One of the biggest challenges facing the finance and leasing
industries is the question of understanding the issues affecting
total cost of ownership (TCO). It is a hugely complex and immensely
specialist concept best summarised as ‘the sum lifecycle cost of a
vehicle’. That is to say, the combined direct and indirect costs
including acquisition, delivery, support, ongoing maintenance,
servicing, fuel and all operating expenses.
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For many companies, running a fleet of cars and vans is a wholly
necessary component of their operation, and understanding these
factors is crucial to minimising losses and creating efficiencies.
Many vehicles choices are dictated by business requirements – such
as specifying estate cars for carrying large loads – but the range
of other considerations beyond the primary specification is
enormous.
The increasing competition between leasing companies, the
decreasing margins on leases and the instability of financial
markets all conspire to make fleet decision-making absolutely
crucial. Add in the ever-changing environmental and fiscal
legislation and understanding the true cost of operating a vehicle
fleet is a minefield of complexity. The business case behind TCO
intelligence is driven by the lack of industry data on how vehicle
options and build logic affects TCO and the industry’s inability to
optimise fleet option packages in terms of maximising residual
value, combined with the difficulty the industry has in
understanding the factors influencing servicing, maintenance and
repair from technological and legislative change – I challenge any
reader to claim expert knowledge in all those fields.
To some companies, the issues involved are over-simplified and
there is little understanding of how their fleets can be better
managed and less of a financial burden. For decades, fleet
management was simple; buy them cheap, spec them to the minimum
level appropriate to the business application and keep the initial
outlay to an absolute minimum. Desirable specifications for company
vehicles should not necessarily be considered on the basis of
up-front cost, but should be considered with regard to the
potential longer term benefits that higher specification cars can
bring and as well the potential benefits of running more expensive
premium brands.
Part of the complexity of this issue stems from the subjective
opinions of car buyers. The question of brand perception does not
necessarily have science or logic to back it up, but is deep-rooted
in the consumer psyche. Twenty years ago, the difference between
the quality premium brands and the ‘volume’ mass-market brands was
considerable. Build quality, reliability and desirability all sat
far higher up the ladder with the premium brands and their
reputations were well-earned. Today, the actual difference is far
less clear than the perceived difference. The traditional
‘non-premium’ products are now generally of a fantastic quality,
well equipped and drive superbly, so logic would dictate that they
are now every bit as desirable as some of the premium
opposition.
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By GlobalDataAccording to the motoring press this is indeed the case, but
when it comes to voting with their wallets, many car buyers still
prefer premium products, which keeps residual values
extraordinarily high.
Brand premiums
So the question then is: what choice is going to give you the
best return over three years? Is it the well-made and good-value
volume brands or the more expensive premium brands? The answer can
sometimes be surprising.
Let’s take a classic example. All over Europe, fleet managers
are deciding between various mid-sized saloon cars. Most on the
market are worthy cars but the premium models can be several
thousand pounds more expensive. But the premium brand image has
kept residual values high and this has a significant bearing on the
total cost of ownership. In recent years, this single factor has
led many fleets to invest in more expensive models which in turn
hold a far higher percentage their original purchase price. But of
course residual values are only part of the story.
Technology-driven efficiency also plays a part. Innovations such as
hybrid technology, stop-start systems and more efficient control
systems all affect fuel consumption and heavily influence running
costs. Over a three-year ownership period, low fuel economy can
save a company thousands of pounds.
TCO allows objective market analysis using information from
independent sources which in turn offers complete transparency in
the crucial areas. The intelligence enables pricing managers or
risk controllers to optimise purchase and remarketing processes on
a pan-European basis. In essence, the intelligence helps fleet
managers to define their car policy by identifying the most
suitable products in terms of reliability and return on investment
and by providing analysis of the best leasing duration or mileage
by considering all these combined elements.
The outcome of having all this intelligence at your disposal
provides a fascinating insight into the comparisons between premium
and non-premium brands and the advantages and disadvantages of
different brands versus their competitors as well as the ability to
calculate leasing conditions to help provide the most effective
incentives and support.
The author is global business development director at automotive
industry information company JATO, which has recently launched a
TCO calculation tool
The author is global business development director at
automotive industry information company JATO, which has reecntly
launched a TCO calculation tool
Motor Finance Issue: 43 – May 08
Published for the web: May 27 08 12:7
Last Updated: May 27 08 12:24
