Strong Commercial Sales Drive Australian Fleet Market
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Australian new-vehicle sales hit back-to-back record highs in both May and June 2017. It looks like 2017 is on track to break the 2016 sales record, making it the third consecutive record-breaking sales year.
In 2016, the Australian new-vehicle market reached 1.178 million units, up 2% on the industry’s previous record in 2015.
The Australian Federal Chamber of Automotive Industries reported 134,171 new vehicles (both retail and fleet) were sold in June 2017, up 4.4 % compared to the same month last year.
In June 2017, fleet-specific sales for the light commercial market were up 3,079 vehicles sales (12.2%) and the heavy commercial vehicle market was up by 327 vehicle sales (9.2%) versus June 2016.
In Australia, June is a strong automotive sales month as dealers clear stock for the end of the financial year.
SUVs and utes are powering the Australian market toward a probable record year. Sales of sport/utilities surged 11.7% in June, with the upper large SUV segment rising almost 21%.
Likewise, in the month of May 2017, business purchases of sport/utilities climbed 14.9%, while light commercial purchases by the government rose 31.7%. Sales to rental fleets were also strong during the month of May.
“For the first time ever in the Australian market, passenger vehicle sales have been overtaken by SUV sales,” said George Loukas, director, national fleet for Holden.
SUVs and utes were hot sellers as private buyers and small businesses took advantage of special incentive offers in the lead up to the end of the financial year. The Toyota HiLux and Ford Ranger utes were the top two sellers overall in June as demand for sedans and small hatchbacks continued to slide. Heavy discounts on the Toyota HiLux SR5 and Ford Ranger XLT over the past two months saw record sales for both models.
(For those unfamiliar with the term, an ute is an abbreviation for “utility” or “coupe utility,” which is used in Australia and New Zealand to describe a two-wheel-drive, traditional passenger vehicles with a cargo bed in the rear integrated with the passenger body; as opposed to a pickup truck whose cargo bed is not integrated with the passenger body.)
New-vehicle sales data from the Australian Federal Chamber of Automotive Industries shows that 92,754 vehicles were registered in July 2017. The July figures were up 1.6% from the corresponding month in 2016 and the market as a whole was up 0.4% over the same period in 2016.
In July, Toyota dominated the sales charts with five models appearing in the top 10. The HiLux ute was No. 1 with 3,742 sales, with the Ford Ranger coming in second at 3,076 sales.
In addition to SUVs, luxury vehicle sales are also booming with both BMW and Audi selling just over 2,000 units in July. Mercedes-Benz took the No. 1 spot with sales of more than 2,600 units.
The macroeconomic factors driving 2017 automotive demand in Australia are the prevailing interest rate, finance availability, current and expected rates of general economic growth, and the level of government and consumer spending.
The economy of Australia is one of the largest mixed market economies in the world, with a GDP of AUD$1.69 trillion as of 2017. Australia has a strong economy that is mainly based on services and mining, making it the 12th largest economy in the world. The Australian economy is dominated by its service sector, comprising 61.1% of the GDP and employing 79.2% of the labor force in 2016.
The Australian economy is improving as some earlier headwinds have passed or are fading. Positive trends influencing automotive sales is strengthening in global growth which is moderating the mining sector slowdown; the still relatively low Australian dollar that is boosting exports; low interest rates; an upswing in investments; and a steady population growth.
Nominal GDP growth accelerated to 7.7% in March 2017, up from 1.8% a year earlier, the fastest pace since March 2011.
Australia’s key export is its resources, and China consumes much of those resources. In addition to China, Australia’s other largest trading partners are Japan, Thailand, South Korea, and Germany.
During the boom in commodity demands (and prices), there was massive growth in the Australian mining industry resulting in an investment surge in the construction of new mines and natural gas facilities. This growth cascaded into the rest of the Australian economy. However, for the past several years, the extraction and mining industries have been buffeted by the slowdown in the Chinese economy, due to decreased demand and lower commodity prices. As a result, the mining industry has implemented operational cost-cutting measures, which affected the number of vehicles the industry purchased. The slowdown in business activity in this segment has also impacted other business activity of other companies, similarly resulting in flat demand for fleet vehicles. But the slowdown in mining appears to have reached its nadir as global demand for commodities strengthens. Also, due to the deferred vehicle purchases, there is pent-up demand for fleet vehicles in the extraction and mining sector to replace aging units.
Light commercial vehicles held 17% of the automotive market in 2017, roughly the same as in 2016.
Australia is the sixth largest country in the world. It’s about the same size as continental USA as shown in the left-hand chart. Most of Australia’s population lives on the coast (the white areas in the right-hand chart). The Australian interior is rich in bauxite, coal, iron ore, copper, tin, gold, silver, uranium, nickel, tungsten, rare earth elements, mineral sands, lead, zinc, diamonds, natural gas, and petroleum.
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. There is an ongoing trend among tool-of-the-trade companies to downsize by operating fewer vehicles in their overall fleets.
Typical annual kilometers averaged 30,000 to 40,000 kilometers (approximately 18,640 to 24,000 miles) per year for tool-of-the-trade or business vehicles.
Passenger vehicles average around 15,000 to 20,000 kilometers per year (approximately 9,320 to 12,427 miles).
The biggest challenge reported by Australian fleet managers is reducing total cost of ownership (TCO), as senior management exerts ever-increasing pressure to contain fleet costs.
- In Australia, the average fleet size ranges from 75 to 100 vehicles. The key fleet segments are:
- Mining and construction industries primarily use light commercial vehicles (LCVs) and SUVs.
- Telecommunications and utility industry fleets are primarily comprised of passenger cars and LCVs.
- Daily rental fleet primarily use passenger cars, but the SUV and crossover segment is a growing rental segment.
There are seven major fleet management companies in Australia. The major players in the Australian fleet management market are Custom Fleet, LeasePlan Australia, sgfleet, Toyota Financial Services, Orix Australia, Eclipx Group (the owner of FleetPartners and FleetPlus), and Interleasing, which also operates an employee benefits business division offering novated lease administration called Maxxia.
Typical contract duration of an operating lease is from two to five years.
“Fleet management organizations (FMOs) are taking an increasing market share as more large companies are outsourcing fleet management. These companies are finding off-balance sheet financing to be increasingly more attractive to them,” said Loukas. “In addition, FMOs have invested heavily in new IT systems, providing better management solutions, reporting, and an extended range of products around insurance, such as GAP, income protection, extended warranties, and fringe benefits tax reporting.”
Loukas adds that “a big part of the FMOs sales strategy is offering end-to-end total ownership cost management for tool-of-trade vehicles and employees, around the areas of vehicle selection, order management, operating management, asset management, and employee vehicle benefits.”
Another focus on the part of Australian FMOs has been expanding their preferred dealer network.
“FMOs have established strong preferred dealer networks as an extension of their service offerings,” said Loukas.
Procurement, as elsewhere in the world, has gained increased influence in fleet purchase decisions.
“As purchasing teams control the acquisition process, there has been a trend to commoditize tool-of-the-trade vehicles,” said Loukas of Holden. “Tenders are the norm for major corporates with shorter contractual arrangements.”
One byproduct has been the growing trend to dual-source from several OEMs. “A panel of providers, such as two or three brands is becoming more common, which allows for mini tenders within the contract period,” said Loukas.
Although automotive manufacturing has ceased in Australia, with Ford, Holden, and Toyota shuttering all of their assembly plants, Australia is a very competitive market. Its 1.2 million new-vehicle annual sales are spread among 67 different brands, which averages out to 17,582 vehicles per brand. The U.S. has 17.5 million new-vehicle annual sales that are spread among 51 brands, which, for comparison, averages out to 344,000 units per brand.
Although acquisition costs are a key factor, fleet application, fuel economy, CO2 emissions, safety, and overall TCO continue to play important roles in the purchase decision-making process. “Whole of Life Cost (WOLC) continues to be a key buying motive,” said Loukas.
Large cars are expected to continue losing market share as a higher TCO due to lower resale values make their operation more expensive. On the other hand, SUVs have gained market share, particularly over the past five years, due to their popularity among both retail and fleet drivers, resulting in higher resale values that put downward pressure on depreciation rates.
For the past decade, there has been an acquisition trend to downsize to the smallest vehicle segment capable of fulfilling the intended fleet application. “There is an ongoing trend for tool-of-trade (ToT) fleets to continue to downsize the vehicles they operate,” said Loukas of Holden.
Similarly, there has also been on ongoing trend to downsize to smaller displacement engines when applicable.
“When selecting vehicles, fuel consumption and CO2 emissions are still on the radar for most fleets,” said Loukas.
There has also been growth of diesel vehicles in Australia with the advent of high-grade diesel fuel.
Dramatic changes have occurred in the Australian automotive industry. Ford stopped assembling vehicles at its two plants in Australia in October 2016. Similarly, Toyota and the GM subsidiary Holden ceased local vehicle production in October 2017. When the last assembly plant closed, it transformed Australia into an import-only market.
“One consequence has been lower consumer confidence following the announcements by Ford, Holden, and Toyota to quit local manufacturing,” said Loukas of Holden.
Holden will transition 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. Although Holden will cease local assembly, it will retain a significant engineering presence in the country and continue to operate the Lang Lang Proving Grounds in Victoria, to ensure Holden vehicles continue to be tuned for the unique driving conditions in Australia and New Zealand.
Three years ago Ford, Holden, and Toyota decided they were unable to produce vehicles in Australia, given the high cost of labor and not enough incentives from the Australian government. It’s been recorded that the Australian government was subsidizing in about $7,500 per vehicle. Given the average car coming off the production lines had been retailing at about $30,000 that was a substantial subsidy from the government.
Because Australia had local automotive manufacturing for the better part of the last century, there’s been a “Buy Australia” policy at state governments, local councils, and some of the not-for-profit organizations, as well as some corporations. The reason for the sudsidies was to support local employment and encourage economic growth within Australia.
Once local automotive manufacturing ceased, vehicle selection options open up for many fleets that previously had to adhere to a “Buy Australia” policy.
While local manufacturing has ceased, these major brands will continue to have an ongoing presence in Australia.
The key remarketing channels in Australia are auctions, wholesale tender, and retail yards.
The estimated size of the used-vehicle market in Australia is approximately 3-million units sold annually. Growth in used-vehicle wholesaling has been 3.7% per year over the past five years, with growth for 2016-2019 forecast to be 5.2% per year.
The importation of used vehicles from Japan plays an important role in the Australian used-vehicle market. Used vehicles or “grey imports” compete with the retail new-vehicle market in Australia. Grey imports do not have a large impact or influence in the remarketing of fleet vehicles. Within the last two years, the used-vehicle market segment of the country has seen an impressive growth.
A 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) 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.
One unique funding method in Australia is the novated lease. Novated leases are an increasingly popular form of vehicle acquisition in recent years. In the last 10 years, novated leasing has grown 10% to 15% year-on-year. A novated lease is a three-way lease between the employer, employee, and the financier, whether it be an fleet leasing company or a packaging company specializing in novated leases.
Novated leases are an increasingly popular form of vehicle acquisition over recent years. In the last 10 years, novated leasing has grown 10% to 15% year-on-year. A novated lease combines many features of more traditional forms of vehicle leases to deliver some attractive benefits for both employees and employers.
A novated lease is a three-way lease between the employer, employee, and the financier, whether it be an FMO or a packaging company. The obligations to meet the repayment under the lease sit with the employer, with the employee sacrificing a portion of salary to cover the lease rental. A novated lease can be structured as either a finance or operating lease.
The employee has the right to take the vehicle with them if they change jobs. Also, novated lease can provide other advantages to employees through their remuneration package.
The company benefits in a couple of ways. First, there is no payroll tax on the sacrificed amount. There is a talent incentive to retain good staff, so in packaging the staff member can choose whichever car they like. The other upside is that the company is not a capital expenditure and it has no exposure to the car, because when the employee leaves he or she takes the car with them.
Salary packaging/novated leasing is a growing segment for the fleet user/chooser as fleets downsize and take their assets off the balance sheets. In the past, employers traditionally only offered novated leases to 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.
The Australian Salary Packaging Industry Association estimates the novated leasing to be worth around 60,000 to 70,000 leases a year, which suggest that makes up about 10% to 13% of business use.
Fringe Benefits Tax (FBT) is a tax employers pay on certain benefits they provide employees, including the employees’ family or other associates. The benefits may be in addition to, or part of, their salary or wages package. If you are a director of a company or trust, benefits you receive may be subject to FBT, which is separate to income tax and is calculated on the taxable value of the fringe benefits provided. The FBT year runs from April 1 to March 31.
A car fringe benefit most commonly arises where you (the employer) makes a car you “hold” available for the private use of an employee (or the car is treated as being available). A car you hold generally means a car you own or lease.
Before a road vehicle can be registered for the first time in Australia, it must comply with the Federal Motor Vehicle Standards Act of 1989. This applies to new and used imported vehicles. The Motor Vehicle Standards Act requires vehicles to meet the national standards covering safety and emission requirements. The national standards are currently the Australian Design Rules (ADRs). When a vehicle has been certified as meeting the ADRs, it can be fitted with a compliance plate. The fitment of a compliance plate is mandatory under the Motor Vehicle Standards Act, and it indicates to the registering authority that the vehicle is eligible for registration.