With the South African economy continuing to be constrained and business generally being tough, what should vehicle fleet operators consider if they want to extend the productive life of their vehicle fleets? The international textbook theory regarding optimal vehicle replacements is simple.
Operating costs increase with an aging vehicle fleet asset – while the residual value keeps on reducing.
If you look at Slide 1 where the two lines cross, that’s when vehicle fleet owners should consider replacing the old asset with a new one. Having being confronted with this challenge with many fleet replacements, the author feels that this ‘textbook’ theory may very well be applicable in a developed economy, where the following parameters are in place:
- Fuel price stability
- Economic growth stability; and, most importantly
- Forex stability
What a vehicle fleet operator should assess before replacing old assets with new ones
Given that our country is exposed to considerable volatility, especially in terms of the strength of the Rand, what is the time for optimal vehicle replacement in South Africa? There are a number of things that a vehicle fleet operator should assess before taking a decision to replace old assets with new ones, as summarised in Slide 2.
On the operating cost side, it is critical to determine when major services take place and expensive aggregates are replaced or overhauled. The assumption that repair and maintenance costs increase continuously, is often unfounded, with TCO-figures actually stabilising or reducing after major services.
The same principle applies to an assumed increase in fuel consumption and cost with age; with fuel consumption often stabilising after major services have been done. Also, the relative advantage of new vehicles offering better fuel consumption than existing older vehicles may or may not be significant, depending on both the strength of the Rand and/or worldwide energy prices.
When looking at residual value (RV) trends, the assumption that RV figures significantly and increasingly fall with age is a fallacy. Instead, RV-rate developments have a tendency to stabilise or even increase with increasing age – especially when the Rand weakens or vehicles are popular in second-life segments.
The relative strength of the Rand to other currencies can have a major impact on replacement decision, especially if a vehicle was bought at at rate of R7 to the USD five years ago, and the replacement vehicle would have to be bought at R12 to the USD.
This means that the new vehicle is disproportionately more expensive relative to the existing vehicle, even if operating costs and RV trends are considered. This may lead to vehicle fleet operators stretching their assets further in the hope of leveraging their previously stronger currency’s ‘purchasing power’ a bit further, before eventually having to replace their old vehicles or midaged assets instead.
Finally, developments in the automotive market have a very strong influence on whether vehicle fleet operators should replace or not. Whereas the Rand may be relatively weak at the moment, competitive and/or stock-pressures may mean that the industry as a whole, or specific players, still offer disproportionately attractive vehicle prices or specials.
This may arise from OEMs facing a global glut in vehicle stock, too much stock or simply posturing for increased market share between the competing parties. In such cases, vehicle fleet operators may have the opportunity to acquire new vehicles with potentially lower operating and fuel costs – at a purchase price which is still attractive and does not include a price-premium due to a dramatic drop in the value of the Rand.
What does this mean for South African vehicle fleet operators?
Generally, fleet operators should not necessarily feel that by not applying textbook vehicle replacement practices, their businesses are somehow at risk. In many cases, and especially where fleets are well maintained, the decision to stretch vehicles a bit longer has little if any impact on the fleet’s overall mobility cost.
The following steps are recommended for vehicle fleet operators contemplating on whether to stretch assets or to replace:
- Draw up cost curves, looking specifically at service/ maintenance and fuel costs;
- Obtain RV figures from recognised data providers and benchmark prices of used vehicles on the market;
- Obtain Total Cost of Ownership figures on new vehicles and compare these to the ones the current vehicles are running at currently;
- Shop around in the market to see which offers are available and whether there is a strong case – in terms of discounts offered, reduced operating costs and lower fuel cost – to justify a replacement in the short term; and
- Speculate and decide on how to deal with the Rand going forward, that is, if the Rand continues to weaken and all OEMs ultimately push through their price increases, it may be better to replace sooner rather than later.
Whereas it is possible to extend the life cycle of most fleets for a certain amount of time without a major impact on cost, invariably a replacement will ultimately become a reality. Given the variety of volatility factors as outlined above, the decision of optimal timing for replacement remains a critical success factor, which nobody else but the fleet operator himself can take.
Dr Harry Teifel is the Director: Strategy and Consulting, at idea 2 Business Services and Investments (Pty) Ltd. He has extensive experience in the transport industry and will be writing the Special Technical feature for Trucks & Heavy Equipment on a routine basis. Dr Teifel holds the following degrees: B.Eng. (Industrial), M.Com and D.Com. He has worked both locally and internationally for a variety of firms, including IBM, DEKRA and Daimler/Mercedes-Benz South Africa.
His areas of focus at present are:
- Strategy Consulting and Systems Engineering challenges
- Support of large organisations with SA Economic Development requirements and large-scale tenders related to the SA Government policy/strategy of IPAP and NDP
- Business Transformation on the basis of Systems Engineering principles and with the application of Business Intelligence solutions such as Qlikview. Readers may contact him at: email@example.com