1 mar 19

The TCO impact of a ‘no deal’ Brexit

British fleets and leasing companies are reviewing the wholelife cost implications of Brexit if the UK leaves the the European Union without a withdrawal agreement in four weeks' time.

This ‘no deal’ scenario would see the UK trade on World Trade Organisation terms, which would include a 10% tariff on imported cars and further tariffs on parts and components for service and repair.

Impact of 10% tariff on RVs

Residual value forecasters say that a 10% increase in the acquisition price of a car does not automatically lead to a 10% rise in its residual value, and would effectively increase depreciation costs.

Rupert Pontin, director of valuations at Cazana, said WTO tariffs would, “cause issues for people who set residual values as a percentage of the new price of the vehicle.”

However, he added that most leasing companies were unlikely to adjust their forecasts from their current value in pounds, at least in the short term.

This would logically lead to a rise in monthly lease rates, although in the longer term other factors may come into play which would have a more profound impact on residual values, particularly regarding supply and demand into the used car market.

Changes in the supply-demand balance

Andrew Mee, a senior forecasting editor at cap hpi, said that if the UK does leave the EU without a withdrawal agreement, “and new car prices do increase, then there will be a reduction in new car sales in the UK. It would push up used car values in the short term as demand outstrips supply as fewer part-exchanges come onto the market, and potentially it will be good news for used car values in the longer term as used car supply will fall in future years.”

But this positive outlook assumes that demand for used cars remains consistent. If, as many economists suggest, a ‘no deal’ Brexit damages the UK economy, then demand for used cars may fall.

“If a no deal Brexit results in a significant contraction of the UK economy in the longer term, this could negate the potential positive impact on used car values. Any change in used values will be a result of the many factors which could affect supply and demand, and it is not merely a question of what proportion of a new car price increase will be passed on to used prices,” said Mee.

“Even if a no deal Brexit does happen, and even if new car prices do increase, the long term impact on the supply and demand equation in the future used car market will not be clear for some time. So we are not planning to make any immediate wholesale changes to our RV forecasts under this scenario.”

Leasing companies need to review contracts

The BVRLA, which represents British leasing companies, held a webinar last month to assess the implications of a no deal Brexit and address the contingency plans its members should be taking to avoid facing a sharp increase of costs.

Jay Parmar, director of policy, BVRLA, advised leasing companies that expect to pass on any additional WTO-related costs to customers to look at their commercial arrangements.

“Check if your current corporate agreements allow for that price variation because once an agreement has been signed you no doubt need to honour those prices,” he said.

Higher service, maintenance and repair costs

He also signalled the potential inflation in the service, maintenance and repair costs of an operating lease due to tariffs on spare parts as well as delays in the supply chain.

“There is concern that if we leave the EU without a deal we won’t have frictionless trade and some of the goods vehicles that bring in parts on a daily basis may be disrupted,” said Parmar.

Delays could lead to additional hire costs for replacement vehicles, while company cars are off the road awaiting parts, and Parmar suggested leasing companies should assess the resilience of their supply chains, “contacting your independent garages and franchised dealers and repairers to understand what steps they are taking to ensure there is resilience in parts being stocked up and that there is no disruption if your vehicles are going in to be serviced, maintained or repaired.”

Brexit schedule

The UK is heading for a ‘no deal’ Brexit on 29 March unless the Government can renegotiate the withdrawal agreement drawn up between Prime Minister Theresa May and the EU. The current agreement was rejected by a record-breaking majority of MPs, although a vote in Parliament before 12 March is likely to lead to a temporary extension of the UK’s membership of the EU rather than leave without a deal.

Authored by: Jonathan Manning