Where have we been, and where are we going? You may be thinking these thoughts as the calendar turns to a new year, motivated to apply what you’ve learned over the past 12 months toward your 2019 fleet strategy. One area to consider is how much money you’ll recoup as you turn in your used vehicles for resale. Let’s take a look at the major trends in used vehicles over the last year and what that means moving forward.
Higher new vehicle prices is a major factor
In general terms, a vehicle’s residual value is typically a standard percentage of the purchase price; therefore, if the new vehicle price goes up, it equates to a proportional increase in the used vehicle price. In 2018, we observed a number of industry and economic factors that contributed to the increase of new vehicle prices. According to LeaseGuide.com, influencers include the increasing cost of materials, labor and manufacturing, and transportation fees.
In addition to manufacturing and logistics factors, new vehicle prices are also climbing due to more expensive technology targeting safety, efficiency, and sustainability. Costs associated with technology-based safety features such as navigation, adaptive cruise control and lane assist are somewhat recoupable – time will tell if these features hold their value as vehicles come off lease. Incidentally, timing is of critical importance in this regard. The longer a vehicle stays in service, the more likely the technology will become outdated and thereby the resale value will fall.
An area of vehicle technology that does hold its value longer is collision avoidance systems. These are features that use sensors, cameras, lasers and short- and long-range radar that are tied to an autonomous braking system. Both the National Highway Traffic Safety Administration and the Insurance Institute for Highway Safety are big proponents for this technology because of its success in preventing or mitigating crashes. For many companies, protecting the lives of employees is worth the cost. If your fleet is not self-insured, you may also qualify for lower insurance rates for vehicles with these features.
Correlating to the increasing prices of new vehicles, Forbes.com has shared word from Cox Automotive that used vehicle sales have shown volume increases in 2018. Even as prices increase overall, the demand for used passenger cars is high. We have seen a drop in demand for compact and midsize cars; however, we may have reached the bottom of this trend and are now starting to move in a positive direction. Driving this supply-and-demand imbalance is word from a growing number of manufacturers that they are moving away from sedan production. Knowing that this vehicle class may soon be a thing of the past, consumers are buying them now in the used market to delay their upgrade to crossovers and SUVs.
Outlook for 2019
Based on what we’ve seen in 2018, the outlook for the 2019 used vehicle market is the continuation of the status quo. Within the year, we’ve seen standard cyclical decreases, but the big drop that leading economists have predicted for the past five years still hasn’t happened. Despite a supply increase, we have seen a strong demand of consumer vehicles coming back into the market. An uptick of various storm types and recalls, plus high tax returns, low interest rates despite Fed increases, and low gas prices are among the many variables contributing to the absence of the forecasted drop.
A factor that looms in the near future is the impact of new U.S. tariffs on imported aluminum and steel, announced in 2018. These products and materials that go into building vehicles will impact your fleet relative to both new vehicle prices and used vehicle resale values. The effect of the tariffs is not currently evident because today’s vehicles are being built with products and materials that were brought into the U.S. prior to the tariffs being implemented. That makes understanding how the tariffs will impact your fleet costs a wait-and-see condition for the present time.
One likely outcome is that the tariffs on materials will further increase new vehicle prices, potentially prompting fleets to delay new vehicle purchases while also driving consumers to the used vehicle market. This boost in demand for used vehicles at a time when the fleet market is turning over fewer used vehicles may result in higher market prices. In contrast, once vehicles with prices that have been inflated by the tariffs are bought and paid for, fleets will not recoup the related costs at resale.
Work with the pros
Whether prices in the used vehicle market are high or low, you should continue working with fleet management professionals to ensure your vehicle selection and cycling align with your fleet needs and budget. To avoid significant losses when selling your used fleet vehicles, you must choose your priorities: maintaining balance between equity and book value, introducing newer vehicles and technology, keeping employees happy, or other initiatives that support your corporate goals.
Our experts with experience in all market conditions can help you understand how your vehicles are performing in the used vehicle market and guide you through decisions to sell off vehicles with old technology or avoid increasing operating costs. They will help you choose not only the best timing, but also the remarketing outlets that can produce the highest returns for your vehicles: traditional in-person or online auctions, websites with buyers who are looking for vehicles just like yours, truck and equipment channels, direct purchase programs, and more.
For additional advice on replacement cycling and capital funding, download ARI’s whitepaper, “Achieving Greater Certainty in Capital Forecasting.”