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Can leasing speed up LEV uptake?

By / 5 years ago / Features / No Comments

It’s probably true to say that the motor industry has never been faced with as much change as it has been for the past few years, at least, not since its beginnings in the late 19th Century. Whether or not we like the idea of vehicles powered by alternative fuels, there is no doubt that we will have to get used to it.

Our conventional fossil fuel reserves are being depleted, but may still be fuelling vehicles for a significant proportion of this century. We may be able to use alternative fossil sources, such as shale gas, but like oil, these resources will be finite. Applying Hubbert’s Peak theory suggests that as supplies dwindle, price will become less stable, like we have seen in recent years.

This will certainly be one incentive for manufacturers to seek out alternatives. With these comes additional cost. Battery electric vehicles are currently dependent on rare and expensive metals for battery manufacture, which adds significantly to the price of a vehicle. Hybrids inevitably bring additional cost as they incorporate an internal combustion engine and electric motor, with a battery pack similar to that in an electric vehicle, but smaller, depending on the hybrid technology used.

Hydrogen fuel cell vehicles will carry a cost penalty to cover the cost of developing the technology and possibly equipping vehicles with batteries similar to those in an electric or hybrid vehicle.

There are other examples we could use, but we must also consider conventionally fuelled petrol and diesel vehicles. In Europe, Euro 6 compliant vehicles will become a reality in 2014. New heavy commercial vehicles are already affected, although it will be January 2014 before all vehicles must comply.

The sizeable reductions in emissions of oxides of Nitrogen (NOx) for diesel vehicles means that selective catalytic reduction (SCR) exhaust aftertreatment, similar to that used for heavy trucks already, will probably have to be applied to light diesel engines too. This would involve fitting a system for injecting a urea solution into the exhaust stream to react with the gases and reduce the NOx to nitrogen and water, in addition to a particulate filter. Alternative systems are being researched, but whatever system is used will add cost to the vehicle.

This is particularly relevant for Euro 6 compliant trucks and buses, where two aftertreatment systems will be needed, where one has been enough before. The on-cost quoted by a number of manufacturers is in the region of €8,000 – €12,000 per vehicle. US EPA ‘10 regulations have already introduced similar aftertreatment technology on US trucks.

So motor vehicles of all types will continue to become more expensive as more technologies are added to control emissions, or alternative powertrains are introduced. For fleets that would mean the prospect of more capital expenditure, if they buy vehicles outright. It is also a potential opportunity for leasing and finance companies, which could help fleets to reduce capital expenditure. Is an operating lease the best option? Do finance providers need to consider new ways of funding? Are there incidental benefits with these funding opportunities?

A new truck and trailer could cost upwards of €120,000, depending on the truck and the complexity of the trailer. Given the high capital costs, commercial vehicle operators have been more ready to use leasing options than those operating car fleets, as KPMG’s 2011 truck study, Competing in the Global Truck Industry – Emerging Markets Spotlight, has identified. Research for the report suggested that some 45% of new trucks are leased in Germany, compared with 21% of cars. Given that around 33% of a transport company’s costs are fuel, releasing capital by leasing vehicles could help with cash flow, while also ensuring that the operator has new, more fuel-efficient vehicles in the fleet, which in turn could help to reduce those fuel costs. It could also help with budgeting if the operator also has a clearer idea of monthly fixed costs.

Over 20 years of emissions reduction policy has helped to reduce truck emissions. But the reductions could be greater. Leaseurope’s report, The Road to 2050: Truck leasing and rental – An integral part of a sustainable European transport system, highlights the age of many truck fleets across Europe. While newer trucks offer sizeable reductions in toxic and CO2 emissions, there are still many older trucks on the road. If these were replaced with newer vehicles, it would speed up improvements in air quality. This is the rationale behind the emergence of city low emission zones (LEZ).

Leaseurope’s report compares the average age of leased trucks on fleets across a number of European States with the age of the entire fleet. In Germany, the average is 2.5 years for leased vehicles and 6.8 years for the entire fleet, in the UK 2.8 years for leased vehicles and 6.6 for the entire fleet and in Spain, 2.5 years for the leased fleet and 8.5 years across the entire fleet. Leasing could play a significant role in helping to ‘clean up’ and renew truck fleets.

The KPMG report – Global Automotive Finance and Leasing: The role of product diversification and emerging markets in future growth, also points to the many additional services that truck OEMs offer customers besides leasing and finance. These include service products (i.e. maintenance/repair and fuel/service cards), fleet management and mobility solutions.

Cost is clearly an issue for car fleets, particularly when considering battery and hybrid vehicles. It seems that sales of electric vehicles have slumped in a number of markets, despite a reasonable choice of good products that are easy to drive. Cost is not the only issue – concerns surrounding range are also a large factor, but electric vehicles can offer a viable solution for many drivers who tend to cover shorter distances in urban areas or delivery fleets operating in similar conditions and returning to the same base each day, where the batteries can be recharged.

Where cost is concerned, buyers who choose EVs are taking on a risk that is difficult to quantify. The KPMG report Global Automotive Finance and Leasing identifies the high cost of batteries and how different battery chemistries offer different life expectancies, making it difficult to determine residual value. This in turn makes it difficult to determine leasing rates.

Separating vehicle and battery cost and making the batteries available on a lease- only basis could be one way to make the leasing model work, as Renault has chosen to do. This reduces the cost of the vehicle to that of a comparable model with a conventional engine, then offers the batteries on a separate lease using a fairly standard distance basis for calculating the cost.

Recently new methods of financing mobility have become available or are in the development stage. Peugeot, for instance has introduced its Mu scheme in many city dealers across Europe. A driver can sign up to the Mu rental scheme, by setting up an account, which can be done online, then buy credits which can be used to rent a range of vehicles, or a bike, a scooter or even an accessory such as a roof box. The Mu account is then debited accordingly.

The scheme allows the account holder to rent any Peugeot vehicle according to their needs and as consumers look for new and more flexible mobility solutions, variations of such a scheme for more permanent users could provide an alternative.

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