Fleet News

European fleets face residuals 'meltdown'

EUROPEAN fleets are heading for a residual value meltdown as the European Union opens its doors to new member states.

This dark forecast was one of the conclusions to arise from the launch in Brussels last month of the new Credit Suisse First Boston New Car Price Index and Eurotax Residual Index. The indices reported 'a close correlation between residual and new car prices'.

'The level of residual values is first of all dependent on the price of a new car. The higher the index for the new car is, the higher is the probability that also the residual price index is high,' they said.

New car prices in Italy, for example, are 96% of the European average, and residual values in Italy are 96% of the European average. In Germany, new cars cost 99% of the European average, and residual values are 101% of the European average.

And in the high price market of Portugal (23% above average) residual values are 30% above the European average. Differences of this magnitude in new and used car prices pose two risks for fleets.

Firstly, new car prices (certainly pre-tax) will harmonise downwards - in competitive industries price harmonisation is almost always downwards - thereby driving down residual values.

Secondly, more entrepreneurs will trade used cars cross-border, taking cars to markets with high residual values and then undercutting local prices.

Both these risks will increase if the EU opens its doors to new member states with cheap new car markets. The CSFB New Vehicle Index reports, for example, that retail new car prices in both Poland and the Czech Republic are 12% below the European average.

These two countries are likely to be in the first wave of new entrants to the EU, and could join within five years given the European Commission's determined enlargement policy.

'We must pursue our enlargement strategy. The Commission expects the first new members to join before the end of its mandate ,' said the EC's 'Strategic Objectives 2000–2005'.

If countries like Poland and the Czech Republic do join the EU they will bring further downward pressure to bear on western new car prices, and fuel uncertainty and potential deflation in residual values. (August 2000)

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