What's Driving Disposal Values?

June 2009
Rosemary Ann Ogilvie, Australian Business Auto

Rosemary Ann Ogilvie looks at the key factors determining vehicle disposal income and suggests ways of maximising it.

Three years of record new-car sales, with the milestone million mark cracked last year, has resulted in the market being flooded with used cars. It's just another factor compounding the challenges fleet managers face when trying to achieve good returns on retired vehicles.

Trade Early

The abundance of quality, low-mileage, near-new vehicles means high-kilometre cars are worth less than ever. So you need to turn fleet vehicles over before they clock up too many kilometres, ideally at 40,000km, and at the most 60,000, advises Vic Moor, consultant to Glass's Information Services Pty Ltd. "Certainly, it's best to dispose of them before they hit the three-year mark, while they are under warranty," he says.

Mark Thornton, national sales manager, government and fleet vehicles, at Pickles Auctions, says the majority of vehicles sold by Pickles still have the balance of their new car warranty. "It's something the second-hand market is looking for - it gives buyers confidence when purchasing a car at auction," he stresses. "Obviously, auction terms mean buying in an 'as is' condition. However, where there's a balance of new-car warranty, if an issue does arise that comes within warranty guidelines, that vehicle can be repaired at any of the manufacturer's service departments."

Alternative Demand

The combination of petrol costs, and corporate Australia's desire to lighten its carbon footprint, have led to a burgeoning interest in alternative fuels. Most manufacturers now include diesel vehicles in their range.

"The new-breed diesel cars are fast and economical and produce a lot fewer grams of CO2 per kilometre than a petrol engine," says Moor. "And, they're holding their value. As recently as two or three years ago, the resale value on diesel cars was hopeless. It's a different matter today, because diesel cars have the new common-rail diesel engines out of Europe, which is the absolute leader in this technology."

Also hot property is the hybrid technology seen in the Toyota Prius, the Honda Civic Hybrid, the luxurious Lexus LS600hL and GS450h sedan models and the Lexus RX400h SUV.

"When the first hybrid came out - the Prius - there was minimal acceptance," recalls George Georgiou, general manager, fleet, at ORIX.
"But with corporate management embracing sustainability, it's now making an impact, as is the Honda Civic Hybrid."

"People are starting to become more comfortable with hybrid vehicles," agrees Thornton. "When the fuel prices increase, we often see a stronger demand for them."

This acceptance and demand mean that hybrids, too, are holding their value extremely well, something that wasn't the case when they were first released. Likewise, LPG vehicles; Georgiou says they can do very well, generally bringing a good $1500 more than their petrol counterparts at the end of three years.

Market Forces

Struggling to hold their value in the second-hand market are the smaller cars - and the Australian launch next year of the first Chinese car, Chery, is likely to further impact this sector. "The Chery is definitely going to be cheaper than $13,990, with some predicting it may be as low as $9990," says Moor. "This sort of price will drag down the value of used cars such as the Ford Laser and Toyota Corolla because people prefer to buy a new car. It will be similar to when Hyundai introduced the Excel [in the 1980s], especially if the quality is there with the Chery."

Sales of new smaller cars, however, are powering ahead while large car sales are declining. "Even the large SUVs like Ford Territory are falling, whereas the smaller SUVs are recording 20-odd per cent growth," says Moor.

Whether the release of the new Ford Falcon will reverse this trend remains to be seen. However, the fact that the car has a more economical engine is in its favour, and may help entice buyers back to the bigger car, especially as the safety and comfort features are there as well. "Ford has really addressed it all in the new model," says Georgiou.

"The industry is very keen for the new Falcon to do well," adds Thornton. "The feedback we've had is that it's a good vehicle - it fits a need. It may sell on a par with the previous model, or possibly a little bit worse due to various factors including uncertainty with fuel prices, interest rates and the ability to borrow money."

Thornton believes the current new-car sales trend - big cars declining, small cars rising -
will eventually flow through to the second-hand market. For now, though, this market favours six-cylinder vehicles such as the Falcon and Holden's Commodore. "The cost of a new Corolla is about the same as a second-hand Commodore or Falcon. You can buy a 2006 BF Falcon Futura sedan with 60,000km for around $14,500, which is great value."

Thornton goes on to explain that one of the key factors - apart from price - that influences buyers in the used-car market is need.

"A buyer with three or four kids will probably need a Falcon or Commodore, despite the 3.6 and 4.0-litre engines being a little heavier on fuel consumption."

Value in Safety

While second-hand buyers look at ANCAP and European NCAP ratings, Thornton says that again, it's more relative to the new-car buyer.

"As far as buying trends are concerned, we're not seeing it here on the auction side of things. The biggest factors are probably price, followed by the need for the purchaser, and then fuel."

Conversely, with employee safety a primary consideration in fleet management, fleet buyers are very aware of these ratings - and they're influencing purchase decisions, as is The Green Vehicle Guide. "A number of NSW councils present at a recent Subaru launch said they will only consider vehicles that have four stars and above, with CO2 emissions less than, say, 250 grams per kilometre," says Moor.

According to Georgiou, the raft of innovative safety features such as air bags, stability control, traction control and reverse sensors appearing on new models does not add any real value. Yet cosmetic features such as sunroofs, DVD players and satellite navigation do.

"People expect stability control as standard these days," Georgiou explains. "Side air bags are also becoming standard in almost all vehicles."

The reverse camera is gaining in popularity, adds Georgiou, which clearly does enhance value at lease-end. While the price has dropped significantly, Moor notes that the cameras are still mainly going into SUVs. "There's a big push for reverse cameras every time a young child is killed in the driveway. Reverse sensors don't always pick up kids who are lying on the ground, but the reverse camera does, so I think in another two or three years it will be a standard feature with every vehicle."

Moor recommends keeping an eye on what BMW, Audi, and Mercedes-Benz are doing with their top-end cars to find out which features are likely to become standard issue down the track. An example of engine technology goiung mainstream is the new Honda Accord's variable-cylinder management that adjusts cylinder use to conditions.

Safety features are not a huge factor in a second-hand buyer's decision making: safety certainly lags behind need and fuel, says Thornton. "Most people believe all cars are generally safe and comply with Australian Standards. Features such as stability control might be an issue with new cars, but not with cars that are two to three years old."

If safety features don't impact on value to the extent we may have imagined, colour certainly does. The universal colour of choice is silver: "We've identified light silver as the best resale colour for any fleet vehicle. It hides superficial scratches, never looks dirty," says Georgiou. "Model variance comes in, too. You'll get a great return from a Holden Statesman in silver. However, if it was green, say, you'd probably get $3000 to $4000 less."

"White, blue, and charcoal seem to be other safe choices," adds Thornton. "But it's a matter of supply and demand."

Trendy colours are best avoided. Thornton says there may be a bit of demand for them initially, but they can sometimes detract from a vehicle's resale value two or three years later.

Current Trends

Georgiou notes that non-mainstream fleet vehicles such as Subaru, Mazda and Nissan
are now having an impact in the fleet market, whereas traditionally it's been Commodore, Falcon and Camry.

"In the second-hand market, we're seeing the Japanese cars doing quite well against the Australian vehicles," says Thornton. "The Subaru Impreza or Liberty, the Honda Accord Euro, the Mazda 3s and 6s - there's definitely a strong demand for these vehicles second-hand, and they're getting very good returns."

Thornton believes that fleets are tending to downsize and purchase more fuel-efficient cars where the opportunity exists, depending on the need for the vehicle. "Organisations are looking at environmentally-friendly cars, looking at other options such as diesel and hybrid vehicles. But, with our buyers, it's definitely affordability and need more than environmental issues."

"The fleet manager performs a balancing act, having to ensure driver satisfaction while keeping fleet costs down for the company," Georgiou comments. "Realistically, to attract and retain good employees in these days of skills shortages and low unemployment, you must have a car policy that offers driver satisfaction, which may mean providing a Falcon rather than a Corolla."

Future Demand

Predicting future demand is something that's becoming harder to do, says Moor. He believes smaller and leaner engines, and diesel and alternative fuels, will be the thing. "This is evident with the comments made at the Subaru launch: that it has to be on the Green Vehicle Guide, with ANCAP ratings of fours and fives," he says. "Safety issues have become more prevalent in fleet management, along with fuel consumption and CO2 emissions."

Thornton believes cars will only get cheaper. "We've had record periods of new-car sales and all these vehicles are starting to come back onto the market. I feel the fleet companies will have to write residual values lower to ensure they're not losing money. On your standard large vehicle, residuals could be around 33 to 35 per cent of new-car price within the next two or three years."