EurotaxGlass s Report The Short-Cycle RV Risks

Transcription

1 EurotaxGlass s Report The Short-Cycle RV Risks How the short-cycle channel creates residual value risks of 200 million in Germany s fleet market Maintal September 2014

2 Introduction Until this year the European automotive industry was confronted with six consecutive years of declining sales. Between 2007 and 2013 new car sales volume fell by nearly a quarter, from 15.6 million in 2007 to under 12.0 million units in With only very few exceptions, manufacturers have done little to reduce capacity, despite the unfavourable market conditions. Instead we see a negative trend that some OEM s have followed a strategy of tactical dealer/ OEM registrations and increasing the share of rental business in their channel mix to compensate for the lower demand for cars. Whilst industry experts agree with the notion that increased activity in shortcycle sales channels is harmful to residual values (RVs), the magnitude of the impact has been a mystery. In this whitepaper we will share with you our latest research on the impact of short cycle activities on RVs, based on an analysis we conducted in Europe s largest car market, Germany. For more information on this whitepaper please contact: Jan Rasmussen Consultant & the paper s author EurotaxSchwacke GmbH Global Services Division Wilhelm-Röntgen-Strasse Maintal Phone jan.rasmussen@eurotaxglass.com 1

3 Summary The Findings: 1. Share of short-cycle registration has been increasing for many years as a result of production overcapacity in Europe 2. Short cycle registrations put negative pressure on RVs 3. OEMs with fleet ambitions should monitor their short cycle aggressiveness vs. that of competitors: Short cycle shares higher than appropriate for their current RV position puts additional pressure on RVs and relatively quickly Short cycle shares lower than appropriate for their current RV level supports RVs in the long term, ultimately reducing subsidies needed in the fleet channel 4. For the fleet channel RV risks amount to 200 million in Germany based on an increase of short cycle aggressiveness of 10% on average in Several OEMs may find themselves in a profitability trap in the years ahead, when additional RV subsidies are required to maintain or build the fleet share 5. Manufacturers need to closely manage their levels of short cycle aggressiveness and seriously consider the impact to their brand and RVs of incentivising their networks to produce excessive demo registrations (i.e. by avoiding substantial specific dealer volume-related bonuses or allowing demo registrations to count towards campaign targets) 2

4 Chapter 1: Current market trends put residual values under pressure New passenger car markets all over Europe have been in steady decline since 2007 (see Figure 1). The markets have lost 4.2% on average annually and 23% in total up to the end of 2013, although the markets could recover slightly in the first half of Figure 1: European Passenger Vehicle Registrations Year on Year; EU27 (excl. Malta and Cyprus) In mn units CAGR -4.2% -22.9% European Automobile Manufacturer's Association ACEA; EurotaxGlass s analysis The shrinking European demand for cars has not been countered by taking capacity out of the market. The consequence is that OEMs are selling off the oversupply with higher discounts. The CAR Discount Index 1, which indicates the incentive level in the German market, shows an compound average annual growth of 7% since 2010 and reached an all-time high at the end of 2013 (see Figure 2). Figure 2: CAR Discount Index Jan 2010 = 100; Jan 2010 Dec CAGR +7% /1/10 7/1/10 1/1/11 7/1/11 1/1/12 7/1/12 1/1/13 7/1/13 1/1/14 CAR Center Automotive Research; EurotaxGlass s analysis 1 The German Center of Automotive Research (CAR) Discount Index, published by the University of Duisburg-Essen, combines the number of incentive campaigns, customer discounts, dealer discounts and tactical registrations into one index 3

5 At the same time OEMs are pushing their oversupply of cars into short-cycle channels. In Q nearly 40% of all registered new passenger cars in Germany were sold through short-cycle channels (see Figure 3). This represents an annual growth rate of 2.2% from Q to Q Figure 3: Share of Short-cycle Registrations in Germany Q Q In % of total registrations % Q Q Q Q Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q Q Q Q IHS Automotive (Copyright IHS Global GmbH, March All rights reserved); EurotaxGlass s analysis Chapter 2: ETG definition of short-cycle business We define OEM registrations (demos, company cars), dealer registrations (demos) and rental registrations as short-cycle business. Short-cycle vehicles appear on the used car market typically within the first year after registration (see Figure 4). Offers of nearly-new cars in this age range represent a substantial alternative for new car buyers. They are considered in negotiating the transaction price for a new car and potentially decrease the interest for new vehicles. Figure 4: Definition of short-cycle business and its time of resale NC UC New OEM/ Dealer Rental 2nd Ownership 2nd Ownership 3rd Ownership ETG Definition of Short-Cycle Business 3rd Ownership Fleet 2nd Ownership Retail 0-6 months 6-12 months 1-2 yrs 2-3 yrs 3-4 yrs 4-5 yrs 5-6 yrs >6 yrs EurotaxGlass s 4

6 Short-cycle business beyond the market average puts more pressure on RVs, because: It lowers the transaction price for new cars as buyers also take into consideration the offer on young used cars, it creates an oversupply of young used cars, which also puts pressure on the RVs of older used cars, buyback used cars from OEM count in theirs cash targets and must be sold as soon as possible to get a better Cash Flow and it sets a market perception of brand discounting levels which erodes RVs rapidly and can take a long time to recover from Chapter 3: High correlation between short-cycle business and residual value performance Figure 5 illustrates the negative correlation between short-cycle aggressiveness and the absolute RV performance. Figure 5: Relationship of Short-Cycle Business and RVs Example: B-segment vehicle, Germany In % Share of Short Cycle in Total Mix Short-cycle Trend curve / RV in EUR (Diesel/12months/20tkm) RV Trend curve /09 EurotaxGlass s analysis 5

7 Where a vehicle s short-cycle share increased (convex curve in upper graph) its RV performance dropped (concave curve in lower graph) and vice versa. Chapter 4 10% higher short-cycle aggressiveness results in an RV risk of 200 million in Germany We have further analysed the impact of more pronounced shortcycle business activity in the D-segment in Germany by setting up a multivariate regression model. 2 Besides the variables age, mileage and lifecycle stage, we reflected three new independent variables in the regression model (see Figure 6): 1. Last 6 months average of OEM/ dealer registration channel share vs. time of the analysis, i.e. Feb Jul registration period compared to the impact on the RV level in August 2. Average rental channel share months before August. 3. Short-cycle share (OEM, dealer and rental) for the model at time of first registration. A higher share at the time of first registration of the model suggests that the OEM had to push sales at launch; this would negatively impact RVs Figure 6: Overview over Short-Cycle RV Impact Model R 2 = 0.70 Age Mileage Lifecycle stage 3. Short-cycle registration (OEM, 2. dealer and rental) for model at time of first registration Rental share for model months 1. OEM/Dealer share f. model 1-6 months RV May 2008 June October February July August Oldest Model Observation date Variables known to drive RV of a model Variables to be analysed EurotaxGlass s 2 D-Segment basket contained four different models; month of analysis was August 6

8 Results confirm our hypotheses for the D-segment in Germany: above-average aggressiveness in short-cycling of +20% reduces RV performance by c. 3.9%. This amounts to 833 for a 1-year-old vehicle, 741 for a 2-year-old vehicle and 658 for a 3-year-old vehicle (see Figure 7). 3 Figure 7: EUR RV-Impact of Higher Short-Cycle Activity Example: Avg. D-Segment, Germany; 20,000km p.a. Avg. Asking Price (EUR) 22,000 21,000 20,000 19,000 18,000 17,000 21, ,465 18, ,201 16, , Months 24 Months 36 Months Age of Vehicle RV at average short-cycle aggressiveness levels RV for short-cycle activities +20% EurotaxGlass s analysis Short-cycle business as a share of total registrations increased during Table 1 show that 14 out of the Top 20 OEMs, in terms of sales, increased their short-cycle share in 2013 vs. the previous year. Table 1: Short-cycle share of top 20 OEMs in terms of total sales Germany Short-cycle share Short-cycle share Short-cycle share OEM vs. NISSAN 43.6% 51.6% +18.5% RENAULT 39.1% 44.7% +14.3% DACIA 8.8% 10.1% +14.2% AUDI 34.3% 38.8% +12.9% VOLVO 37.2% 41.0% +10.4% PEUGEOT 45.7% 50.1% +9.5% FIAT 46.7% 50.8% +8.6% MERCEDES 32.3% 34.7% +7.7% HYUNDAI 49.8% 52.7% +5.8% VOLKSWAGEN 38.4% 39.7% +3.3% BMW 35.8% 37.0% +3.2% SEAT 44.0% 45.0% +2.4% OPEL 53.0% 53.6% +1.0% SKODA 28.2% 28.2% +0.3% TOYOTA 26.4% 26.0% -1.2% MINI 34.4% 33.7% -2.0% MAZDA 37.1% 35.2% -5.2% KIA 40.9% 38.6% -5.6% CITROEN 54.6% 51.4% -5.9% FORD 53.3% 40.5% -24.1% IHS Automotive (Copyright IHS Global GmbH, March All rights reserved); EurotaxGlass s analysis 3 Our model has a statistically high level of fit: all analysed variables are significant drivers of RVs and the overall quality of the model is high with an R² of 0.70, i.e. 70% of the variances in residual value performance can be explained via the independent variables considered in the multivariate regression model. 7

9 With approximately 650,000 corporate fleet registrations in Germany in 2013, an increase of short-cycle aggressiveness creates an RV risk that OEMs may soon need to compensate for by providing RV subsidies or additional fleet discounts. The following example shows the impact of additional short-cycle aggressiveness on the levels of subsidy necessary to support 650,000 leasing contracts, each of them running for a period of 36 months: 4 +20% applied to 650,000 fleet registrations: 428 million +10% applied to 650,000 fleet registrations: 214 million +5% applied to 650,000 fleet registrations: 107 million 4 For the simulation we assume that the impact established for the D-segment is on average representative for the entire market: D-segment true fleet sales in 2013 amounted to approx. 150k in Germany; approx. 230k are occurring in smaller-vehicle segments; 220k in largervehicle segments; 48k in small transporters and LCV 8

10 Conclusion OEMs with fleet ambitions should monitor their short cycle aggressiveness vs. competitors activities. If their short-cycle share is higher than average for their current RV level, this will put additional negative pressure on RVs. Conversely, if their shortcycle share is lower than adequate for their current RV levels this will support RVs, ultimately reducing subsidies needed in the fleet/ leasing business. Manufacturers should control their short-cycle aggressiveness to avoid falling into a profitability trap in later years when the risks will materialise in higher subsidies needed to support and build market share. Additionally manufacturers should control and manage the used car activities and aggressiveness of their networks. Networks should be incentivised accordingly, for example by limiting volume-related bonuses related to short term activities to a small portion of the dealer earnings. Manufacturers using an OEM or captive buyback programme should evaluate the RV s of their current car park regularly. About EurotaxGlass s: Europe s leading provider of data, solutions and business intelligence services for the automotive industry with over 75 years of experience. EurotaxGlass s Group has offices in 32 European countries as well as Australia. EurotaxGlass s International AG is based in Switzerland. For more information please visit our website About EurotaxGlass s Global Services: Global Services advises manufacturers with the aim to establish a sustainable residual value policy and offers data, online solutions, studies and consulting services on a broad range of automotive subjects. Dedicated Global Services staff work in the European automotive core markets France, Spain, Italy, UK and Germany. 9