Fleet industry challenges – and what to do about them

31 Oct Fleet industry challenges – and what to do about them

Eye-wateringly high energy costs, the Covid hang-over and the ongoing war in Ukraine are challenging every part of every industry, and car fleet has not escaped the clutches of this triple-whammy. Leaseplan have captured what these challenges mean for fleet with an insightful look into the impact on the automotive industry.

Challenge #1: Inflation

Challenge #2: Chip shortages

Challenge #3: Rising battery prices

Challenge #4: Spiralling energy costs

Challenge #5: Conflict & Covid-19

All very worrying for our sector, with not insignificant implications for the fleet supply chain. To understand more about how they will impact day to day fleet operations we have looked deeper into what these mean for the supply chain and what interventions may mitigate their full impact – we’ve also reflected on two additional challenges that we experience in our dealings with the supply chain.

Challenge #6: Supplier capacity issues

Challenge #7: Tightening of credit

#1 Inflation

“The Bank of England base rate, which influences interest on loans and savings, was cut from 5% to 0.5% following the 2007-2008 financial crisis it’s stayed low since. However, rates have risen sharply this year, from 0.1% in January to 2.25% in September, as part of measures to curb inflation. The aim is to incentivise saving money, and close the gap between supply and demand of goods”

Impact on fleet – The 3/4/5 SWAP rates govern typical lease pricing, and along with increased vehicle investment prices (caused by increase list price and reduced discount), and a higher base rate fleet operators are finding it more expensive to finance the leases.

Our recommended intervention:

1. Consider contract extensions on existing vehicles – exploiting anticipated lower mileage to negotiate a reduction in the extended rental cost
2. Consider using Total Cost of Ownership to classify your car list. This will help you understand the true cost of owning and running each vehicle and which cars will be more cost-effective in the longer term
3. An alternative to “full-service leasing” where you, the client, accepts some risk and reward in the process should always be considered, so that the re-sale windfall profits usually enjoyed by the lessor are shared between both parties.
4. Review your commercial terms to ensure they are as favourable as possible and prevent profiteering from the supply chain.

#2 Chip shortages

“Modern cars use hundreds of semiconductor chips – from engine management to the infotainment system – and only a handful of specialist factories supply the entire automotive industry. Already constrained by Covid-safe operations, a combination of fires, extreme weather and reduced availability of neon gas from Ukraine have all widened the gap between supply and demand. New factories won’t get up to speed until next year, and experts have warned that any escalation of tensions between China and Taiwan would cause even bigger problems.”

Impact on fleet – less car choice as manufacturers focus on popular models and equipment to keep production moving. The shortages have also led to longer delivery times and higher prices

Our recommended intervention:

1. Contract extensions on existing vehicles (as referred to in #1), could produce short-term benefit
2. If vehicle availability is impacted and your car list is compromised then it is important to recognise the potential impact on your ability to recruit and retain key people. Some form of consultation may therefore be necessary to mitigate any impact on perceived value of their benefits package.

#3 Rising battery prices 

“The price of lithium-ion batteries declined by 89% between 2010 and 2021, enabling manufacturers to offer cheaper and longer-range electric vehicles, but the market is changing quickly. Twice as many electric vehicles – some 6.6m of them – were sold globally last year than in 2020 and surging demand is affecting the cost of materials. Lithium is almost eight times more expensive than it was in 2020, and battery prices are expected to rise this year for the first time in over a decade.”

Impact on fleet – Lithium-ion battery prices are expected to rise this year for first time in over a decade, the resulting higher material costs will be reflected in the list price of EV’s

Our recommended intervention – According to the IEA Global Electric Vehicle Outlook 2022, average battery prices fell by 6% to USD 132 per kilowatt-hour in 2021, a slower decline than the 13% drop the previous year. If metal prices in 2022 remain as high as in the first quarter, battery packs would become 15% more expensive than they were in 2021, all else being equal.

However, (and this is important as our recommended intervention is, in fact, not to intervene) given the current oil price environment the relative competitiveness of EVs remains unaffected.

#4 Spiralling energy costs

“Europe is in the midst of a once-in-a-generation energy crisis. Wholesale gas prices surged last autumn as supply struggled to keep pace with post-pandemic economic recovery and sanctions on Russian energy have exacerbated that shortage. With almost 40% of the UK’s electricity produced at gas power stations, consumers and businesses are coping with record energy costs compounded by fuel prices that are 25% (petrol) and 33% (diesel) higher than they were in January.”

Impact on fleet

• UK consumers and businesses are coping with record energy costs, compounded by fuel prices that are 25% (petrol) and 33% (diesel) higher than they were in January.
• Fuel prices also soared across Europe during the first half of 2022 with diesel increases of 25% in France, 36% in Germany and 18% in Italy.
• Electric vehicle fleets also face challenging cost increases. Although domestic electricity in the UK is capped at 34p/kWh for 2 years, it still means that a Kia Niro EV would cost 9p per mile at home and up to 26p per mile on the most expensive public charge points.

Our recommended intervention:

• Introduce in-car technology that provides feedback on driving style, encouraging, and in some cases gamifying, economic driving behaviour.
• Implement tighter controls over fuel reimbursement to prevent fraud
• Review the fuel policy and potentially cap the value of reimbursed fuel or only pay for business mileage rather than both business and personal (although this will require a reward package review and employee consultation)
• Even though domestic electricity costs are double the national average of 2021, home charging EV’s remains the cheapest and most convenient way to keep an EV on the road. To encourage home charging a robust and transparent domestic electricity reimbursement scheme needs to be introduced, this will give the drivers confidence that they will not end up out of pocket when charging at home. The car fleet home-charging infrastructure is quite immature and will need careful planning and implementation to ensure it is robust enough to cope with drivers demands and those of the fleet stakeholders. We have investigated this and identified 6 potential flashpoints when introducing home-charging with our suggestions for intervention.

#5 Conflict and Covid-19

“Movement of people and goods hasn’t fully recovered since the first Covid-19 lockdowns in 2020, and it’s unclear how long this will last. Russia’s invasion of Ukraine triggered unprecedented economic sanctions, including exports, and disrupted Ukrainian industry too. Meanwhile, China’s pursuit of zero Covid cases has led to restrictions at factories and ports this year, causing further challenges for time-sensitive automotive supply chains.”

Impact on fleet – Russia’s invasion of Ukraine has affected 17 factories making vehicle wiring looms, while Russia supplies palladium for catalytic converters and nickel for batteries. China’s pursuit of zero Covid cases has led to restrictions at factories and ports, causing challenges for the supply of automotive components, 25% of which come from China, and electric vehicle batteries, 80% being manufactured in China.

Our recommended intervention – keeping a close watch on your supply chain with regular updates and briefings will help you understand what might be round the corner, whilst implementing our suggested interventions will help mitigate the impact of these unfortunate global events as much as possible.

#6 Supplier capacity issues

As manufacturer and lessors currently experience a period of high demand and restricted capacity they lack the motive to chase new business as they can sell everything they can produce.

 Impact on fleet – Our dealings with manufacturers see increased prices, reduced discounts and cancelled orders, which normally results in re-orders at a higher price, whilst lessors are hardening their credit terms and offering rental pricing that is extremely volatile – as such any Request for Proposals (RFP’s) in today’s climate will produce little value.

Our recommended intervention:

• Introduce robust supply chain management, making yourself front and centre with a persistent and co-ordinated presence. It is worth noting that leasing companies will not have all the answers to these macro challenges because, quite simply, it is not in their interests to. Which is why it is vital to press them for solutions.
• Create and proactively manage Service Level Agreements with all suppliers ensuring all commercial terms are addressed accurately

#7 Tightening of credit

The increased leasing costs associated with rising interest rates coupled with the broader economic outlook has led many lessors to reassess credit lines, even for existing clients where there is an established trading history.

Impact on fleet – businesses, particularly start-ups, small businesses and Venture Capital invested businesses need to remain agile with their leasing supplier strategy and approach.

Our recommended intervention – with support, creative solutions can be negotiated through deposits, advance payments and parent company and bank guarantees.

How we can help

Helping clients navigate these headwinds is what we do. We are helping many organisations deal with these supply chain challenges right now, reviewing policy, implementing process, containing cost …. and maybe we can help you.

So if you would like to find out how then contact Tom Osborne for a confidential chat on 07770 821016.