What's going to happen in 2007
10 January 2007
Author: Guy Bird
What has saving the planet, talking on a mobile phone, and China got in common? According to the industry's movers and shakers they're all going to have a major impact on the world of business cars this year. Guy Bird reports
What will make the UK business car market tick this year? The answer, as always where fleets are concerned, is cost, but the issues influencing cost have changed significantly in the past year.
Duty of care was the big issue in fleet circles at the end of 2005. At the end of 2006 it was environmental concerns, especially after the autumn publication of two key reports conducted on behalf of the Government - the Stern Review on climate change and the Eddington Study into sustainable transport. You don't have to be a clairvoyant to see that the signs are that increasing numbers of motoring taxes will be CO2-indexed - beyond the existing company car tax and VED to London congestion charge scaling and road tolls.
Everyone we spoke to listed the environment in their top three of issues that will effect the business car market in 2007. Last year it barely registered. This mood is echoed in GE Fleet Services' most recent Company Car Trends survey. Eco concerns are expected to be the third most important influencer during the next 12 months according to 90% of respondents, just behind duty of care (92.8%) and fuel prices (92.9%).
Managing director at GE Fleet Services, Rich Green, believes fuel's top billing was due to the short-term fuel price rises in the summer, and reckons it will remain a hot topic with duty rises announced in the Pre-Budget Report and further rises likely. "Fuel is an area in which fleets will continue to take a high degree of interest, especially as a fuel-efficient fleet is also a greener fleet. The two subjects are clearly linked," says Green.
Although duty of care is still a 'top three' issue, fleets are further advanced with coping with its main thrust - to reduce at-work driving risks - so its importance as a new issue to face is less than last year.
“While the industry has talked about green issues for more than a decade, we could finally be at the tipping point where widespread action is taken”
Rich Green, GE Fleet Services, on the environment
Green neatly sums the shift: "The next two years in fleet will belong to environmental concerns in the same way the last two have belonged to duty of care. Many fleets are in a similar position with the environment today to where they were with duty of care a short time ago. While the industry has talked about green issues for more than a decade, we could finally be at the tipping point where widespread action is taken."
Three-quarters of the GE survey's respondents say they now include eco impact when drawing up fleet policy. and the trend is only set to continue. This could mean an even greater focus on framing fleet car choice lists by low CO2 emissions and incentivising employee car allowances via a CO2 threshold. It could also mean better planning to minimise business miles, car sharing, video conferencing and carbon offsetting too.
Whatever group of policies is chosen, senior car editor at Glass's Guide, Jeff Paterson, reckons used values for heavy-emitting cars will inevitably suffer: "The writing seems to be on the wall for the big stuff. A lot of new SUVs are now entering a 4x4 market that is just starting to show signs of wobbling."
An '07 eco backlash?
While saving the planet is obviously desirable, a few big names in the industry are worried this new green focus may be penalising the car industry too heavily, and it's possible that dissenting voices will become greater in number this year. Although broadly in favour of some of the proposed green legislation, Nigel Stead, MD of Lloyd's TSB Autolease, worries that the cost to industry could risk making UK firms uncompetitive. "It's laudable to take an environmental lead, but it's no good if the rest of Europe (never mind India and China) doesn't play its part," he says.
“Large companies are under political pressure to respond but it will be individual self-interest that will hold sway”
Jon Walden, Lex Vehicle Leasing, on the environment
Others are more forthright. The SMMT's chief executive, Christopher Macgowan and the director general of the BVRLA, John Lewis, dispute the various Government-backed reports on the true cost of motoring to the environment. "It's a fallacy that motoring is too cheap," says Macgowan, while Lewis goes further, saying "the emphasis on CO2 is just a façade for increasing motoring taxes. You can pollute as much as you like in this country as long as you can afford it. Are CO2 taxes about pollution prevention or revenue-raising? If you wanted to stop pollution you could simply put a CO2 pollution limit on the cars you can sell in the UK. But that would be politically unacceptable."
That scenario seems unlikely, and nearest thing to it that already exists - Euro4 and Euro5 emissions standards - only police exhaust pollutants other than CO2. Jon Walden, the MD of the UK's biggest contract hire player, Lex, and arguably the most influential person after Gordon Brown in the business car industry, is also annoyed at the mainstream national media's lack of informed debate about the green issue in relation to transport. Lex was an early adopter on environmental best practice with ISO14001 and Walden has faith that economics will find the answers before social consciences do.
"The reality is that the UK is hugely dependent on vehicle transport and the other forms of transport are not very good. Large companies are under political pressure to respond but it will be individual self-interest that will hold sway," said Walden, who cited an employee who has just switched to a hybrid vehicle to save tax.
Government planning please
What all the industry agrees on is the need for Government to set a clear strategy, so the various players can plan. New chairman of the Association of Car Fleet Operators (ACFO) Julie Jenner states: "Fleets are looking to the Government for a joined-up co-ordinated strategy. Ending the PowerShift [grants for alternatively-fuelled vehicles], while preaching the importance of environmentally friendly transport left many fleets up a 'green' cul-de-sac."
“The writing seems to be on the wall for the big stuff. A lot of new SUVs are now entering a 4x4 market that is just starting to show signs of wobbling”
Jeff Paterson, Glass's Guide, on used car values
Hints at more tax breaks for biofuels in 2007 were made by Chancellor Gordon Brown in his December Pre-Budget Report, but they only extended to company car tax, not further fuel duty rebates. No-one predicts a big take-up of biofuels next year until any of those potential sweeteners are finalised, which is frustrating for the likes of Ford and Saab who already offer flex-fuel vehicles able to run on bio- and conventional fuels. As Ford's director of fleet operations, Kevin Griffin, says: "Everybody talks about wanting to be green and biofuel cars are available now, so why not get on with it?"
Unfortunately, again, even the idea of putting a 5% blend into all conventional petrol and diesel - something that could make a huge CO2 impact overnight and is feasible without modifying existing engines - may not happen. The reason according to the BVRLA's Lewis - as told to him by an unnamed Government official - is that such a move could involve, in the short term at least, buying large amounts of biofuel from France, which represents a massive bonus to our cousins across the channel that the UK Government is apparently reluctant to endorse. Whether true or not, it suggests the path to a green future in 2007 has more than practical hurdles to overcome.
What price petrol or diesel?
After years of diesel growth in the UK encouraged by company car tax favouring the fuel's lower CO2 output, the onward rise seems to be levelling out. The high point was in December 2005 when many fleets rushed to register Euro4 diesels before the 3% benefit-in-kind tax penalty was reinstated. However, sales are still strong with Lex's Walden reckoning on two-thirds of his fleet choosing diesel in 2006.
New Euro5 emissions standards due on new car types from 2009 and all new registrations from 2011 will alter that split because smaller cars may need to fit diesel particulate traps to comply. This could shift three-year fleet car purchasing plans away from diesel and back to petrol from 2007 onwards, especially when - according to the SMMT's Macgowan - the traps could equate to a £600 premium on top of diesel cars' already higher price compared to petrol equivalents.
“Fuel is an area in which fleets will continue to take a high degree of interest, especially as a fuel-efficient fleet is also a greener fleet”
Rich Green, GE Fleet Services, on fuel
The BVRLA's Lewis also expects the five pence per litre differential between petrol and diesel at the pumps to be maintained by the oil companies despite the fact that he believes the extra price paid bears no real relation to supply costs. Indeed, given that diesel is cheaper than petrol in most EU countries Lewis can't help but get a little cynical. "Are the oil companies exploiting customers' desire to go green?" he asks.
Still a duty to care
Keith Allen, MD of leasing outfit ALD Automotive, says managers in 2007 need to remember how intertwined issues such as duty of care and eco concerns are. "These issues must be treated collectively and not individually. One of the many spin-offs of a comprehensive occupational road risk management policy is employees adopting a smoother, less aggressive driving style with harsh braking and accelerating being consigned to the past. Not only does safety improve as a result, but vehicle emissions are reduced, fuel economy and other operating costs are improved and, again, financial benefits come to the fore."
Other new duty of care messages that need to be reinforced to your drivers early in 2007 are the impending toughened-up laws on phone-driving. By the end of spring phone-drivers could have their licences endorsed by three penalty points and a £60 fine (up from a mere £30 penalty notice) while the consultation on the new graduated speeding penalty points (two to six depending on severity) will take place, with the law itself likely to be enforced in early 2008.
Scheming over ECOs
“I love their food but think it will be a long time before there will be business confidence in their vehicles”
John Lewis, BVRLA, on the emergence of China
The Government's delay in deciding what to do about taxing Employee Car Ownership Schemes (ECOs) continues to be a problem for the industry, but some pundits hope that may change this year. It's the key issue for the BVRLA's John Lewis. "At some point in 2007 the Government needs to get off its pot regarding ECO schemes," he says. "It really doesn't understand the impact of its procrastination on the industry in terms of planning and strategy."
Lewis says the Treasury is worried by "permanent losses to the exchequer" from the company car opt-out schemes as some employees avoid benefit-in-kind (BIK) tax by moving to private cars funded via their companies but which still benefit from significant discounts as a result of their firm's group purchasing power. Lewis also says the Government is upset at the VAT and corporation tax benefits those running ECO schemes can profit from, and thinks the Government will try to even things up by taxing the BIK benefit of those discounts. But how can you tax an employee on the private benefit of using a business car that's technically in their name? Lewis laughs: "Why do you think there's been a delay in the announcement?"
Ultimately he thinks the Government may simply choose to make it (even more) administratively difficult, to reduce the numbers prepared to take the schemes on, but hopes it will not be made too hard as he feels there is still a place for the well-run schemes. Lex's Walden reckons the Government may end up not doing anything about it at all, as he says ECOs only represent a very small part of the fleet vehicle parc (some 80,000 vehicles compared to 1.6 million contract hired), and given that there seems to be a move by firms back to company cars because of duty of care - if you fully own the car you can control how it used better.
According to Glass's and Lex, the continuing new car oversupply problem will threaten to depress used car values later in the year. But with 125 all-new models due in 2007 there may be a slight silver lining for end users, as Glass's Paterson says: "With more cars chasing fewer customers, bumper deals are in store for fleets." Indeed, although the whole market is predicted to drop from 2.345m sales in 2006 to 2.315m in 2007, the SMMT's Macgowan says fleet and business sales will continue to prop up the market with 56% or more share.
“If you thought our Japanese colleagues were fast learners 35 years ago our Chinese colleagues are at a whole another level”
Christopher Macgowan, SMMT, on the emergence of China
One potential wild card that may start to exert influence in 2007 is the arrival of the Chinese vehicle industry (which will do no favours for the alleged oversupply problem). Glass's Paterson believes their market entrance will affect Korean brands currently accepted as the value brands and also the 'middle' volume players who could lose customers too. Paterson concedes, however, that in fleet at least, it may be awhile before they are accepted. The BVRLA's Lewis agrees, saying he's already seen perception problems for Korean brands that have been turned down at delivery and specifically omitted from fleet tenders. "China doesn't have a stable supply chain. I love their food but think it will be a long time before there will be business confidence in their vehicles."
The SMMT's Macgowan is not so sure, having enrolled a handful of Chinese automakers to his organisation in the last few years. "If you thought our Japanese colleagues were fast learners 35 years ago our Chinese colleagues are at a whole another level. You'd be hard-pressed to find a more determined set of people."
While green issues and the Chinese could be the new topics making waves in 2007, a familiar prediction to the past few years is further consolidation, with Lex's Walden suggesting that yet another top ten leasing firm may quit the business and sell up to someone else due to economic pressures this year.
In a world when change is inevitable, at least it's nice to have a few changes that are familiar.