The heavy goods vehicle (HGV) sector has experienced consistent growth in recent years, but has also faced road bumps such as regulation, changes in the consumer approach and the perennial European issue of the past three years: Brexit. Christopher Marchant speaks to experts in the HGV leasing industry about these challenges, and how the sector plans to adapt and overcome them.
According to data from the European Automobile Manufacturer’s Association, in April 2019, the EU market for commercial vehicles expanded for the fourth month in a row, boosted by gains in both the van and truck segments.
The month was nothing out of the ordinary for the sector. In 2018, EU demand for commercial vehicles went up by 3.2% compared to 2017, marking the sixth consecutive year of growth.
On whether this growth will continue, Benoit Laflamme, head of rental solutions for BNP Paribas Leasing Solutions in the UK, weighs up the possibilities. “HGV leasing is in a stage where it is very difficult to predict which way it is going to go,” he notes.
“Businesses are facing uncertainty, and that is definitely creating delays in the decision process. Because of that, there is the chance of a decrease, but on the other side, there are issues that companies need to address today: whether they are ready or not, they need to make decisions on their assets, because of costs that are going up in relation to compliance and recent government legislation.”
MAN financial services director Peter Collins adds: “The HGV market has been, for the first four months of the year, at its highest level since 2008 in the UK. This might be driven by Brexit and pre-buying in the market, but no one’s quite sure. Sales could fall off a cliff for the rest of the year, but from a leasing perspective it is difficult to anticipate any increase or decrease.”
From April this year, Central London has implemented the Ultra Low Emission Zone (ULEZ), in a bid to reduce the amount of pollution produced by vehicles in the capital. Operators of non-compliant vehicles now must pay a daily charge of £12.50 (€13.90) to enter the area.
Non-compliant vehicles include motorcycles that do not meet the Euro 3 standards (pre-2007 vehicles), petrol cars and vans that do not meet Euro 4 standards (pre-2006 vehicles), diesel cars and vans that do not meet Euro 6 standards (pre-2015 vehicles), and buses, coaches and lorries that do not meet Euro 6 standards.
There are similar plans to introduce ULEZs in UK cities such as Bristol, as well as schemes across Europe ostensibly aimed at curbing vehicle emissions in built-up areas. John Fawcett, head of the transport division at Close Brothers Asset Finance, says: “It’s too early to tell how these issues of regulation will affect HGV leasing, although affordability is being impacted and margins eroded by the higher cost of ULEZ-compliant vehicles.
“Teams are working hard to come up with flexible solutions that will help maintain our customers’ cashflow, given how higher costs are impacting margins.” Collins adds: “In the UK, the government has fully devolved the powers for cities to decide what they want to do, but a problem is that, because of this devolution, everyone has their own idea on how it might work.
“Some cities have been more vigorous with their approach than others. Hauliers need to know that in whatever city they are going to in the UK, there is a conformity of approach. That doesn’t exist, and that’s caused a lot of problems. In the coach market, this uncertainty has completely ruined it.”
Laflamme also identifies issues in the UK approach to emissions regulation. “There is pressure on operators to change,” he notes. “The challenge is that the city powers are devolved and not very co-ordinated. That makes life difficult, and this is becoming evident in the transport and logistics forums. Operators are voicing their concerns that regulation is going faster than technology.
“The reality is that fleets would like to be greener, they would like to be better corporate citizens, but sometimes either the infrastructure or the actual equipment is not available in the right quantities or with the right risk level. The UK’s transport regulation would benefit from being enacted through a more centralised system.”
Emissions regulation, as well as technological developments and the introduction of new diesel standard Euro 6, may be having an effect on the pricing of HGVs and their residual values.
Collins also focuses on the classic factor affecting residual values: economic stress. “If there is a downturn in the economy, new vehicles tend to become reduced but used vehicle prices go up. People will revert to cheaper options,” he explains.
David Potter, commercial development director at Asset Alliance, identifies a perhaps unexpected consequence of improvements to current diesel HGVs. “A lot of vehicles going into Africa with the high standards that we have in Europe can’t necessarily take those assets into the supply chain,” he says.
“The vehicle and the fuel to service that vehicle are not to the right standards, with Euro 6 vehicles often unable to process the diesel fuel that is available in African countries. This is quite an extreme situation, but it shows that it is important to look at the whole market of that asset, and ultimately where it is going to find its final journey.”
The creation of electric (EVs) and alternatively fuelled vehicles has been a number one priority for OEMs across the world.
Somewhere in which EVs are more of an obvious issue is in the HGV sector, as due to their sheer size they require larger batteries to run, with potentially increased charging times compared to a passenger car battery.
The Volvo FL Electric and Volvo FE Electric were the first EVs from Volvo Trucks, and were first shown to the world in April 2018. On the question of funding electrified trucks in the leasing sector, Nils Jaeger, president for EMEA at Volvo Financial Services, says: “There is no hesitation to fund EVs and to put them on the balance sheet. Yet to be fair, the portion is still small; the growth rate is considered significant, but that is also the starting basis.
“Volvo, however, has full dedication towards and support of that line of business. It’s actually important to provide financial services here, to show to the customer there is a belief in the product and the technology.”
Jaeger continues: “It’s also important because there are still hurdles to overcome when it comes to electrified vehicles. To provide the right financial solution is critical and of importance to really make sure that those new technologies find acceptance in the wider market space.”
Fawcett adds: “Electric HGVs are at an interesting stage. Areas of development are led by smaller operators in niche areas, such as waste collection, much the same as many other sectors, but the big manufacturers, understandably, aren’t quite there yet.”
There are few industry sectors that stand to be as impacted as much by the UK’s departure from the EU as haulage.
There has been a great amount of discussion in the press about transport issues such as tailbacks at the Calais-Dover crossing, but in the event of the UK reverting to conducting international business on World Trade Organisation (WTO) terms, there could also be 20% tariffs on purchases of HGVs imported to the UK.
Potter says: “Asset Alliance is conscious of possible WTO tariffs, and there is a concerted effort to make customers aware of the risks. In planning for a worst-case scenario, the company has tried to ensure as many orders are completed by the end of October this year [the current proposed date for Brexit].
“Another challenge to Brexit would be the impact of things coming in from Europe, whether it is trailer parts or materials. All these things are affected by the currency swing, which can deliver real challenges in terms of cost and how this can be passed over to customers. There is a hope that, long term, there is a sensible approach to tariffs from both sides, as there is only a certain amount of stock that can be pulled forward.”
Laflamme says: “BNP Paribas Leasing Solutions could not absorb the cost of tariffs; I don’t think the supply chain could absorb that cost, so the lease costs would have to go up. Manufacturers want to protect themselves against that potential risk, and BNP Paribas would have no choice but to also isolate itself.
“Brexit could also affect the supply chain, considering vehicles could have a platform and a tail lift and a crane and camera systems, all different manufacturing streams coming from different suppliers. If there are a lot of customs delays, this will impact how quickly vehicles will be completed and ready to be delivered. There is the cost factor, and also definitely the delay factor.”
Collins, however, assesses the situation on a more optimistic level. “If you go to WTO terms it adds over 20% to the price of a truck. The reality is that’s not going to happen,” he notes. “In the end, every truck is imported, so every UK manufacturer is in the same boat. There is an argument that if you increase the price of a truck by 20%, that’s going to be sustained forever, and then there’s an argument that the residual value would increase in the same fashion and therefore the holding costs might not be a lot different. As long as the holding costs stay the same, as long as there is an equitable increase in residual value, then the price to the customer stays the same.”
As with all areas of vehicle leasing, there have been technological developments in the last 10 years which could potentially revolutionise the market. As well as data being transmitted from the vehicle itself through telematics, the sales process is being updated through concepts such as online portals.
On the effect of technology on HGV leasing for Volvo, Jaeger says: “Digitisation and having a smooth customer journey are areas of focus for both captives and non-captives. This may not have changed the fundamental nature of the business, but it has changed the customer experience and made it easier, more convenient, and by that measure has also made it faster.
“Connectivity, electrification and automation are continually changing this industry, and through that having an impact on the financial solution provided. At the end, what is important for Volvo as a group is not just a focus on the financial services aspect, but on all services provided to customers. There is a need to distinguish against competition by having a full suite of services.”
Laflamme says: “Consumerisation of the business space is very real. Business customers now expect a similar experience when they deal with B2B providers, and that’s triggered BNP Paribas Leasing Solutions to invest heavily into its IT systems. We are getting our foundation ready for more self-serve functionalities, a more user-friendly experience and a platform we can build our future on.
“The reality of connected vehicles is surfacing more and more. The big challenge is to avoid creating a data dump and actually find the relevant elements and leverage them.”
Asset Alliance is also planning further roll-outs of new products in the digital sphere. “In terms of finance, there is the implementation of a single-stop platform that enables Asset Alliance to do all of finance, costings and invoicing on a single platform,” Potter explains.
“People are looking to work smarter and harder with the use of technology, and this will enable contracts to be done electronically on a screen. The days of lots of paper being pushed around are definitely reducing, and when these processes can be integrated, the efficiencies and the pace of response are a lot, lot quicker.”
This has been a roaring market for the leasing industry for a decade, but there may be signs of a slowdown in the coming years.
The reaction of the leasing sector has not, however, been one of fear, but an awareness of the need to adapt to an ever-changing market, and that despite concerns, this can still be an area in which healthy margins are possible.
Issues from Brexit to the ULEZ may be cause for attention, but they are no reason for the wheels to come off in this competitive and still dynamic arena.