Last month, a group of
decision makers and spokesmen from across the vehicle leasing and
finance industry met at the London offices of accountancy firm
Grant Thornton to discuss the state of play in the sector as it
heads towards the close of 2010. What follows over the next four
pages is a selection of highlights from more than two hours of
debate and analysis around the table, as our experts grappled with
both familiar issues and new challenges.
Go deeper with GlobalData
Question:
What are the challenges and opportunities in the year
ahead?
Gerard Moon: We’re
focused, here at Grant Thornton, largely on contract hire, and my
main comment would be the lack of liquidity in that market.
Those that are already funding that
sector are putting their prices up significantly, and that’s making
it fairly difficult for independent contract hire companies to get
business onto their books. However, in terms of opportunities we
are seeing new funders coming into the market place. –
A big issue, however, is margins –
they are varying dramatically.
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By GlobalDataOver the last few months, I have
seen a margin difference of 1.5% or 150 basis points across the new
funders that have entered the market.
Contract hire companies might not
have entertained these rates before, but now they are starting to
accept this. The attraction for the new funders is that they are
now getting a good return on their money.
New entrants are looking to provide
funds on a back-to-back basis rather than on an undisclosed agency
basis. They’re not creating a level of liquidity relative to the
amount of money they’re putting into the market.
On another note, salary sacrifice
is a major opportunity for contract hire companies, especially
those who can offer a good internet-based solution.
There are also opportunities for
those contract hire companies who want to deleverage their balance
sheet, and sell off part or all of their books to other people.
Some of the residual values being written across the industry over
the last 18 months may suggest this is the case.
Graham Hill: In
terms of challenges for brokers, underwriting is inconsistent,
partially due to what has just been said about the levels of
liquidity available to different providers.
I have seen some deals being
declined for bizarre reasons, and score sheets are varying
dramatically between companies.
Customers are increasingly
price-driven due to the internet, and there is a lower range of
services offered by brokers. As well as increasing the amount of
value they can add, I think intermediaries may need to concentrate
on their local markets more.
At the same time, there are fewer
brokers out there, and that’s an opportunity to those of us that
remain.
The biggest challenge concerning
the contract hire sector is its supply of vehicles.
Another opportunity is education –
we need to make consumers and small businesses much more aware of
contract hire. We need to get the information out there, and that
could create a huge opportunity.
Paul Brotherton:
From a macroeconomic standpoint, consumer demand is waning –
whether it will come back next year or stay as it is remains to be
seen.
The VAT increase in January is
bound to have an effect and will pull sales forward into the
back-end of this year, but it may cause a struggle to get off to a
good start at the beginning of next year.
We would value new entrants into
the market – competition is healthy for everybody – and to return
to liquidity – there isn’t enough. The market was oversupplied for
many years previously and is now undersupplied. New entrants would
really help create new equilibrium.
A major opportunity for us is the
chance to support customers in these difficult times.
In the longer term, the point of
sale motor finance industry has got to find a business model that
works well, and profitably, for both providers and dealers.
The consumer credit directive (CCD)
coming along in the fourth quarter will be interesting, and will
mean considerable changes in terms of regulations and processes at
point of sale, which dealers are going to need to follow.
It is going to add cost, as
legislation does. Hopefully, though, it will give the customer a
better experience, and more confidence in buying finance at point
of sale.
Colin Thornton:
Demand for our product will be an issue. There has been a
re-pricing of contract hire, which we have, as an industry, been
selling too cheaply for years.
Trying to get customers to
understand re-pricing for risk, at a point when they are focusing
on reducing costs, is a challenge. There is a struggle between low
prices and sensible prices for covering risks.
Another danger is that this
industry stops investing when times get tough; this is a mistake,
especially when it comes to developing new products.
We also need to improve the quality
of people working within the industry, and that means investment in
training.
A lot of the cost-cutting in UK
business has concentrated on extending life cycles, and we are yet
to see substantial numbers of old, tired vehicles coming back onto
the market.
Therefore, appetite going forward
is quite hard to predict.
Andy
Shuter: Banks are still being criticised for not freeing
lending up; they are back in thebns profit-wise and it has had no
effect. Meanwhile, small business are struggling and are now
complaining about cash flow.
There’s a distinct lack of near- to
sub-prime lenders and no appetite for anyone to dip into that
sector anymore.
This is in stark contrast to the
situation in the US, where Capital One, a company that is very big
in subprime over there, reportedly just upped its quota for the
year’s lending from $6bn to $8bn (£3.7bn to £4.9bn).
FSA regulation for insurance
represents one of the best opportunities for dealers at present,
and hopefully CCD will be seen in the same light.
The VAT rate increase in January
will hopefully see an increase in sales before the end of the year,
and dealers seem to be reporting good figures for September
so far.
Overall, however, consumers still
aren’t feeling confident about making large spending decisions,
regardless of whether they have the power to buy or not.
Nevertheless, adversity should
produce opportunity – the industry has got to use its collective
knowledge, expand its research, and find new products.
Colin Tourick: On
the issue of product innovation, there isn’t enough in this
industry and there never has been.
When PCPs came out, they were
treated as a panacea. Then it was PCH, and so on. Now salary
sacrifice is the flavour of the month, and a lot of contract hire
companies are diving into it.
Even though many companies are
signing up for salary sacrifice, the number of employees that are
actually involved remains an unknown quantity.
To go off on a slight tangent: over
the last 18 months, contract hire companies have been reorganising
internally, and I think this is a trend that is largely over. Those
who will make big changes have already made them.
Nonetheless, there are still some
companies in significant difficulty, that aren’t going to look the
same coming out of the recession in the next 12 to 18 months. There
are going to be closures.
Parent groups and companies are
going to close companies that don’t give the return they desire and
consume large quantities of cash. This is a very capital intensive
business and many owners are seriously thinking that their money
might be better spent elsewhere.
Many may think it’s time to get out.
