There has been a rather public spat between EurotaxGlass’s
– publishers of Glass’s Guide – and the BVRLA
[see MF Jan 08]. EurotaxGlass’s has warned fleets that used car
values will fall by an average £400 this year, because of the
slowdown in the economy and because there are too many used cars
for sale. The BVRLA has questioned the likelihood of this
happening.
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If prices do fall this fast it will cost the contract hire
industry tens of millions of pounds in 2008 alone. Whether that
translates into actual losses for contract hire companies depends
on the actual residual value they originally priced into their
leases, though it’s fair to say that for many lessors such a large
fall would indeed hit their bottom lines.
It seems there is a pretty firm consensus that the economy
will slow in the short term. The debate revolves how damaging the
slowdown will be; have we reached the tipping point beyond which
it’s all bad news, or is this just a short-term adjustment that
will come right by 2009?
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By GlobalDataIn academic circles and in investment analysis, each quoted
company is said to have its own beta. This is a value
representing the amount by which the company’s stock price moves
relative to the average movement in stock market prices. Companies
that sell the basics of life – electricity, food and so on – have a
low beta; their prices are relatively stable regardless of economic
cycles because people always need light, heat and food. Companies
that are affected badly by economic downturns, or do particularly
well when the economy is doing well, have high betas.
House-building and travel companies are a good example; we spend
money on new homes and holidays in the good times and cut back when
feeling the pinch.
There are no quoted contract hire companies but if there
were any they would probably have extraordinarily high betas. They
do very nicely when GDP is rising because more companies want more
cars and consumers are keen to buy used cars too. But when the
economy slows down they get hit on three fronts.
Firstly, used car buyers have less cash in their pockets
to buy their next car, so used car prices fall. This hits contract
hire companies in the pocket and that’s why the BVRLA is concerned
about Glass’s recent prediction.
Secondly, it forces lessors to reappraise the residuals
they factor into their new business and to decide whether and when
to reduce their residual values. If they do it too early or by too
much (i.e. before or by more than their competitors) their new
business volumes start to dry up.
Thirdly, a general economic slowdown reduces employment
amongst the industry’s clients and makes them extend their leasing
periods, so the number of new leases written declines.
Few industries suffer from economic downturn on so many
fronts. Let’s hope Mr Brown manages to reverse the nation’s
economic fortunes, otherwise things are going to start looking
rather frosty in the contract hire market.
Colin Tourock MSc FCA FCCA MICFM, www.tourick.com
