More and more companies are looking to save on purchase cost by buying used cars. Ian Hare, Managing Director of Motor Management, takes a closer look at this trend and assesses both the advantages and the disadvantages of such a policy.
Does it make commercial sense?
A growing number of UK fleet operators are utilising second hand vehicles as pool cars and as company cars according to research carried out by Arval. The research reveals that 54% of UK fleets are buying new cars and a further 24% plan to do so in the next three years.
This emerging trend shows no variation across companies of different sizes among those surveyed. However, the UK figure is much higher than the Europe wide average of 29% of fleets operating used vehicles. Why should this be and does this make sense? Will the extra SMR (service, maintenance and repair) costs outweigh the lower depreciation?
I looked at the whole life cost of running a one-year-old used vehicle compared to the total cost of ownership for a brand-new vehicle. The example used was a BMW 330e 2.0 M Sport Automatic. The on the road price for a new vehicle is £48,235 compared to £32,980 for a 12-month 15,000 mile used vehicle at retail money.
SMR
Looking first at the SMR and based on its projected fleet life of three years 60,000 miles the monthly cost is £92.36 per month for the new vehicle compared to £102.94 for the used vehicle, an incremental cost for the used car of £380.88 over its three-year life. A significant number, but is it a showstopper compared to savings on depreciation?
Depreciation
Savings on the used vehicle’s depreciation are significant compared to the new vehicle. The forecast future residual value for the new vehicle is £23,762 while the used vehicle forecast is £18,771 at trade money. Comparing the purchase price of the used vehicle to its forecast residual value reveals a monthly cost of £394.69 per month compared to £679.81 per month for the new vehicle. This substantial saving of £285.12 per month equates to a figure exceeding £10,000 over the three-year life of the vehicle.
True, the calculation is based on the full retail price of the new BMW and if you factor in a discount the depreciation figure would reduce. However, the used vehicle calculation is also based on a dealer forecourt retail price and excludes any negotiation over price. Also, if the fleet operator decided to buy at auction or direct from a de-fleeting rental company, the used vehicle depreciation would reduce also.
The Fleet Operator Decision
Any vehicle acquisition decision should consider the vehicle’s whole life cost/total cost of ownership. This should include fuel calculation, insurance costs, vehicle excise duty, vehicle funding costs, roadside recovery costs and corporation tax. The fuel calculation and insurance costs will be identical for the two vehicles. It is likely that the vehicle excise duty will be the same for annual renewals although this will depend on the age of the used vehicle; however, the new vehicle will be subject to a first registration fee in addition to the first year’s road tax. Funding costs will be greater for the new vehicle but there are likely to be small savings on roadside assistance costs when the free manufacturer assistance package runs out for the used vehicle.
So, the big variables are depreciation and SMR costs. Comparing the saving of £10,000 on the used vehicle’s depreciation to its incremental servicing and repair cost still demonstrates substantial savings through operating the used vehicle.
The trend towards fleets buying more used vehicles is therefore logical and makes commercial sense. However, fleet managers should be aware of subtle differences involved in managing a used vehicle compared to the new vehicle equivalent. Management controls should be implemented to ensure that the used vehicle fleet operates as reliably as the new vehicles.
There is one final caveat. I analysed a one-year-old vehicle with low mileage compared to the new vehicle. Purchasing an older used vehicle, for example a two-year-old high mileage vehicle or a three-year old vehicle, is likely to result in SMR costs which are substantially higher than for the new vehicle. There will still be savings on depreciation, and indeed these savings will probably be even higher; but a new cost factor might emerge in the shape of unplanned vehicle off the road time. Fleets should therefore buy nearly new used cars avoiding older and higher mileage vehicles.
Data Sources
Data has been sourced from the Clear Vehicle Data Whole Life Cost website www.wholelifecost.uk.com
You can also check out high level data at https://www.fleetpoint.org/account/login.php
Author: Ian Hare, Managing Director of Motor Management
