China: set to revolutionize the auto market? - Asset Finance Pricing Review Bynx celebrates
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Asset Finance Pricing Review
Sponsored by
Bynx celebrates
▼
30 years
Colin Tourick on
▼
pricing principles
ExpertEye reports
▼
on the European
leasing market
China: set to revolutionize
the auto market?
Introduction
Introduction Pricing: could do better
Welcome to the latest edition of our Asset Finance Pricing Review, published in Setting prices and residual values is rightly recognized as a science, not a “finger
Welcome to the sixth edition of Asset Finance Pricing Review, published in
association with
collaboration Asset
with Finance
Asset International
Finance International and Professor Colin Tourick. in the wind” guess, but too many asset finance companies still overlook the value
of internal data in delivering that elusive optimized quote, argues Colin Tourick,
Thirty
As in years seemsissues,
all previous like a long time put
we again – in forward
1988 the internet
a host was infrom
of articles its infancy,
industry Professor of Automotive Management at the University of Buckingham and a
smartphones
insiders that serve were tounknown
illuminate and thethe dotcom
more bubbleaspects
challenging had yetof toasset
inflate, let alone
finance 38-year industry veteran
pricing.
burst. The The purpose
asset finance is to bringwas
sector you already
valuablean insights, knowledge
established part ofand theexamples.
lending
landscape,
In any company, but operating
there areindifferent
a very different environment
stakeholders involved and in a different
in pricing policy and fashion It’s six years since I started making regular contributions to the Asset Finance
to today. sales and finance to see eye-to-eye on every issue is the stuff of fantasy.
expecting Pricing Review. A lot has happened in that time, as witnessed by the sweep Professor Colin Tourick
This is especially true for businesses that operate internationally and have to take of topics I’ve touched on: the big data revolution, Brexit, quality management,
Ininto
theaccount
intervening decades,
the cultural, asset finance
political, financialhas andundergone
regulatoryits share of stresses
differences within those Porter’s Five Forces, residual values, personal contract purchase, business
and strains,
markets. In and there–have
Car Wars been profound
reconciling divergentchanges,
views onnot least in recent
manufacturer autotimes,
finance
pricing strategy, business platforms and more.
with the(pages 3-5), Bryan
automotive marketMarcus,
witnessing regional director
a swing awayoffromVWFS Latin America,
outright ownership
ofCanada and Northern
cars towards Europe, offers
new usage-based an interesting
mobility solutions. perspective
For finance onproviders,
resolving pricing
who Undoubtedly the biggest disruptions in that time have been the result of
disputes – and one that doesn’t involve leather gloves and a boxing ring!
have traditionally focused on the asset rather than the consumer, that is a highly technology change, notably the rise of big data coupled with rapid advances in the
significant
There are development.
many ‘levers to profit’ in every asset finance business but the one that development of self-driving vehicles. For lessors, that means getting ready for a
will throughout
have the greatest impactBynxon the new world, in which cars will run autonomously and may not need to be privately
But that period hasbottom
been aline is changing
constant. Ever your
sincepricing
the companypolicy.
This is the advice of Professor Colin Tourick, management consultant and editor of owned. These developments will shake the foundations of the motor finance and
was
Asset founded
Finance inPricing
1988 we have been
Review, in Thedelivering solutions
pricing action plan fordesigned to address
profit (pages 6 andthe7). fleet leasing industries to the core. Also, the last two years, we have seen some
often complex needs of the vehicle leasing fleet management and vehicle rental
lessors investing heavily in new mobility products whilst others have carried on
industries.
There’s only Asonenewtopic
technologies
(other than have come
pricing onboard,
policy) we’ve
that can updated
claim our systems
joint ownership of
the most-difficult-aspect-to-get-right-in-asset-finance title and that is setting with business as usual, oblivious to the changes that are coming towards us.
to take advantage of new functionality.
Residual Values (RVs). But it’s not just a matter for vehicle leasing and daily rental
“
Now, however,
companies, the automotive
states Dean Bowkett, market is going
technical through
director andrapidchief and
editor dynamic
at
change, which touches
EurotaxGlass’s. on theSetting
In his article wholeResidual
basis on Values
which it operates.
(pages 8-10),The he push
examinesis forthe
pitfalls and best practices and offers a unique perspective
much greater integration of services into combined mobility packages. At Bynx on how it matters for
OEMs too. For lessors, that means getting ready for a new world, in which
we’ve responded by combining our existing portfolio of products into one simple,
global, integrated, flexible and scalable solution, and we're rebranding our image cars will run autonomously and may not need to be privately
Page 11 presents the results of our last Pricing Survey, which posed questions
owned. These developments will shake the foundations of the
”
to demonstrate
around our embrace
how to pitch pricing atofa thelevelnewthatways of working.
delivers the most new business and
highest margins. As ever, the results surprised
In his article on page 7, Bynx co-founder Mark Binks looks us. They maybacksurprise
at how youit too
all or motor finance and fleet leasing industries to the core.
perhaps confirm your prior thinking. Either way, get in touch and give us your
started and outlines the plans for the years to come.
perspective.
Technology changes are also having a profound impact on pricing, which is
Take part in our next survey
the critical element for asset finance companies to maximize profits. Professor
Colin Those changes will happen, even if the precise timing of the switch from
We’reTourick, who istoProfessor
very grateful everyoneof whoAutomotive
takes partManagement
in our surveysat(you the can University
do so
of Buckinghamifand ownership to usage and the move towards shared and on-demand mobility
anonymously you alike)
38-year
becauseindustry veteran,provide
they always arguesus that
withlenders
valuable have large
pools of information
understanding held internally
and ideas. This time which they need
we’re asking: What to is
plumb in order
the primary to find the
consideration options is still uncertain.
when yourquote.
optimized asset finance
Find outbusiness
more onsets page its3.prices/issues a quote? You can take part
here: http://bit.ly/bynxpr5.
Meanwhile, new markets are opening up. Our main feature on page 10 takes a Pricing trends
close look atinteresting
It’s always what’s happening
to read how in China,
supplierswherework government
successfully incentives
with leasing to tackle What do these developments mean for the pricing function? Every business needs
companies
urban and are
pollution Kwik Fit GBinterest
driving is no exception.
in electricInvehicles.
an article, Kwik Fit
Leasing GB
is in itsfast fits but
infancy, to decide what price to quote on a particular deal, and that price should maximize
deliver service excellence
the prospects are significant. and financial savings (pages 12 and 13) Peter Lambert,
fleet director, talks us through how the fast fits concept is delivering tangible results the probability that the client will proceed with the deal whilst simultaneously
Asforever,
leasingwe companies.
also have ExpertEye’s report on residual forecasts and market maximizing the margin the business earns. Every lessor needs to quote such a
summaries, which you can read on page 19. price. Let’s call it the optimized quote.
We end this Pricing Review with the latest figures on changes in residual value
Do enjoy and
forecasts, SMR your comments
costs and lease and opinions
rental rates are
acrossalways
Europewelcome.
(to January 2014) from I’m going to focus on full service fleet leasing businesses, where pricing is complex,
benchmarking and research specialist Experteye. as the same principles can be applied to all types of asset finance business.
Gary
And don’t forget to share your feedback with us and tell us what you’d likeJefferies
to see
in future Pricing Reviews. Sales and Marketing Director, Bynx
Gary Jefferies
2 Sales and Marketing Director, Bynx 3 
In 2012, few fleet lessors were applying much science to the setting of an The washing machine example clearly shows the way forward. Examine the
optimized quote. I can say this with some confidence having carried out pricing success of all your quotes, determine how you might optimize these, then go
projects for a dozen fleet leasing companies, including many of the multinationals. ahead and change them, making sure to check frequently the impact this is
having. This has to be done at the most granular level: each permutation of
Historically, fleet lessors have distributed the pricing function – the function that
model/term/mileage/financial product etc needs to be evaluated separately.
determined price – across multiple internal areas. This included obtaining list price
data; negotiating discounts with manufacturers and dealers; determining (maybe Pricing by fleet lessors has actually moved on a lot in recent years. Quite a few
negotiating) funding costs; determining service, maintenance and repair (SMR) now have Pricing Managers who do much more than just setting residual values
budgets; negotiating the price of add-on services such as roadside assistance, or maintenance budgets – which is a big change compared with 20 years ago –
and determining residual values (for operating leases). Each of these functions and the measurement of price elasticity is central to their roles.
loads the results of their work into the quoting database and then someone else
But in many cases they still arrive at a price by aggregating costs then challenging
determines the margin to add for each particular deal.
the salesperson to win a particular margin, without giving them any data or
Let us think for a moment about a different market sector: the online sale of insights to help them understand how their quote might look to the client. So the
white goods such as washing machines. This is a competitive market so retailers sales team do the best they can. And often the client pushes back and asks for
flex their prices dynamically to stay in tune with market prices. If 50 people a discount, and without a full understanding of price elasticity the salesperson
looked online at the Miracle Wash ABC on a retailer’s website last week and 30 doesn’t know whether they should accede or stand firm. So they give the discount,
went ahead and ordered, and another 50 looked at the Washeroo XYZ on the thereby encouraging the client to ask for one next time.
same retailer’s website and only three had gone ahead and ordered, that tells
“
the retailer something about the relative competitiveness of their prices for the
Miracle Wash and the Washeroo.
They might well nudge down the price of the Washeroo to try to pick up some Pricing within fleet lessors has actually moved on a lot in
volume, albeit at a lower margin than planned. Through standard costing variance recent years. Quite a few now have Pricing Managers who do
analysis they could determine whether the gross profit on the extra volume they much more than set residual values or maintenance budgets
were picking up exceeded the margin they were losing.
”
– which is a big change compared with 20 years ago – and the
Similarly, they might well increase the price of the Miracle Wash, to see if they measurement of price elasticity is central to their roles
could obtain an even higher price without losing too much volume. Here again,
standard costing variance analysis would show the point at which they had
increased the price by too much.
The fact that lessors still haven’t embraced optimized quoting came home to me
What do you know? not too long ago when I carried out a survey amongst fleet lessors. I asked thirty
questions about all aspects of pricing, including:
If you’re wondering why we’re discussing washing machines in an asset finance
publication, it’s because the logic we have used above is best practice for all When you alter residual values (RVs) for a particular vehicle model, does this affect
situations where large numbers of quotes are being issued by any business – every subsequent quote for that vehicle for all clients? In other words, if your RV
including asset finance businesses. committee amends an RV, perhaps at a six-monthly RV review, does that become a
global change for all quotes on that vehicle, until they make the next global change for
Research carried out by International Asset Finance Network in August 2018 that vehicle?
and published at the IAFN conference in September, showed that asset finance
executives felt they lacked sufficient data from third parties to help them set This was in fact the only answer I was interested in.
their prices accurately. This is interesting but misses the point. Accurate reliable Every respondent said yes, which I take as good evidence that we still have a long
external data is always going to be hard to obtain, but even if a lessor obtained way to go to improve pricing in the world of asset finance.
a competitor’s full price list it would still not have reliable information, because
By saying yes, these respondents were saying that even if very large numbers of
those prices change frequently and of course most lessors compete against
the company’s quotes for that model were converting into orders, they would
multiple competitors.
reduce the rental if the RV committee had decided to increase the RV. To my
No, by far the best data for pricing purposes is internal data, which each lessor mind, this is just giving away money.
has in abundance. It also happens to be free.
4 5 
And if the global RV change resulted in a rental being increased on a model where
they were already getting a poor conversion of quotes into orders, this was only Bynx: thirty years of technical
going to make things worse. The right approach surely would be to make the RV
change then reduce the margin on these vehicles to try to stimulate some orders. know-how
So here is my plea, whatever type of asset finance company you run. Look again at This year is a memorable one for Bynx, as it marks the beginning of the company’s
how you do your pricing, try to bring science to the process, and ask yourself this fourth decade, and co-founder Mark Binks reflects on how it all began and where
question: if clients were happy to wait two weeks for their quotes, what internal data it’s going next
would I look at and how would I analyze it, in order to come up with the quote that
maximized the probability of winning the deal but was still as high as possible?
It started back in 1988. We were three expatriates living in South Africa and all
And once you’ve answered that question, build the system that brings that data independent software engineers. We realised that as individuals we were not Mark Binks
together and delivers it into the pricing process at the point of sale. The client going to go far in terms of building something, so we decided to band together to
needs to get an optimized quote as soon as they click a button on your online form what became Bynx Ltd.
quoting system. Sadly they won’t be willing to wait two weeks for it.
Back then, we were developing software for all sorts of different industries but
at the core of our application was a financial management suite of modules that
Professor Colin Tourick
really set us apart.
University of Buckingham
In about 1994, we decided we needed to focus on a particular industry and we’d
written some software for a client with a large fleet and we thought “that’s an
interesting area”. It seemed a little different, more challenging but definitely in
need of a management platform, hence we ended up in the fleet sector.
Since 1996 we’ve focused on the vehicle leasing fleet management and vehicle
rental industries. The key thing you’ve got to understand is that in the vehicle
leasing fleet management sectors the complexities you encounter are extremely
challenging. I often say that if I knew then what I know now we’d have probably
never developed a fleet management vehicle leasing system!
We’ve designed Bynx specifically to handle that degree of complexity. It comes
down to understanding that we deliver our clients a single source of the truth.
While the data is required in many areas of the business, it’s the same core data,
centrally stored and then accessed through the different applications within
the platform. Customers can set rules within the system to manage access
permissions and define who can see what, when and make changes, add or delete
data. Doing it this way minimizes the risk of errors and data discrepancies.
Somebody in one department can be looking at certain customer or contract
records and they may be looking at it from a slight different angle from a person
in another department, for example, but they’re actually looking at the same
data - unbeknown to them. This ensures the integrity of the system, which helps
maintain confidence in it.
Changing times
We now manage over one million assets globally. If I was to pinpoint the biggest
change that’s happened in the last 30 years, it’s probably the path to being
proactive instead of reactive.
If you think back to 1988, obviously we didn’t have the mobile phone or the
connectivity we’ve got today. Vehicles have evolved in terms of safety features
6 7 
and service management alerts. Bynx has always looked after the asset and we Refresh, rebrand
needed to know that information so our system could alert the customer, but the
Our birthday gift to Bynx, as it were, is a rebrand. We’re evolving everything – logo,
difference now is that the vehicle alerts the driver. However, with fleet vehicles
website, product name, graphic elements within our platform – just about every
the driver is often not the decision-maker so Bynx has to capture that information
touch-point is enhanced.
from the data in the management system and alert the fleet manager.
Our new branding reinforces our commitment to continually embrace change
When I recall the number of bits of paper we used to have floating into an
and the opportunity this brings, to evolve to meet the needs of our customers,
organization to give us information related to the vehicle lifecycle and how that
their customers and markets – in all areas of the world – as their businesses and
information is now just arriving via the cloud into the system, that’s a huge change.
markets progress.
As part of the move towards integrated, mobility as a service offerings, we’re
Road ahead
amalgamating all our products into one coherent offering and simply calling
We have many clients who’ve been with us for years. We’re not in the business of it bynx. No more bynxFLEET, bynxNET, bynxMOBILE, bynxSERVICES – just one
securing a new contract and after two or three years they go! Some clients have simple, global, integrated, flexible and scalable solution available installed, via
been with us for 20 years and I’m very proud of that. A number of our staff have a managed service and through the cloud to cater for all sizes and types of
been with us a long time too. As a result of this longevity, we’ve acquired a great organization touched by mobility.
pool of knowledge about the industry and I’m proud of that, too.
This is all much more than just about changing the logo, which we’ve done a
Of course we’ve had ups and down over the years – the whole dot.com bubble, couple of times in our 30 years. It’s about committing to our customers and
which saw Bynx decided to go for a listing and then subsequently de-list, is declaring to them that we’re in it for the long haul. It’s about communicating our
probably the biggest hurdle we’ve faced as a company, but we got over that and mission to support them through one of the most dynamic periods of upheaval in
we’re still here, which is more than can be said for many of those very early tech the history of the industry we elected to focus on all those years ago. These times
start-ups. are also throwing up new opportunities for both Bynx and our customers, which
I think looking forward we all know the challenges are coming down the line in we are well placed to help them capitalise on and we – and the Bynx platform
terms of where the motor vehicle is going. I do believe we will have motor vehicles. – are ready. We expect the next 30 years to be as interesting, challenging and
They won’t have the same power trains as they have today. There will be a lot profitable for us and our customer base as the first 30 years have proved to be.
more autonomy in that vehicle than we have today. I think the driverless car is
going to arrive a lot quicker than what we imagine, especially in the urban areas,
and really the focus now is on mobility within the urban area.
It’s about how do we get those people from a to b quickly and as efficiently as we BACK THEN
possibly can. There will be a space for us in terms of our asset management, in
terms of looking after the fleet. I think that we will migrate though into providing a
mobility solution, which will not only involve the fleet, but also interaction to other
sectors – whether it be public transport, carpooling, car sharing, taxis, buses,
trains, planes and so on.
Thirty years ago Margaret Thatcher became the longest serving
prime minister of the twentieth-century, industry statistics
showed new car sales in Britain topping 2,000,000 for the first time,
And there will be some interaction between our own clients and providing those and the Jaguar XJ220 was unveiled as the world’s fastest production
services to their clients which will require our solutions to manage that scenario Margaret Thatcher
UK Prime Minister car with a top speed of 220 mph and a £350,000 price tag.
for them.
serving 1979-90 Egg sales cracked dramatically after health minister Edwina
What we need within our solution is to make sure we focus not only on the Currie said most of Britain’s egg production was infected
technology changes in our industry, but also on the revolution occurring within with salmonella, while in Scotland a terrorist bomb blew up Pan Am flight 103 over
the motor industry. There’s a lot going on in terms of change, such as the power Lockerbie.
trains I’ve already mentioned. We need that information because that’s going to
Around 45 million PCs were in use in the US, where an IBM PC with 30Mb hard
drive a lot of taxation and utilization figures, in terms of how the governments are
going to tax vehicles. I do think it’ll come down to a usage term, as opposed to a disk, mono monitor and 512K memory cost close to $1200, and the first major
flat rate for every car on the road. computer virus, the “Morris worm”, infected around 6,000 computers connected to
the Internet.
And the average UK house price hit a record £60,000. £ 60,0
00
8 9 
This outperformed the US which saw 2% growth at 4.9m vehicles and the EU car
market at 4.8m vehicles, which was flat at 0.7% in the first three months of this year.
During the first three months of 2018, car production growth slowed down in
China (-0.7%), mainly because of taxation measures that entered into force at the
end of last year. Nevertheless, China maintained its leading position among global
passenger car producers, accounting for 28% of all cars built around the world so
far this year.
State/Territory results (by sales volume)
Units (10,000) Share(%) Y-o-Y (%)
Saloon/hatchback 1,184.80 41.03 -2.48
MPV 207.07 7.17 -17.05
SUV 1,025.27 35.5 13.32
Mini Van 54.7 1.89 -19.97
Passenger Cars Total 2,471.83 85.59 1.4
China’s growing cities fuel Commercial Vehicles Total 416.06 14.41 13.95
car boom
Grand Total 2,887.89 100 3.04
Source: China Association of Automobile Manufacturers (CAAM)
Journalist Tom Seymour takes an in-depth look at the finance and pricing challenges
facing the vehicle leasing and fleet markets in China
US-CHINA TRADE WAR
China has gone through a period of rapid change and growth, as the country
seeks to shrug off its past and develop into a global powerhouse. While its own
A big impact on the automotive market in China compared to premium
economy may have faltered in recent times after years of staggering increases
in GDP, it has now embarked on its most ambitious project yet, ploughing an this year is the continuing trade war with the US. manufacturers like Audi
estimated $1 trillion (£760bn) into a range of global infrastructure projects under and Porsche that export
The Chinese government reduced import taxes
its Belt and Road Initiative (BRI). from Europe.
on vehicles from 25% to 15% on July 1, 2018
This is a state-backed campaign designed to boost Chinese investment abroad, but then increased duty on an US manufactured Both Mercedes and Donald Trump
and is often regarded a “21st century silk road,” made up of a “belt” of overland vehicles from 25% to 40%. Jaguar Land Rover have US President
corridors and a maritime “road” of shipping lanes. issued profit warnings
This was in reaction to President Donald Trump
From South-east Asia to Eastern Europe and Africa, Belt and Road includes 71 this year as a result of fluctuations in import
increasing import taxes on $500 billion worth of
countries that account for half the world’s population and a quarter of global GDP. taxation regimes in China.
Chinese made goods that are imported to the US.
While the activity is overseas, the impact is felt back home, where burgeoning The trade war between the US and China is
business activity has meant Chinese standards of living are increasing and a new BMW is the US’s largest vehicle exporter to China
having a knock-on effect on economic stability
middle class is emerging. by value and has already increased the prices
too. China’s economy is still growing, at 6.7% in
of its popular models like the X5 and X6 by 4%
As China’s megacities continue to swell in size, there is a booming demand for Q2 2018, but this is the slowest rate since 2016.
and 7% respectively. Tesla has followed suit,
vehicles with a middle class that needs access to transportation. Bicycles, long a
increasing the prices of its Model S and Model China’s central bank injected $74bn into the
familiar symbol of the Chinese worker, are being displaced by cars at an increasing
rate. X by 20% to pass on some of the tax hike to country’s financial system in July 2018 to ease
customers. The changes created fluctuations in pressure caused by the US trade turmoil. The
The new car market increased by 3% in 2017 year-on-year to a market of 28.8 the market as car buyers held off buying a car cash injection is the largest made by the People’s
million vehicles.
until July 1. Bank of China (PBoC) since it created a new
China is also still leading global demand for new passenger vehicle sales in system to help provide loans to commercial
The remainder of 2018 will see manufacturers
major markets, ahead of the US and EU, according to the latest data from ACEA, banks for three to 12 months.
the European Automobile Manufacturers’ Association. ACEA’s latest 29-page
that build their cars in the US and export to China
Economic and Market Report for Q1 2018 shows that Chinese demand increased like BMW and Mercedes-Benz at a disadvantage
by 5.6% to almost 6 million vehicles, representing 29.5% of global sales.
10 11 
Car finance originations, over 95% were essentially auto loans signed in the form of a lease-
loan contract, resulting in an actual lease penetration (dubbed “standard leasing” )
According to J.D. Power’s 2018 China Consumer Auto Financing Sales Satisfaction
of less than 0.1% based on KPMG’s estimation.
Study, the vast majority (95%) of car buyers intend to fund their car on finance
with their next purchase.
Lease penetration rate in China
The study is based on responses from 9,204 new-vehicle buyers across 71 cities
throughout China and was fielded from March and April 2018. New car sales volume breakdown
by financing method (%)
Car finance is still an underdeveloped, but emerging, business in China. Compared %
with a penetration of more than 80% in the US and the UK, the study finds that 100
auto financing has a less than 30% penetration in China.
Among those consumers in China who used auto financing to buy a car, 38% say 80
they would have postponed their purchase if auto financing services had not been Cash
available. Another 10% indicate they would have not purchased a vehicle at all. 60
Lease-loan
Loan
The survey shows that attractive financing programmes have become the key
40
driver for brand loyalty and repurchase, with 30% of
customers purchasing the same brand as a result.
20 Finance - 38% Standard
Jacob George, vice president and general manager at
leasing
J.D. Power Asia Pacific, said: “Even though auto finance’s Leasing - 7% < 5%
0
penetration in China is lower than that in the US and
other developed markets, it is playing an increasingly
Source: KPMG analysis
critical role in driving Chinese consumers’ vehicle
purchase decisions. However, there are considerable challenges on the way. Due to leasing’s lack of
“The landscape is evolving fast. For OEMs and dealers, market share, there is the challenge of making companies aware in the first place.
Jacob George
vice president & general the improvement in auto financing services and more For mature leasing markets like the US and the UK, it requires a regulated used
manager, J.D. Power, experience can help them differentiate in a highly car market and a route to dispose of stock in a profitable way. This is something
Asia Pacific competitive market.” China doesn’t yet have, while there are no real residual value setters or large
remarketing centres that have made their way into the Chinese market.
Leasing potential The used car market, as the most commonly used remarketing channel, is
currently viewed as fragmented, regional and non-transparent in China. Used car
China’s automotive leasing market holds massive potential, as currently out of a sales are often handled by individual dealers and take place in offline markets with
substantial market of nearly 29 million vehicles, traditional contract hire accounts one-on-one negotiation. This is clearly not an optimal way for leasing companies
for just 0.1% of that. to dispose of their large volume of vehicles. Further, the underdeveloped used car
That tiny portion of just 29,000 vehicles a year illustrates how big the opportunity market also results in higher volatility in residual value, challenging the setting of
is for a bank or leasing company that can crack the company car market. contracted residual value. Unlike developed markets in the UK, Europe and the
US, where there is an accurate and systemic residual value forecasting system in
KPMG China, which produced a study of the Chinese auto market in late 2017, place to mitigate losses on returned vehicles, with advanced forecasting models
says that despite being the world’s largest market for auto sales, China is still in have already been built on comprehensive data sets, residual value forecasting is
the early stage of development in terms of its auto finance industry. The report still in a trial-and-error stage in China, and leasing companies have to cope with
notes that with a finance penetration rate of 38%, China lags significantly behind the risks and uncertainties.
developed countries, where most have penetration rates between 50% and 80%.
In this underdeveloped auto finance environment, leasing has only started to
China’s automotive leasing market holds massive potential,
emerge as an option for auto consumers in the past few years, KPMG says. In
2016, the China auto market is estimated to have generated some 600,000 as currently out of a substantial market of nearly 29 million
leasing originations, indicating a penetration rate of 2.5%. Nevertheless, of these vehicles, traditional contract hire accounts for just 0.1% of that
12 13 Lease penetration rate in China, 2016-2026 Top five Chinese leasing companies
Just like the UK, there is a mix of leasing companies backed by car manufacturers,
Annual sales volume dealer groups and independent companies.The largest in China is All Trust
(1 million units)
Leasing, which is owned by dealer group China Grand Auto.
7
6 According to KPMG’s analysis of the Chinese leasing market in 2018, online
5 specialist Yixin Capital is the second largest, followed by independent Herald
4 CAGR: +106% Pacific Financial Leasing, SAIC-owned Anji Leasing and then Ping An Leasing.
3 Volkswagen, Mercedes-Benz, Toyota and BMW have all entered into joint-ventures
2 in China’s automotive leasing market but are still fledgling operations that are
1 leasing a few thousand vehicles a year.
0
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Alphabet, BMW's leasing division, acquired Herald International Financial Leasing
Penetration Company, an existing Chinese leasing operation, in November 2015. Its focus has
rate -0% -20%
been on offering leasing services to European and Australian fleet customers with
local operations in China, but it is increasingly promoting the idea of company
Source: KPMG analysis car leasing to Chinese businesses in the 58 cities where Herald already has a
presence.
However, KPMG China is confident leasing will take off, forecasting penetration to
reach up to 20% by 2026, accelerating from close to nothing to millions of vehicles
in less than 10 years. Lease-loan
Gary Cai, KPMG Advisory (China) associate director, said: Currently lease-loan is the predominant finance option for leasing in China. This
“In the next decade, a significant portion of car buyers offers leasing with the residual value below the market level by as much as 20%
will be millennials, who are typically considered to be and accounted for a volume of 600,0000 last year, according to analysis by KPMG.
open to new concepts and westernised consumption
behaviours. The Chinese banking industry created the lease-loan as a way for customers to
increase loan approval rates in comparison to a traditional bank loan.
“Concurrently, the used car market is evolving into
a more transparent and regulated market under Lease-loan customers have to buy the vehicle at the end of the contract and the
government decree. As such, increasingly advanced emphasis is the low or zero deposit, rather than keeping monthly payments at a
residual value forecasting based upon more transparent lower level.
Gary Cai data becomes possible.” Bennett said the lack of maturity in the used car market has meant that other
advisory associate
Paul Bennett, former international business than Mercedes, the majority of manufacturer finance houses are not looking at a
director (China), KPMG
development director at Cap HPI and now international offering a guaranteed future residual value product (GFRV).
business development director at Autofutura, an Bennett said: “With a predominantly hire purchase (HP) product where the
automotive and finance data management company, customer owns the car at the end of the deal, the finance house isn’t exposing
said the main push back on business leasing taking off is itself to the risk of the asset.
the concept of not owning the car.
“This will start to shift though because manufacturers previously had been able
He said: “China is still very traditional on that front, you to just build 100 more dealerships to gain market share with new buyers in each
have to have the cash to own the car and you keep area.
that car afterwards and it goes to your children or your
“It’s getting to the point now though where manufacturers need to attract more
family.
people into those dealerships to gain further volume and this could come in the
“This will start to change as younger blood comes form of new finance products and leasing.”
Paul Bennett
through and attitudes to accessibility and affordability
“
former international
change.” business development
director, Cap HPI With a predominantly hire purchase (HP) product where the
customer owns the car at the end of the deal, the finance
”
house isn’t exposing itself to the risk of the asset
14 15 A volatile used car market
The used car market is the missing piece of the puzzle for traditional contract hire
in China and until a solution is found, it will be tricky to gain traction.
Used car sales are not controlled or organised, but that doesn’t mean it’s a small
market. Used car sales have been growing at a faster pace than new cars since
the early 2010s and in 2017 the sector grew by 19.3%, compared with 3.2% for
new cars, according to data from the China Auto Dealers Association (CADA).
CADA is predicting used cars will reach 20 million by 2020.
Bennett said: “The used car market is huge, but it’s very old school. New car
dealers have to apply to have a licence to sell used cars and even then they are
restricted to stocking a certain number of vehicles.
“This is to protect the sole-traders and used car brokers, of which there are
thousands, that take used car stock and sell them on.”
Bennett said China doesn’t yet have a joined up remarketing infrastructure or a
way for vehicle manufacturers to dispose of stock.
Most popular car in China, Wuling Hongguang
He explained: “Without a controlled disposal route and data from auction houses,
there isn’t a reliable source of data to base a residual value on.
Red Book, an Australian company, is the main business attempting to provide
“This is why lease loan deals are priced in favour of the manufacturer in terms of residual value market data in China right now, but more could attempt to enter
residual value, because they’re protecting themselves from risk.” the market as it matures.
Bennett said: “If you’re a leasing company with thousands of vehicles and no
Top 10 individual models (by sales volume) accurate information on pricing or disposal, how do you do it? The answer is that
you don’t.
Position Brand Model Jan–Dec 2016 Jan–Dec 2017 % Y-o-Y
“As the market changes it’s a case of if not when the used car market will mature
1 Wuling Wuling Hongguang 650,018 533,950 -17.90
and at that point, there is a huge potential for those that are well positioned.”
2 Haval Haval H6 580,683 506,362 -12.80
3 VW Lavida 478,857 457,114 -4.50
4 Buick Excelle GT 370,372 416,990 12.60 Electric spark
5 Nissan Bluebird Sylphy/Sylphy 367,979 405,854 10.30 Not only does China lead the world in terms of car volumes sold, it’s also the
6 Baojun Baojun 510 0 363,949 - largest market for electric vehicles.
7 GAC Trumpchi GS4 333,280 337,330 1.20
8 Toyota Corolla/New Corolla 324,052 336,018 3.70 Plug in vehicle sales
9 VW Sagitar 341,333 332,733 -2.50 Year Sales volumes
10 VW Tiguan 242,160 332,402 37.30
2015 331,000
Source: Market Lines Data Centre
2016 507,000
2017 777,000
The used car market is developing, however, and some manufacturers like
General Motors have approved used car programmes and Cox Automotive is 2018 est 1,000,000
major shareholder of BitAuto, an online new and used car marketplace.
Source: CAAM
The Chinese government is also lifting the restrictions on the sale of used cars
between provinces and introducing new legislation to increase transparency on a
used car’s history. Second most popular car in China, Haval H6
16 17 Keep calm and carry on
Fo
While China's leasing market seeks to build from a low base, on the other side of
the world, the six key players in the more mature European market are experiencing
Ri
challenges of their own, ExpertEye's analysis shows
Changes in residual value
The European economy outperformed even the European Commission’s
Foreca
expectations in 2017 as growth continued to gather momentum through
the second half of the year. The eurozone saw quarterly GDP growth of 0.7%
and 0.6% in Q3 and Q4 respectively, resulting in a full year rise of 2.4%. This 3 mont
mirrored the growth seen in the wider EU 28 region, according to the European
change
Commission’s latest economic forecasts.
France +0.2%
Germany +0.9%
6
Italy EU (28 countries) +1.1%
Beijing traffic 4 Portugal
Germany +0.7%
2 SpainFrance -0.1%
Data from China’s Association of Automobile Manufacturers (CAAM) shows that UK +2.8%
Italy
plug-in vehicles generated sales of 777,000 units in 2017, a 53.3% increase year- 0
on-year and the market has doubled in size since 2013. Against a market of 29 Spain
It appe
million, it’s still a relatively small percentage of sales, but analysts are predicting -2
Portugal
becom
continued growth to a million plug-in vehicles this year. residua
-4 lessors
China has set out its “Technology Roadmap for Energy-Saving and New Energy United Kingdom
the UK
Vehicles” and this includes to have plug-in vehicles to represent 12% of all vehicle -6 in Portu
sales by 2020. 2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019e the only
The Chinese government has also put targets in place to have 50% of all vehicles These fi
as plug-ins by 2030, with the average fuel consumption for vehicles to be 73mpg Source: European Commission, OECD and the IMF Europe
forecas
by that deadline too.
mainten
2018 is expected to see a similar level of growth, rising 2.3% as the move from rates in
This is to counter China’s air pollution, which has become a major public health
economic recovery to expansion continues, but with Brexit taking place in 2019 supplie
issue in Bejing, Shanghai and a number of other large cities, where daily smog
there is expected to be a small slowdown with growth dropping back to 2%.
clouds make life unpleasant and unhealthy. Around a third (30%) of the air
pollution in cities is attributed to vehicles. Consumer spending remains a key driver of growth across the region as • The c
employment prospects continue to improve thanks to sustained levels of job duration
In response the Chinese government is putting large subsidies in place to help • Twelv
creation. Spending remains a little tempered though as the relatively high level
boost uptake, with reductions of up to 110,000 yuan per unit (£12,400) for buyers Februar
of unemployment eases the pressure on wage increases. Low interest rates, • Three
that choose a plug-in.
readily available lending and moderate levels of inflation are also favourable for Novemb
However, the grant is only available on vehicles with a zero emissions driving • Renta
investment. the time
range of 185 miles. There are even higher subsidies for vehicles with a zero twelve m
Global GDP outside of the EU is forecast to rise by 4.1% in 2018 and 2019 creating
emissions range of 250 miles. There has also been indications that the
further export opportunities which is good news and will support the expected
government may roll back incentives further in order to force Chinese-based plug-
strengthening of domestic and export demand over the next couple of years.
in vehicle manufacturers to innovate, rather than rely on grants.
It is stating the obvious but Brexit remains the biggest threat to the economies of Pr
This could be a strong opening point for leasing companies that could offer bu
both the UK and the remaining EU27 as trade between these soon to be divorced
finance as a way to fund a plug-in vehicle. However, the same issues remain
partners is so significant.
around the maturity of the used car market for plug-ins that need to be disposed Ed
of at the end of a contract. ©
Th
na
sio
18 19 Room to grow For the period 1990-2017 the average for the EU28 and EFTA3 is 31.59 per capita
compared to 30.1 for just this century, although part of the decline is due to the
European car sales statistics show there is capacity for further growth. The overall
EU accession of less motorised nations. This means there is a natural capacity for
average for the EU28 and EFTA3 was 29.8 cars per thousand head of population
a circa 1.1% increase in total car sales across the region, with countries like Italy,
for 2017 which is the second highest it has been since the accession of Romania
Spain and France as obvious targets due to the significant decline they saw during
and Bulgaria to the European Union in 2007 when sales were at 31.6 per
the economic crisis which they have still to yet fully recover from. It is also worth
thousand before they started dropping during the economic crisis, hitting a low of
remembering that a number of countries, such as Poland, have transformed their
23.8 per thousand in 2013.
economies during this century and with this increasing domestic wealth there is
The main cause of the rise from 2013 to 2017 has been the 26.5% increase in new further scope for car ownership to grow significantly.
car sales against an EU population which has grown by just 1.1% over the same
period according to The World Bank’s latest data.
New vehicle sales
Only Luxembourg (89.4), Iceland (61.0) and Belgium (47.9) saw more new cars
The “war on diesel” has seen diesel share of the new car market fall from 49.5%
registered per capita than Germany (41.7) in 2017. Aside from 2009 when the
for Western Europe in 2016 to around 43% in 2017, a level last seen in 2003. The
Germany government introduced a scrappage scheme to stimulate the car
media reporting of “dirty diesel” has pushed buyers away from replacing what are
market, pushing up per capita sales to 46.5, 2017 was the second-best year this
dirtier older diesels with clean and efficient Euro 6 engines and instead encouraged
century. Whilst new car sales are forecast to rise in Germany for the next couple
the sale for petrol powered vehicles which has resulted in the first increase seen
of years, the per capita sales do indicate that there is little natural headroom for
in CO2 emissions since almost the start of the century in a number of countries.
growth and that sales may have to come at a price.
Thanks to political grandstanding the downward trend shows no sign of stopping
and we may soon be back to the circa 32% diesel market share we saw in 2000.
New passenger car sales per thousand population Ireland is the latest country to announce in its Project Ireland 2040 plan - a
60.0 60.0 proposal for no non-zero emission vehicles to be sold in Ireland from 2030 and
no NCT certificates (MOT for UK readers) will be issued for non-zero emission
vehicles after 2045. A noble plan but one that seems to neatly gloss over how
they will fund the required upgrade to the domestic electricity network, produce
50.0 50.0 electricity in a way which doesn’t substitute internal combustion engine emissions
with electricity generation emissions and achieve in less than 13 years what
Norway have been unable to achieve in 21 years despite it being one of the most
electric vehicle promoting countries in the world.
40.0 40.0
The 3.3% growth for the EU28 and EFTA3 car market was just marginally behind
our 3.6% forecast for 2017. Going forward whilst January got off to a flying start
with sales rising 6.8% we expect the growth rate to slow down during the year
with 2018 ending just under 3% over 2017 levels with a further circa 2% rise in
30.0 30.0
2019 before the market starts to contract into 2020.
Our prediction of LCV growth being in line with new car sales for the whole of
2017 were just about spot on as sales rose 3.2%. The move from recovery to
20.0 20.0 growth in the European economy can be seen in the 8.1% rise in LCV sales in
January but as we saw in 2017, this is likely to ease back again during the course
of the year. But that growing economy should mean LCV sales outperform the car
market this year and is more likely to grow by around 5% in 2018 and 2019.
10.0 10.0
Residual values
As expected RVs have remained relatively stable at an overall level across most of
0.0 0.0 Europe and this is going to continue through 2018 and 2019 but the devil is in the
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018f
2019f
2020f
2021f
2022f
detail. Petrol RVs have been on the rise as RV setters see the change in the demand
in the new car market, whilst diesel RVs have remained stable in some markets and
EU (28 countries) France Germany Italy
Spain Portugal UK
falling in others. As 2018 progresses we expect to see this divide widen, however
with diesel making up the majority of fleet vehicles we expect the overall impact will
Source: ExpertEye AG be a fall in the RV Index of a percentage point or two this year and again in 2019.
20 21 France Germany
New car sales have risen every month this year with Autoscout24 reports a split of around 55.4% diesel car The German car market continued the volatility of trade guide DAT who have reported values dropping
the year-to-date (YTD) growth standing at 4.7% by the adverts versus 42% for petrol across all ages. 2017 with sales falling in two of the first six months of by around 2.5 – 3.0 percentage points in the last year
end of June, and a staggering 18.9% increase in July this year, with tactical registrations playing a key part compared to petrol vehicles which have remained
Light commercial vehicles (LCVs) have also risen for
due to the rush by some brands to clear out old stock in ensuring the market reached the mid-year point up stable. However, demand for diesel remains, with the
the first 6 months in a row with sales up 5.0% for
before the Worldwide Harmonised Light Vehicle Test 2.9% with 1,839,031 cars registered. average days in stock falling by around 2 days to 99
the first half of the year and up a further 5.1% in
Procedure (WLTP) kicks in in September. days although petrol demand remains stronger as
July. France is the largest LCV market in Europe by The impending implementation of WLTP has seen
stock days dropped by 8 days to just below 81 days at
Whilst an increase in sales sounds like good news, it some margin and by the end of June it had registered a flurry of brands registering old stock with sales
the mid-year point.
does carry some bad news for the planet because 240,442 new vans which is 33% more LCVs than jumping a further 12.28% in July. August is sure to
diesel sales have fallen from a high of 72.9% in 2012 Europe’s second largest market, the UK. see further day registrations before Germany and the LCV sales have fared a little better than passenger
to just 40.6% by the end of Q1 this year. Overall diesel other European markets start to go into reverse from cars with sales only falling once in March (-6.7%) and
French RV setters have eased RVs back a little during
sales are now down 5.44% for the first half of 2018 September onwards as dealers offload these vehicles. hitting the mid-year point up 5.0% with 136,839 units
the first half of 2018 for diesels, whilst petrol RVs
against the same period last year. It is bad news for This means that whilst new car sales to the end of July registered.
have been moved upwards generally. The increasing
the planet because most new car buyers are switching are up 4.2% the likely scenario is for a 2.8% full year
brand awareness of the budget Dacia brand and its RVs have followed the used car market in many ways
to higher CO2 emitting petrol engines rather than increase over 2017, which will still make 2018 the best
popularity amongst new car buyers has resulted in with only minor tweaks across all brands and diesels
electric vehicles or hybrids. year since 2009.
RVs being increased more than the other brands down a little more than petrol. Historically diesel
Whilst there is a natural lag in the used car market, who have generally seen values decline per the table The diesel situation is a similar story to other markets, represented 15% of Germany’s used car market and
diesel is also losing out to petrol there. According due to the heavier diesel mix of the fleet and leasing with diesel new car sales accounting for just 32% of the falls we are seeing in the new car market may mean
to Autoscout24 even though only around 27% of market. RVs for diesel vehicles are expected to all sales compared to 41% for the same period in in 4-5 years’ time we start to see a shortage of good
used cars available are petrol, the search rate is now continue to drop by a percentage point or so in 2018 2017, and well below the diesel high of 48.1% in 2012. used Euro-6 diesel cars and therefore RVs may actually
around 47% and rising for some ages of cars. Overall and into 2019. Used diesel values have also fallen according to the start to rise.
RV Index: 36 months / 90,000 kms RV Index: 36 months / 90,000 kms
125
125
115
115
105
105
95
95
85
85
75
75
2010 03
2010 08
2011 01
2011 06
2011 11
2012 04
2012 09
2013 02
2013 07
2013 12
2014 05
2014 10
2015 03
2015 08
2016 01
2016 06
2016 11
2017 04
2017 09
2018 02
2010 03
2010 8
2011 01
2011 06
2011 11
2012 04
2012 09
2013 02
2013 07
2013 12
2014 05
2014 10
2015 03
2015 08
2016 01
2016 06
2016 11
2017 04
2017 09
2018 02
EU Average France European Sentiment Indicator EU Average Germany European Sentiment Indicator
Source: European Commission – Economic Forecasts; Expert Eye AG – RV Index Source: European Commission – Economic Forecasts; Expert Eye AG – RV Index
22 23 Italy Portugal
New car sales have grown only twice in the first six The economic and political pressures are also Apart from a minor 0.3% drop in May, new car sales rules would continue to apply until the end of the
months of 2018 and by the mid-year total sales were impacting commercial vehicle sales. LCVs started the have been rising at a healthy pace since starting the year. Starting from January 2019 new tax tables for
down 1.4%, with June seeing sales drop by 7.3%. In year with two months of growth, but they then saw year down 2.8% due to a vehicle registration technical the new car taxation ISV (Imposto Sobre Veículos Tax)
contrast July has seen sales go into a total reverse with four consecutive months of decline resulting in a mid- issue. and the annual taxation IUC (Imposto Único Circulação
sales up 4.4%. Whilst there was an extra working day year position of just 77 units ahead of the 89,540 LCVs Tax) are supposed to ensure “fiscal neutrality” but
By the middle of 2018 new car sales were up 5.8% with
compared to July 2017 the WLTP effect has played a registered in the first half of 2017. this is easier said than done given the complexity of
sales rising 13.6% in July according to the latest data
part and August is likely to show a similar result before the impact of options, as well as the fact that the new
Despite concerns over the economy and the from the Associação Automóvel de Portugal (ACAP).
the likely downturn from September. WLTP test is more flattering to larger engine cars than
political battle brewing with the EU, Italian RV setters This is the second highest rise this year (May 13.8%) but
the old NEDC test.
The demonisation of diesel is not impacting new diesel have remained relatively bullish with RVs climbing the increase has been caused by the same WLTP factor
car demand as much in Italy as many other parts of consistently over the last couple of years. Movements we have seen across Europe. According to local media LCV sales have suffered in 2018 with 3 out of the first
Europe. By the end of quarter 1, diesel represented over last quarter have been little more than flatlining reports the additional registrations have come as a 6 months showing sales falling leaving the market up
55.1% of new car sales compared to a high of 58.3% but the situation over the next year will depend heavily result of daily rental companies replacing some of their just 3.3% followed by a fall of 1.8% in July. This means
in 2005, and even in July diesel was still the most on how the coalition government can marry their fleet, and large discounts in the retail market. LCV sales are now up just 2.6% and may indicate a
favoured fuel type, taking 50.8% of the new car market, spending plans with the EC’s requirements for fiscal weakening in the Portuguese market.
Portugal has some of the most punitive emission-
a drop of just 5 percentage points over July 2017. constraint. If they can pull it off, consumer confidence
based car taxes in Europe and many feared the move RV setters in Portugal have been lowering their
should rise, boosting used values and RVs, but if they
Due to the high demand for alternative fuels, not all to WLTP in September would also see these taxes estimates as a precaution against a potential
fail and Italy drops out of the euro, expect significant
of the lost diesel sales have gone to petrol engines. increase. This undoubtedly caused some car buyers to slowdown in the economy. Diesel demonisation has
turmoil.
Petrol car sales grew by 11% in July whilst LPG car pull forward their car purchases but at the beginning seen it fall from 72.3% in 2013 to just 53% by the end
sales improved by 9% and CNG jumped up by 67% of August the State Secretary for Fiscal Affairs António of May and RV setters are expected to include that in
compared to the same month in 2017. Mendonça Mendes announced that current NEDC future movements.
RV Index: 36 months / 90,000 kms RV Index: 36 months / 90,000 kms
125
125
115
115
105
105
95
95
85
85
75
75
2010 03
2010 08
2011 01
2011 06
2011 11
2012 04
2012 09
2013 02
2013 07
2013 12
2014 05
2014 10
2015 03
2015 08
2016 01
2016 06
2016 11
2017 04
2017 09
2018 02
2010 03
2010 08
2011 01
2011 06
2011 11
2012 04
2012 09
2013 02
2013 07
2013 12
2014 05
2014 10
2015 03
2015 08
2016 01
2016 06
2016 11
2017 04
2017 09
2018 02
EU Average Italy European Sentiment Indicator
EU Average Portugal European Sentiment Indicator
Source: European Commission – Economic Forecasts; Expert Eye AG – RV Index Source: European Commission – Economic Forecasts; Expert Eye AG – RV Index
24 25 You can also read
