The boom has arrived!
There is a sense of unreality about the economy. Inflation is
creeping up, petrol prices have rocketed, government borrowings are
rising, the housing market is in trouble and new car sales have
slowed. Yet employment remains higher than ever, summer holiday
bookings are buoyant and there have been few stories of mass
redundancies.
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In my conversations with fleet industry people over the last few
weeks the story has been mixed. At one extreme there is an owner
desperate to sell his business because the tide is turning against
him and he wants out before it gets ugly. Yet his story seems to be
an aberration, with the majority expressing views that ranging from
sanguine to pretty upbeat.
There is a time-worn pattern as far as the vehicle leasing
market is concerned. The economy cools, demand falls, employment
falls, used vehicle prices fall and contract hire companies find
there is less demand for their services (and they have to pitch low
to win such business as is available). They start losing money on
residuals and bad debts, and they start making internal changes
(business process re-engineering, change projects, introduction of
new QM systems, overhauling the sales or customer service or
operations team, adding new products, yadda yadda…) – all internal
things that are within their control to change and which allow them
to go home thinking they’ve done something positive, whereas in
truth in many cases these steps give little bottom line benefit,
because the problem invariably lies between the company and the
market rather than the company and its internal organisation.
Justified optimism?
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By GlobalDataThe optimism I am hearing at present is interesting and,
frankly, unusual. Normally at this stage in the cycle any optimism
would come more from hope than conviction. But this time it seems
it may be well-grounded. The fact is, most vehicle lessors are
owned by banks or car manufacturers that are highly committed to
this sector. Unlike, say, a mortgage lending institution, where the
advances last on average for 7 years, an average car replacement
cycle is just 36 months so lessors get their funds back fairly
swiftly and can redeploy these into new business. A general drying
up of credit in the market may well find these companies well
placed to pick up the slack, particularly if UK plc decides to
retain its cash resources and use leasing even more for its
funding.
The new car sales market seems to have cooled, but the used car
market is holding up well, suggesting lessors may not need to make
provisions for losses and that, if repossessions do become
necessary, collateral values will hold up well. I also have a sense
that credit assessment and control are rather more robust
disciplines than they were in the early ‘90s, and this too should
help matters if things get chilly.
As for me, I’m pretty upbeat about business. When things happen
in the economy, businesses are forced to save money, boost profits
or find new markets. It could be a boom time for consultants!
Colin Tourick MSc FCA FCCA MICFM, www.tourick.com
Motor Finance Issue: 44 – June 08
Published for the web: June 26 08 10:42
Last Updated: June 26 08 15:22
