Try as they might, businesses can’t control everything that affects them. Stock markets, government regulations, labor laws and myriad other outside forces dictate the way a company runs and how it evolves.
Costs and spending trends are no different. A multitude of economic factors goes into how people spend their money, which in turn influences how businesses behave.
For businesses that have mobile workforces and vehicle programs – whether a fleet, company car or reimbursement program – as part of their operations, this means that every fluctuation of fuel costs, driving trends and vehicular habits ultimately impacts them.
Depreciation will increase
Over the past 12 months, depreciation accounted for 36.8% of the total cost to own and operate a vehicle. This is a slight year-over-year increase, but is higher than two years ago, when depreciation accounted for 35% of total costs.
Rising vehicle prices will partially offset the impact of this trend. Depreciation is expected to increase 1-1.5% as a result, starting slowly (less than half a percent over the next few months) and increasing as the year continues.
As depreciation increases, re-sale value will fall, meaning businesses with fleets and company cars will receive less return on their investment when it comes time to re-sell or trade in their vehicles.
Residual values will drop
Residual values will decrease over the next 12 months by 2-3.5%, as inventory in the used vehicle market steadily increases.
In 2017, the average sale price for a used vehicle dipped below levels not seen since 2011. This continues a trend of declining residual values over the past three years. When the Great Recession, which began in December 2007 and was at its height in 2009, disrupted new vehicle sales, residual values increased because people started keeping their vehicles longer.
This created pent-up demand for new vehicles that helped drive record sales volumes once people felt the economy had straightened out and their finances were back to normal. The surge in new vehicles purchased post-Great Recession now are aging out and are being sold as used vehicles. Due to the law of supply and demand, there is now a glut of used cars on the market, which will drive the price of that commodity down.
In business vehicle programs, residual value is a major contributor to capital costs, working as a handshake with the upfront costs. A decrease in residual values means business won’t get as much re-sale value for cars they bought new if they sell them in the next few years, which is an important budgetary planning consideration.
New vehicle prices are on the rise
The overall average price of a new vehicle will increase moderately over the next 12 months by 1-2%. While production costs for new fuel efficiency and safety features continue to rise, new vehicle sales are expected to decline.
Several factors affect new vehicle prices:
- Automakers incur increased production costs for improvements like more fuel-efficient engines and transmissions and lightweight body materials.
- New vehicle prices increased minimally for cars and trucks. In recent years, light truck sales have increased from 45% of new vehicle sales in 2009 to more than 60% of new vehicle sales in 2016.
- In comparison, car sales have decreased starting in 2014.
As the price of new vehicles goes up and re-sale value goes down, it costs buyers more money in the long run – over the total life of the car – when they sell a vehicle and/or trade it in. This means mobile workforce businesses will pay more over the long term to replace their fleet or company vehicles.
Finger on the pulse
Keeping tabs on these trends is critical for companies with business vehicle programs, as it helps them understand the true cost of owning and operating a vehicle and how outside market factors affect total cost of ownership.
However, these trends are not easy to predict unless a company has time to do its own outside research. Additionally, structuring a business vehicle program that can accurately measure and account for these types of trends can be difficult because there are so many factors to take into account.
By partnering with a reputable third-party in the business vehicle industry, companies that require a mobile workforce can better understand the total cost of ownership of their company car or fleet programs and how to better structure their fleet or reimbursement programs. A business vehicle solution provider can develop a custom program that meets their requirements and strategic objectives. These programs are designed to meet different business needs, and the best solution is dependent on what works best for an individual business and their mobile employees.
Most businesses don’t want to be in the vehicle business, and would prefer to focus on what they do best—their own business. Outsourcing the vehicle program to an expert that can use key industry trends and research, along with knowledge of the business itself, to create a custom program will help companies understand the true total cost of vehicle ownership.