COVID-19 the dilemma for Fleet - Purchase vs Hire

COVID-19 the dilemma for Fleet - Purchase vs Hire

14 April 2020 By Scott Hesketh - Fleet Category Buyer at YPO

Fleet vehicles for purchase or hire

As a fleet buyer in the public sector, I thought I would touch my thoughts on what effect the pandemic may have on the vehicle market, and why hire and lease are great options to acquire vehicles in the coming months.

Thinking about what future markets and procurements may look like when we return to “normal” during the peak of the pandemic is very much bottom of people’s priorities. In addition, there is no right or wrong answer as we can only predict what will happen in the future.

The response from the UK government, in terms of financial support has been astronomical, with schemes such as the furlough and government backed loans along with a pledge to invest whatever is required into the NHS. The March 2020 public sector finance report which publication has been delayed until 23rd April 2020 will start to give us some guidance on the actual cost that Covid-19 may have on the public sector. Even without this information it is no secret that the spending will have drastically increased, GDP will have dropped due to many organisations temporarily closing, which will leave the public sector in more debt than ordinary. To recover from this, we will need to increase GDP, and reduce spending – which ultimately and unfortunately may lead to public sector budget cuts. This presents a challenge for purchasing procurements of fleet, as there will be a large capital investment required upfront to acquire vehicles. Leasing offers a great solution for this, with no large capital sum to pay upfront, monthly instalments can be paid throughout the duration of the lease which can be for the full cycle of the vehicle life if required. Spreading the cost can provide a short term fix to cashflow whilst public sector organisations balance the books. Those customers looking to own the vehicle outright could lease for a few years whilst balancing the books and take full ownership of the vehicle at the end of the lease by paying what is known as a bubble payment.

There has also been recent changes to the interest rate. The current interest rate at 0.1% is the lowest in the Bank of England’s history. With interest rates being so low, this will result in a lower cost to finance the lease agreement, making the monthly payments and overall cost of the lease lower. If there was ever a time to take advantage of finance agreements, now is the time.

The effect on the supply chain is difficult to understand right now but preparing for some huge disruption is advisable. I expect the supply chain to realise many bottlenecks, causing excessive lead times for vehicles. Firstly, I expect manufacturers priority to be to complete work in progress to ship out orders and invoice for delivered goods to improve their cashflow, which could then negatively influence the amount of new business being sought after. With many car parts manufacturers being temporarily closed, manufacturing of parts may be behind schedule causing delays. The fleet market is a worldwide market, some countries may not recover as quickly as the UK, causing potential further delays. Any suppliers who cannot manage their cashflow with the additional challenges being faced could become liquidated or bought out.

There will also be a backlog of organisations who have held off procurements of fleet whilst Covid-19, creating a further bottleneck created by customers. Hiring vehicles could be the solution to this since the vehicles are likely to be already manufactured and ready to be hired to customers, with no delays to the lead time of manufacturing. There are various options with hire to meet requirements such as the hire term. Long term hires could be agreed to have running vehicles until the market catches up and returns to some normality. Short term hires can be used to temporarily fill a void for those customers who choose to purchase vehicles but experience the excessive lead times.

As mentioned, hire vehicles are very likely to already be manufactured and paid for, which will alleviate any risk that arises from weakened currency. As a worldwide market, fleet is heavily affected by currency, which is volatile currently with the GBP trading weak. Although I expect an extension to the UK and EU trading agreement as a result of COVID-19, there is always a risk that uncertainty over future trading will cause further weakening of the GBP, which will have a direct impact on parts that are imported from the EU. Hire companies will know the cost of each vehicle and therefore be able to offer a fixed price that is not exposed to the risk of currency fluctuations. With no manufacturing taking place for months, there could be scarcity in the market which will naturally cause inflation for new vehicles, hire vehicles could be very competitive.

It is not just the fleet market, but all markets and currency will remain volatile. Investors are likely to invest in materials such as gold which is deemed a ‘safe-haven’ meaning that the price of shares will continue to fall. This presents further problems with suppliers throughout all markets as the option to release shares to quick raise cash will produce less cash returns.

All the above points may change the behaviour of suppliers, some may begin to choose to source more locally or we may see some larger organisations looking to vertically integrate their supply chain to take control of certain aspects of. We simply do not know but acknowledging and exploring other acquisition methods such as hire, and lease could offer solutions to the challenges that we are likely to face in the future.

How can we, the public sector, help suppliers throughout this challenging time? The biggest threat to some of our suppliers and particularly SME’s is cashflow. Not having enough cash to pay their short-term debts can lead to organisation liquidating assets to cover these debts. Should the debts mount up to more than the assets are worth, the company will end up entering administration. The public sector have a responsibility to manage our risk and ensure we achieve best value from the public purse, with this in mind it would not be suitable to pay in advance for purchases of vehicles, due to the large capital required – with smaller and more frequent payments, hire and lease offer the option to forward pay suppliers to help sustain competitive markets whilst reducing risks of large losses being incurred in the event of suppliers entering administration.

 

If you would like to find out more about leasing vehicles at this time, please contact me and the team on [email protected].

Categories: Public Sector , Procurement

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