Sustained success in automotive retail will demand a more conservative reappraisal of residual values, according to MotoNovo.
Speaking at the recent Sword Apak Wholesale Finance Summit, MotoNovo Finance division manager Adam Mepham outlined the importance of finance companies reviewing their residual value (RV) and Guaranteed Minimum Future Value (GMFV) approaches in the face of wider changes in the retail environment.
In the short-term this may be unpopular with dealers, he acknowledged, but MotoNovo’s Motor Division chief executive, Karl Werner, has backed the approach, stating that making changes now “will be good for long-term sustained success for dealers and finance providers”.
Werner said: “After almost a decade of largely benign operating conditions, our judgement is that it is time for the industry to review residual values.
“For sustained success, a more conservative approach, particularly in GMFVs now seems appropriate. Candidly, counting on a strong disposal price is just delusional economics in today’s market.”
Werner highlighted the threat of rising interest rates, the slowdown in new car sales, the introduction of scrappage schemes, regulatory oversight and the development in clean air standards for creating uncertainty in residual value forecasting.
He added: “I recall the impact of PCPs when the ‘half-a-car concept hit our shores. Early market scepticism was quickly followed by rapid growth and in a market operating in an upward trajectory, residual values/GMFVs were bullish.
“Sadly, when the economic cycle and operating conditions turned, the issue of negative equity emerged and hit the finance industry very hard.
“Consumer confidence in the PCP product and dealer finance was seriously undermined, something which in turn affected dealers as credit conditions tightened. The whole industry needs to avoid such a repeat.
“At MotoNovo, we have taken the long-term approach consistently – hence our 40+ year history, during which time we have seen a number of other providers enter the market aggressively, win, close, re-enter, repeat.
“Given the importance to dealers in both sales and retention, no dealer benefits from choosing a lender with a model which proves unsustainable.
“A more conservative RV/GMFV strategy seems entirely appropriate. Yes, we may lose some sales, but even in what is a tactical often short-term market, the smart step is to take a longer-term view; and that is exactly what we are advocating.
“Working to keep the customer in a positive equity position is smart business sense, the part-exchange and renew journey is far better for both customers and dealers.”