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State of the Australasian Fleet Market

The three OEMs assembling vehicles in Australia will stop production and transform themselves into national sales organizations selling imported models. Also impacting the Australian economy are soft commodity prices.

December 2015, by Mike Antich - Also by this author

Source: ACA Research
Source: ACA Research

Dramatic changes are occurring in the Australian automotive industry. First, Ford announced it will stop assembling vehicles in Australia in 2016. Similarly, Holden and Toyota announced that they will cease local vehicle production in 2017. When this occurs, it will transform Australia into an import-only market for every manufacturer selling vehicles in the country.

WEST
WEST

“The iconic 150-year-old Holden brand is undergoing a significant transformation,” said Gary West, corporate sales manager, General Motors International Operations. “Holden will move to a national sales operation by the end of 2017.”

As part of this transformation, Holden will launch 24 new vehicles over the next five years in Australia and New Zealand. It will also retain a significant engineering presence and continue to operate the iconic Lang Lang Proving Grounds in Victoria, to ensure Holden vehicles continue to be tuned for the unique driving conditions in Australia and New Zealand.

“Holden’s strategy is to continue to be a dominant player in Australia and New Zealand (ANZ), which requires the best products in the right segments. This year, Holden is bringing to Australia three European-sourced vehicles — the Holden Astra Compact, Cascada Soft Top/Cabriolet, and the Insignia Midsize,” said West.

Fleet Industry Highs & Lows

Being a mature market, the key economic factors that drive demand in Australia include the prevailing interest rate, availability to finance, current and expected rates of general economic growth, and the level of government and consumer spending.

During the first six months of calendar-year 2015, there was volatility in the Australian fleet market.

“The fleet industry has had its highs and lows in line with volatile business and government activity. The resources boom and the construction industry, while marginally softer than same time last year, was not enough to hold back the economic pressures of a global downturn,” said West.

The key vocational (fit for purpose) fleets are in the following industries: natural resource extraction (mining), construction, and utilities. The mining industry is experiencing some decline in fleet acquisitions due to operational cost cutting. The price of Australia’s key commodities — such as iron ore, gold, and coal — remain, largely flat, although there have been signs of pricing strength in recent times.

“We’re seeing some challenges to the overall industry. Australia’s key export is its resources and China consumes a lot of those resources, so the extraction and mining industries are being challenged at this moment in time,” said West.

The current sluggish Chinese economy, and a corresponding decline in demand for raw resources, is prompting Australian mining companies to cut back on expenses, which is affecting the number of vehicles the industry is purchasing.

While there may be some relief at the pump for motorists as oil prices have fallen, it has also put more pressure on liquefied natural gas (LNG) producers to contain costs. One reaction is that mining companies have cut back on staff and exploration dollars.

The fall of crude oil has strengthened the position of gasoline in Australia, in turn, significantly reducing the sale of LPG-powered vehicles, which have been seeing significant growth over the past five years due to significant availability at the fuel station.

“However, we believe prices will increase at some point, allowing for continued growth of alternative fuels,” said West.

The natural resources extraction industry is a significant segment of the Australian economy. The slowdown in business activity in this segment, due to decreased demand and lower commodity prices, is impacting other local businesses, which is resulting in less demand for fleet vehicles, as most of these companies are working to cut back expenses as their business activity faltered.

However, the Australian fleet market is broad based, and, while some sectors may be retrenching, other segments are expanding.

“The additional fleet value-added services offered by fleet management organizations (FMOs), such as customized fleet management and service options, including novated leasing/salary packaging, are adding further impetus to fleet growth and, indeed, the intensity the FMOs have on the industry,” said West.

Other market factors positively influencing the Australian economy are exchange rates for the Australian dollar and interest rates.

The Australian economy is such that the once stubbornly high Australian dollar has fallen to more appropriate levels, providing a much needed buffer for many resources sector exports.

Current interest rates and taxation rates are favorable to fleets. “The Reserve Bank of Australia has set the base interest rate to a record low of 2 percent, which is considered to be very favorable to the industry, in terms of taxation incentives,” said West.

The biggest challenge reported by Australian fleet managers is reducing total cost of ownership (TCO), as their management exerts ever-increasing pressure to contain fleet costs.

Vehicle Acquisition Trends

Holden currently sources products from Australia, South Korea, Europe, and Thailand.

“The Holden team is working hard on its future product lineup, which includes the continuation of the iconic Commodore nameplate, along with new and exciting products from GM’s global portfolio,” said West.

Large cars are expected to continue losing market share as total cost of ownership make large passenger car operation more expensive.

“The mid-size segment has also lost market share, as fleet operators opted for compact passenger cars to save on running costs, a trend that is expected to continue,” said West.
SUVs have gained market share, particularly over the past five years, due to their popularity among both retail and fleet drivers, stemming from perceptions of social status and safety.

“These vehicles are popular despite high fuel prices that have made their operation expensive, which has led the way for growth in the compact SUV segment that can deliver lower running costs,” said West.

In Australia, order-to-delivery (OTD) times range from one to three months, dependent on model. “Holden works closely with its fleet customers to ensure their requirements are met, especially with the resources/mining project base purchases,” said West.

Popularity of Novated Leases

One unique funding method in Australia is the novated lease. A novated lease allows companies to improve salary vehicle packaging for staff, while transitioning away from “benefit” company-supplied lease vehicles. Essentially, it is an individual employee lease, but paid for by the client company via a pre-tax salary deduction from the employee. The tax income and goods and services tax (GST), purchasing, and disposal benefits for the employee are significant, while the client company holds no responsibility for the vehicle if the employee should leave the organization at any stage.

Salary packaging/novated leasing is a growing segment for the fleet user/chooser as fleets downsize and take their assets off the balance books. In the past, employers traditionally only offered novated leases to their middle or senior managers. Now, the trend is to include all staff. Some companies are using novated leases as an employee recruitment tool.
While novated leasing has distinct advantages for businesses looking to reduce risk and responsibility on discretionary benefit vehicles — a common trend over the past 10 years – it offers substantial benefits in motivating salary packaging and engagement for all staff within an organization, creating fleet growth potential far in excess of the traditional company vehicle fleet.

Fleet Market Conditions

Fleet sizes in Australia can range from small and medium enterprise fleets of fewer than 20 units to mega-fleets exceeding 1,000 vehicles. Larger fleets tend to be more prevalent in the fast-moving consumer goods, telecommunications, logistics, and utility industries. One key component of the Australian fleet market is “tool-of-trade” vehicles, known elsewhere in the world as utility or work vehicles.

In Australia, the average fleet size ranges from 75 to 100 vehicles. The key fleet segments are:

  • Mining and construction industries, which primarily use light commercial vehicles (LCVs) and SUVs.
  • Telecommunications and utility industries, whose fleets are comprised of passenger cars and LCVs.
  • Daily rental, which primarily uses passenger cars.
  • Political subdivisions, such as federal, state, and local governments.

Australian Resale Market

The key remarketing channels in Australia are auctions, wholesale tender, retail yards, and novated lease remarketing.

“There are several powerful factors that will influence future vehicle depreciation trends in the Australian market,” said West. “A key factor has been the news that the three locally producing OEMs will cease production by the end of 2017, which will have some short-term negative impact on residual values on some locally produced vehicles,” said West. “However, we are confident that Holden’s future product portfolio will appeal to both the retail and fleet buyer in terms of product appeal and TCO.”

Forecast for the 2016-CY

“Because of the recent declines in equity markets, we believe the fleet market in Australia will continue to stay flat,” said West.

New Zealand:

Fleet Market Conditions

The fleet market in New Zealand is relatively small due to the country’s small population and mountainous terrain on the South Island. New Zealand is a mature fleet market with more than 90 percent of businesses classified as small and medium enterprises.

Company ownership is very prominent in the traditionally conservative New Zealand market; however, leasing is becoming increasingly popular with businesses with an international ownership model.

In addition, new-vehicle registrations in New Zealand are supplemented by large numbers of used-vehicle imports, predominantly from Japan.

Although a close neighbor to the larger Australian market, the New Zealand market has different market dynamics.

One difference is that New Zealand’s core industries are not based on extraction, which means that current market conditions remain very strong in all segments with little or no impact to fleet sales. “Year to date industry performance for 2015 is at 99,557 vehicles sold compared to 94,350 for the same period last year,” said West. “We’re certainly seeing the industry numbers and the Holden numbers backing that up. The effects of China and the economic issues that they’re going through haven’t had any effect on New Zealand.”

Source: Government of New Zealand
Source: Government of New Zealand

The average fleet size in New Zealand is from 20 to 30 vehicles, with vehicles being operated in both the North and South islands.

As with Australia, the SUV segment is strong and experiencing some downsizing in terms of engines, going from six- to four-cylinders and segment shift to more compact SUVs.
Holden New Zealand currently sources product from Australia, South Korea, Europe, and Thailand. OTD times range from one to three months, depending on the model.

“Holden works closely with its fleet customers to ensure their requirements are met,” said West. “The Holden transformation incorporates New Zealand operations, making the next few years an exciting time for the brand.”

The key vocational markets (fit for purpose) in New Zealand are construction (trucks and LCVs), forestry industries, and dairy. Other key fleet buyers in New Zealand are multinationals and the government.

The only economic segment in New Zealand currently being challenged is the dairy industry, which is comprised of a large co-operative called Fonterra, representing approximately 13,000 farmers.

“If you think about 13,000 farmers and the trucks that they need, that’s starting to have an effect on fleet sales,” said West.

The New Zealand dairy industry is huge, exporting 95 percent of its product and accounts for 30 percent of the total dairy market globally. “There have been some year-over-year reductions in purchases from the dairy industry,” said West.

Current vehicle depreciation trends in New Zealand sees the large car segment is continuing to contract. “But, Holden NZ is confident that Holden’s future product portfolio will appeal to both the retail and fleet buyer in terms of product appeal and TCO,” said West.

Fuel Price Trends

Currently, the trend among fleets is the downsizing to smaller vehicle segments and engine displacements with a preference for gasoline for passenger cars and diesel for LCVs.

“The fall in oil price has diminished the diesel value proposition, with prices at the pump not justifying the cost differential of the diesel engine,” said West.

About the Author

Mike Antich is editor of Automotive Fleet magazine, published by Bobit Business Media, and conference chair of the Global Fleet Conference held in North America. He can be reached via e-mail at [email protected]

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