs from the
conventional source. Time will tell.
A second issue that might be raised
is the impact of scrappage on the used LCV sector – has inclusion
of LCVs in the scheme damaged the used LCV’s profile? A mouthful of
a question, but the response again differentiates the older used
LCV market from the older used car sector.
Consider the bar chart in
Figure 4 below. This shows the monthly take-up of
replacement cars under the scrappage programme in the UK.
The scrappage programme shows, for
cars, a steady take-up from May 2009 through to March 2010. The
scrappage numbers can be isolated in the bar chart.
However, for the LCV profile, (and
remember that slightly younger LCVs could be included in the
scrappage programme), the take-up has been ‘pathetic’. Figure
5 below presents the monthly take-up.
The reason for the contrary
scrappage pattern is one of simple economics and bears similarities
with the incidence of price hikes in periods of high inflation.
An SME operating an eight-to-nine
year old LCV is most unlikely to be able to raise the necessary
cash for purchase, even after the £2,000 discount to move from an
old van to a shiny new one. They have better use for their cash in
a period of recession!
The Buckingham Automotive Team has
tried to establish a profile of buyers of new LCVs under the
scrappage scheme. After all, what small business can raise £15,000
to £20,000 for a new unit during a recession, unless it is
essential for their absolute core business?
Ambivalent
findings
The survey has been quite
ambivalent in its findings. There have been a few organisations
with capital in the bank – the exceptions – which feel a new unit
is a once in a lifetime opportunity. Some others have had ‘access
to family support’, while others have had such broad rationales
that they could not be readily classified.
Our conclusions from this analysis
are simple: “There could well be a strategic issue in the used LCV
sector over the next three- to-five years, as supply is unlikely to
be able to satisfy demand and, as a result, used LCV prices will be
higher than they have conventionally been.’
The next couple of years could see
an ironic hit on the growth of SMEs needing one or a number of used
LCVs to help build their businesses as they recover from recession.
It will be an interesting challenge to see just how that black hole
can be filled. Any ideas?
Professor Cooke is the author
of the BCA Used LCV Market Report to be published
shortly
