With the coronavirus (COVID-19) causing huge problems for the automotive industry, Chief Commercial Vehicle Editor, Andy Picton considers the implications for residual values in the Light Commercial Vehicle (LCV) market.

New Market

With the Society of Motor Manufacturers and Traders (SMMT) already expecting the new LCV market to contract 4.8% in 2020 with a further 1.8% decline in 2021, a sustained weakened economy, whether globally or nationally, will hit predictions harder and could potentially lead to a recession.

Production at plants across Europe has halted as a mixture of parts shortages, staff welfare and confirmed cases of COVID-19 have combined to cripple manufacturing in the automotive industry.

The escalating pandemic is likely to result in a large drop in consumer confidence and spending, especially for big ticket items such as new and used light commercial vehicles. China recorded a 79% fall of new car sales in February, as shoppers stayed at home and dealerships closed their doors.

Ordinarily, new vehicle demand suffers more than the used market when the economy is under pressure. However, these are unprecedented times, with the coronavirus likely to impact new vehicle supply in other ways. As plants close and production lines come to a halt, there will be the obvious lack of available stock. At this stage, nobody knows how long the production lines will be at a standstill, whether it be weeks or even months. Inevitably, this will lead to longer lead times.

A shortage of new stock may result in list price increases, discounts withdrawn and tactical registrations reduced. Whilst a shortage of spare parts could hamper vital logistics moving medicines, food, fuels and equipment whilst also potentially affecting the work of the emergency services.

Today, there is new stock available in the UK, with rental companies receiving high enquiry volumes from cleaning companies, couriers and pharmacies as companies seek alternative means of helping the UK through the crisis. Additional vehicles will also be required as supermarkets increase the number of home deliveries.

On the downside, fleet registrations are likely to reduce as companies cut or reduce investments due to the uncertainty. This will result in a drop in vehicles entering the used market in 2-3 years.

Used Market

With supply and demand heavily driving performance, any extra vehicles entering the market as companies lay off staff is likely to upset the equilibrium.

Due to ‘self-isolation’ and ‘social distancing’ orders, auction houses have had to close until further notice, leaving the trade in the difficult position of not being able to buy new or sell their existing stock. With the possibility of a small exception of vehicles that may be allowed to be sold for home shopping or pharmaceutical deliveries, there are vehicles up and down the country not generating revenue.

For all small businesses, a prolonged stop in trade will result in huge cash flow problems. When the market reopens, replacing their existing fleet will certainly not be high on their list of priorities. Sales of used vehicles through retail outlets and websites would also be minimal, for similar reasons.

Rental companies will also come under pressure to de-fleet vehicles, returning them to OEMs if they can, as the pandemic dramatically affects most mobility industries.

Residual Values

In terms of residual values (RVs), any drop in the new vehicle supply, due to a recession for example, would normally lead to an increased demand and strengthening of RVs for late year used stock, especially those models subject to long lead times, such as chassis conversions or those with specialist equipment.

These types of vehicle could well be in demand again as the country readjusts its focus on keeping the country supplied with vital provisions.

Should rental companies also de-fleet, this will increase the supply of sub 12 month old vehicles. Finding buyers will be challenging. Any increase in the supply of late year stock in addition to the reduced demand for vehicles, will likely result in a decline in RVs.

With the UK in lockdown, buying a used van will not be a priority, or even an option, for most consumers right now. 

From recent research, we have already seen an 8,000 unit increase in the overall numbers of LCVs available in the used market since the first week of March. This does not bode well. As stock sits idle and the backlog of end of contract vehicles grows, any oversupply will lead to pressure on values.

The underlying resilience of the economy will be the key factor in how quickly the commercial vehicle industry and its values recover.

• In the best case, there will be a short, sharp hit to the market, but the underlying resilience of the economy coupled to government stimulation will see a speedy recovery.
• The medium case will see a short term decline, followed by a longer period of flat/slow recovery as consumer confidence and buying power is squeezed. The underlying economy struggles to recover, similar to the last financial crisis.
• In the worst case, the economy could be severely damaged, with many European Countries requiring huge bailouts and the global economy taking many years to recover.

There is the likelihood that demand will decline, and with it, values in the short term. The CV team at Glass’s is currently predicting values to drop by more than the seasonal norm over the coming weeks. Our short-term forecasts for the coming months are also likely to fall however, our longer-term forecasts are likely to remain broadly unchanged.

When the light commercial vehicle industry does return to anywhere close to normality, we expect there to be a good level of pent-up demand, which coupled to the shortage of new LCVs, will be positive for prices of used stock.

We will continue to monitor our regular trade and retail data feeds, as well as our industry contacts for opinion over the coming weeks, to ensure our values remain as relevant as ever in these uncertain times.