Nobody Asked Me, But...

Yes Virginia, There is Depreciation

March 1, 2017

by - Also by this author

Operating costs for fleets have been flat for a while. Vehicles cap costs have gone up and fleet incentives have been less than impressive but the relentless drive for efficiency has kept costs in check for most. Telematics has helped. Lower fuel prices have helped a lot too. Right sizing fleets has helped. Downsizing vehicles has helped. But the biggest contributor to the bottom line has been depreciation, or more aptly, the lack of depreciation.

It’s hard to appreciate the lack of depreciation after so many years. The uninterrupted bull market in used vehicles has continued unabated since 2009. There were a few brief moments where we thought things were going to turn south but used-car demand always picked right back up and the market just kept chugging along. The extreme reduction in new car sales from 2009 to 2012 did a lot to prop up prices, as well.

The OEMs just didn’t produce enough new cars and trucks so used vehicles just didn’t lose value like they were supposed to. We were back to a 15 million unit market by 2013 and surprisingly the market held up. And then we were at a 16 million market, and the market held up. And then we hit 17 million units, and the market held up. And now, after a couple years at 17 million, we are starting to see cracks in the market. Prices are getting soft and not just in one or two vehicle categories. We have seen periods where small cars do poorly or large vans do poorly for a few months. But this time it’s almost across the board.

There isn’t any suggestion that the used vehicle market is going to fall off a cliff. But that doesn’t mean that returning to historical norms won’t be painful. It also means that vehicle selection is going to be more critical than ever. Picking the right category of vehicle is important but picking the right OEM is crucial too. You can look at Vincentric or ALG data and see some real differences in depreciation within a vehicle category.

Every OEM has a strategy for surviving and growing. Sometimes that strategy is to sell more vehicles by whatever means necessary because there are sales targets to hit. Sometimes that strategy is selling as many vehicles as the market needs but not producing incremental units if it means having to cut prices to maintain volume. Some look at rental fleet as a great way to expose their vehicles to the public and generate some interest through what is essentially a paid test drive. Others look at rental as a place to make up for shortfalls in retail sales. Knowing your OEMs thoughts on these issues will go a long way toward making your own residuals more predictable.

Depreciation is a necessary evil in our industry. Knowing your risks and knowing your OEM partners won’t make depreciation go away but it can make it more manageable. Getting ahead of this problem might even generate some senior management appreciation for your ability to handle depreciation.

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Sherb Brown

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Sherb Brown is the vice president and group publisher for BBM's AutoGroup. Sherb has covered the auto industry for more than 12 years in various positions with Bobit Business Media.

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