Automotive Messenger

02 Quarter 1 2015 starts with a bang!

03 Grant Thornton Professor of Automotive Management

04 Finance products

07 News snippets

09 Registration data

Contents

Records keep tumbling – where to next?

April 2015

It was looking quite ominous at one or two points during the month of March, but when the final results were added up, March 2015 became the best month for passenger car registrations this century. Therefore March takes the accolade of the best month since twice-yearly number plate changes were introduced in 1999, 16 years ago.

The SMMT headlined in their press releases the ‘contribution of

automotive to the UK economy’ and later ‘whatever the general election result, the new government must keep up the commitment to the sector which is delivering at home and abroad’. Exactly how a vocal trade body should be lobbying – and a reflection of the nervousness around political change slamming policies and working practices in to reverse at speed.

In this edition of Automotive Messenger, we announce our new sponsorship at the University of Buckingham, introducing the latest member of the ‘team’, Colin Tourick who takes up the post of Grant Thornton Professor of Automotive Management. We are very excited about this collaboration and look forward to reporting further developments in future issues.

We take a more detailed look at the

Tarun MistryT +44 (0)20 7728 2404M +44 (0)7966 432 299E tarun.mistry@uk.gt.com

Neil BarrellT +44 (0)20 7865 2700M +44 (0)7976 550 312E neil.barrell@uk.gt.com

Bill Parfitt CBET +44 (0)20 7385 5100M +44 (0)7528 870 341E bill.parfitt@uk.gt.com

Paul BurrowsT +44 (0)1908 359 554M +44 (0)7850 538 309E paul.v.burrows@uk.gt.com

March registrations and consider the equally impressive boom in commercial vehicles. European registrations are covered again to March and we have the usual snippets for your enjoyment. We had a very successful, and inaugural, webinar this month looking at the hot topic of PCP (Personal Contract Purchase). Chaired by Paul Burrows, our panel of Colin Tourick, Bill Parfitt formerly VP GM Europe and Richard Parkin formerly EuroTax Glasses shared their collective view and answered questions from the live audience. The debate was lively and the topic a real hot potato.

As ever, please enjoy your read and do not hesitate to contact a member of the team if you have any burning issues.

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Finance products – their structure and influence on the market

What makes PCP attractive?All the important economic factors have aligned themselves to create the ideal environment for PCP to grow into the core product it has now become. Low interest rates, favourable exchange rates, improved credit performance and robust used car values have all served to make PCP the ideal product. In so far as the ‘private’ element of new vehicle registrations, or roughly half the annual total, goes, the consumer is enjoying the benefit, the finance companies are going great guns and the retailers are enjoying the shortening of the change cycle to generate more sales and the increased associated service products that sit alongside. There are dangers as we note elsewhere in this edition – volume comes at the expense of margin and that could quite easily flip to a problem situation.

Nonetheless, PCP is something to enjoy whilst all the economics work. If you visit our webinar link, you will see the range of views and visions, so we have not repeated them here. But the ‘private’ side of new vehicle sales is only half, the other half belongs to the world of ‘fleet’, and in particular, the leasing

and contract hire market. Interestingly, this half also contains products which are often more, or at least, as relevant to private new vehicle buyers. It is just that PCP is so attractive they may not be competitive enough.

The pricing conundrumMotor finance and leasing companies have enjoyed very good trading conditions in recent years for the same reasons covered above. Competition has, however, been fierce and retention performance has been built around absolute levels of service and pricing. Frankly, the latter has started to grow in importance and this has been seen in many industries where pricing is not a ‘one size fits all’ issue. There is flexibility but it has to be competitive.

In the last decade pricing has undergone something of a revolution in many markets though not in ours. We need only go online to buy a book, plane ticket or to book a hotel room, to realise that prices are much more dynamic than they used to be. There are far fewer fixed prices; prices are continuously being modified to reflect demand and supply, in some cases

changing every couple of weeks but in other cases this happens every day or even more frequently.

This is happening because those vendors are trying to hit the pricing sweet spot: the price that is as high as possible whilst maximising the probability of winning the sale.

Fifty years ago, economists Granger and Gabor asked consumers how much they would be prepared to pay for a product. They then increased the price until the consumer said no. They developed this chart, which shows the optimum price point for anyone selling a fairly standardised product to multiple buyers. It plots the total revenue the supplier would earn at different price levels. It works for vendors of consumer goods and also for leasing and motor finance companies selling Contract Hire (CH) or PCP.

Pricing is a key consideration for all asset finance businesses and Colin Tourick has developed a particular specialism in the way that Automotive Finance and Fleet Leasing companies carry out their pricing. Colin discussed some of the issues with the editorial team.

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Finding and utilising the ‘sweet spot’The ‘sweet spot’ in the chart above is the price at which total revenues are at their highest. The question is; how to determine the sweet spot? The answer differs depending on which financial product you are selling.

Lets consider one product: Contract Hire (though the principles are similar for PCP price setting by the Finance Companies). If you check how many quotes are issued every month by a CH provider, and see how many of these turn into orders, you might be surprised. Quote conversion rates are quite low for a variety of reasons, including, the fact that clients shop around and get several quotes for each car.

If the CH provider has conservative residual values (RVs) or over-determined service, maintenance and repair (SMR) budgets, it will certainly find itself losing out, though as it happens few Leasing or Finance companies go to this level of detail and modify their prices according to the ‘competitiveness’ of their RVs and SMR budgets. But when they do, they get good results.

This approach can be enhanced by plotting the ‘competitiveness’ of the RVs and SMR budgets against actual success in converting quotes into orders. So, for example, if the CH provider has a model where RVs and SMR budgets are competitive and a high proportion of quotes are converting into orders, that’s the time

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to nudge up margin. Where RVs and SMR budgets are uncompetitive and relatively few quotes are converting into orders, this should be the time to consider lowering the margin, because there’s no point in quoting high and losing too many deals.

A number of CH providers (and Lessors/Finance providers) have started adopting these approaches, using the data they already hold in-house to gain useful insights into how to price the next deal. These methods can be highly sophisticated; tailoring the rental perfectly for an individual client, a particular model, for a specific term and mileage and taking into account recent experience in quoting to that specific client, similar clients or all clients.

Source: Clive Granger and André Gabor, 1965

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The benefits to be gainedUltimately a CH provider should aspire to be able to calculate the optimum price to quote in every situation; a price governed by real insight rather than gut feel, and modified in real time according to the success in issuing the most recent quotes in identical situations. If this is successful, Messrs Gabor and Granger will be applauding.

Colin has carried out a lot of work in this arena, and is like most of us, coming to grips with the fundamental performance drivers and the world of PCP. Pricing in the world of Fleet is very similar to Private consumer-land, albeit credit scoring influences headline rates more for the latter. What is clear, as Colin notes, is that “Finance and the motor vehicle are inextricably related, they create the demand environment together, and pricing strategy is key”.

PCP webinarThis edition of Automotive Messenger has more than one reference to Personal Contract Purchase, or PCP, products. We have been asked by many stakeholders in the industry to pass comment on the rise and popularity of this finance product for new vehicle sales. On 23 April we held a webinar on this subject, chaired by Paul Burrows and with panellists Bill Parfitt, Colin Tourick and Richard Parkin.

All of the panel come from an industry background and have touched PCP from many different angles. Bill was the former UK MD of Vauxhall Motors and VP General Motors Europe so understands how the manufacturer sees the opportunity. Colin’s CV is noted elsewhere in this edition and he brings to the table a vast amount of knowledge from the Leasing world. Richard is the former Head of Valuations at EuroTax Glasses and so has intimate knowledge of residual value management, a fundamental part of PCP management.

Below is a link to the webinar which lasts around 40 minutes and includes a number of questions from the audience watching online. You will enjoy a lively debate and see that the topic brings with it many differing points of view. We will continue to develop our thoughts on the subject matter as the year unfolds, and will be happy to discuss any issues you may have, just contact one of the team.

http://responsive.policyreview.tv/video/1024/7886