MANUFACTURERS face the deferral or cancellation of huge orders as leading daily rental companies delay the replacement of their fleets until prices strengthen in the nearly-new car market. The weakening residual values of ex-hire cars have severely damaged rental company profits throughout 1998, with lower and upper medium cars now fetching £1,200 less at disposal than in December.

One rental company has suspended all acquisitions from a key supplier until the used car market picks up, and others have warned fleets to expect a shake-up in the structure of car hire pricing. The trouble stems less from the supply of nearly-new cars than demand for them.

This year's nearly-new market is set to be no higher than 1997's figure of 400,000 units, although second-tier fleet manufacturers have been quick to take up the slack left by the reduction in fast-cycle business at Ford, Vauxhall and Rover, according to Mark Cowling, chief economist at CAP Motor Research.

But demand has fallen due to a raft of special offers - from 0% finance to free insurance and servicing - designed to stimulate the retail new car market. These have cut the price of de-fleeted rental vehicles in order to re-establish a price differential between new and used cars, but residual values are being further undermined. Dealer group Reg Vardy, for example, is advertising old-shape S-reg Vauxhall Astras with the catchline 'Registered but never used' for £4,075 below their official list price.

This type of offer has a depressive effect not only on the residual value of ex-rental Astras, but also on the prices of all nearly-new lower medium cars. The situation is now so serious that rental companies are deferring the acquisition of thousands of new cars, preferring to keep their existing fleets for longer.