Indego, automotive consultancy, automotive consulting, steve young Indego, automotive consultancy, automotive consulting, steve young

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Steve's Blog

Credit Crunch hits Residuals

Wednesday, 30 April 2008 12:42

In the last few days we have seen writedowns of hundreds of millions of Euros by BMW and Daimler related to their exposure to residual values of vehicles which they leased in the US.  They will not be the last to have to recognise that the value of the vehicles that they leased in the last couple years now have a lower value when it comes to resale than originally assumed .  This was one of the issues which we considered within the IndeGo concept, as the business was based entirely on leasing, rather than selling vehicles.



Along with undisclosed warranty issues, poor leasing decisions in the US were one of the contributing factors to almost bankrupting Mitsubishi Motors a decade ago.  Only a huge corporate bail-out saved them at that time.  The issue is that when you lease a vehicle, you recognise the sale, probably provide some bonuses to the salesman and the lease company, but you also take on risks related to the credit worthiness of the individual and to the residual value of the vehicle at the end of the lease period.  In many respects these are the same issues that exist in the financial institutions that led to the credit crunch.

In the IndeGo concept, we assume that the vehicle is owned throughout its life by the company, and at the end of its serviceable life, is retired and recycled.  Over the life cycle therefore, the total depreciation is 100% of the value of the vehicle when it is taken onto the books, and the company is not gambling on being able to dispose of the vehicle at a given value within a one month window two or three years on from that initial point.  In the conventional industry business model, there is no follow-on lease customer, so the policies on disposal tend to be focused on liquidating the asset at whatever the market value is at that time - hence the need for automotive finance companies to review their book values now.  Over the life cycle therefore, IndeGo addresses this problem of residuals as the total depreciation is known as an absolute, and it is all borne by one company, although recovered from a number of customers sequentially.

However, from an accounting point of view, accounting standards require that at any given point in time, the books represent a fair view of the assets and liabilities of the company.  The accountants have to consider what the asset value would be if you chose to sell the assets at that point, rather than continue to operate them through to retirement from service.  Again there is a parallel to the current turmoil in the financial markets, as this is the equivalent of the "mark to market" process that is leading to writedowns at many major banks.

The difference however, is that the banks hold those assets with a view to at least maintaining capital value and potential disposal at a profit.  In IndeGo, the assets (the cars) are held in the absolute knowledge that their value will reduce over the planned holding period to their scrap value only.  In these circumstances, does it make sense for IndeGo to be forced to adopt the same depreciation and periodic "mark to market" processes as a traditional manufacturer?  If there is anyone from the Accounting Standards Boards or audit firms who supports a different policy, please let me know!

 

Post-Geneva Show Thoughts

Thursday, 27 March 2008 21:03

The Geneva Show was much as expected - a lot of emphasis on small cars and more environmentally friendly vehicles.  Most of the technology in the cars was evolutionary, but no less effective for that.  There were a number of "fuel cell" and "hybrid" concepts which owed more to the model maker than to any actual engineering.  Think were brave enough to have an outdoor stand where they were encouraging visitors to drive their electric City cars round a short course - hard!

Read more: Post-Geneva Show Thoughts

 

Geneva Show - a product watershed?

Friday, 29 February 2008 14:00

Looking forward to my annual visit to Geneva next week for the opening of the Geneva Show.  This is generally viewed as one of the "must do" motor shows in the annual calendar, largely down to the compact size and level playing field for all exhibitors.  I think we will see evidence of a watershed in respect of product this year.

Read more: Geneva Show - a product watershed?

   

IndeGo Next Steps

Tuesday, 05 February 2008 00:00

When I left A.T. Kearney in 2004, I had the ambition of finding a way to implement the IndeGo concept in full – from product through to commercial operation and ultimately recycling.

Read more: IndeGo Next Steps

 

Think

Thursday, 31 January 2008 00:00

I had a short drive in the original Think car at an Automotive News Europe Congress in Gothenberg back in 2002.  Even in a few hundred metres it was obvious that this was a much more sophisticated product that the G-Wizz and other electric cars which are becoming popular in London, driven entirely by the opportunity to avoid paying the congestion charge to Ken Livingston.

Read more: Think

   

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