Why do cost-performance-related vehicle factors influence future residual value?

08 June 2020

8 June 2020

In part 3 of a five-part series, Ana Gutierrez, head of production at Autovista Group’s Car To Market & Consulting, and her team explore elements impacting resale value.

There are many different factors that impact the resale value of any vehicle. Residual-value (RV) experts base their forecast analyses on statistical models and historical and current data, but also on a detailed examination of attributes of the car itself for successful residual management, some of them are cost-related factors.

The RV of any vehicle is vital in today’s economy and is becoming even more important as the automotive world is moving towards less ownership and more subscription-based models. Even if these new models of “less ownership” (associated with fewer concerns regarding costs) are more popular now, some customers base their purchase decision on the estimated performance cost of the model, especially used-car buyers.

There are several factors that influence the cost-performance ratio impacting RVs, but the most obvious one is the price that the used-car buyer is willing to pay for a specific model. The list price of the new model should be adequate and defined mainly by the correct relationship between the vehicle’s cost and those of main competitors and products from the brand’s own model range, which includes the predecessor.

Negative influence

Furthermore, the pricing must be adapted to the brand’s status in its segment. This is crucial for successful RVs since discounted new-car prices have a significant negative influence on depreciation. OEMs with aggressive cash discounts will create the perception of a brand with highly discounted models in potential new and used-car buyers’ minds. Therefore, customers will only be willing to pay a limited priced for those models. Also, cash discounts for a single model will have repercussions on other RVs as the brand should maintain a reasonable price gap in the line-up.

In addition, aggressive discounts will create artificial sales, resulting in over-supply in the future used-car market, harming values. Therefore, unavoidable discounting should be kept to a minimum to protect RVs, but in any case, a competitive price positioning should help avoid cash discounts.

Moving to another element deciding RVs, equipment is one of the most important as it determines a large part of the perceived value of the vehicle. A car’s specification is crucial on the new and used-car markets, as it needs to meet customers’ demand (especially private customers). Therefore, when defining the equipment of a new car, OEMs should take into consideration the future used car, i.e. what is most likely to be in demand in three to five years.  At the point of remarketing in the future features which are perceived as important today will be indispensable tomorrow. In particular, standard equipment should suit the requirement of the market segment for RV stability.

The standard equipment catalogue should be enough to fulfil most customers’ requirements of the segment while missing crucial features could weaken the RV, as general preferences are not found in the used car. An appropriate list set of optional items should be available to meet the needs of more demanding clients. That said, to avoid too many individual and differently equipped cars in the used-car market, the list of options should be defined according to the segment needs and should cover crucial items not available as standard to avoid harming RVs. The equipment configuration is very market-related for success. Therefore, adequate local specification settings should be defined to meet preferences and support RVs in each country.

Fuel and tax

There are more aspects influencing a rational purchase, such as fuel consumption cost and taxation, particularly as taxes are emission-related. Fuel consumption and taxation are elements defining the cost efficiency, and therefore impact potential used-car buyers’ decisions. Fuel prices have been rising for decades; manufacturers are investing large sums of money and resources in developing more eco-friendly vehicles, implementing new technologies and developing engines that are more efficient.

Future used cars with low running costs, and alternative engines (hybrid, plug-in and all-electric) will be in high demand. Therefore, OEMs constantly working and investing in engine-efficiency development will benefit in the used-car market, offering more efficient and environmentally friendly engines than other brands.

Different taxes apply to the ownership of a vehicle, and they vary market to market.  Acquisition taxes, including registration tax, generally are the largest portion of the tax that has to be paid. This tax has a low impact on the used car, and it is payable when the car is registered for the first time and, in some countries when it changes hands. Annual tax has a slightly higher impact as it will also apply to all subsequent owners of the vehicle, plus it has a direct impact on the total cost of ownership of the vehicle. Many countries include emissions on the annual tax calculations and the ones who do not will, most likely, include it in the future; thus, investing in reducing emissions could pay off with improved RVs.

Warranty is another factor considered by the potential used-car buyer when analysing the cost-performance ratio, helping them to decide how much they are willing to pay. Models with long-term vehicle warranty are not only attracting new-car buyers but also used-car buyers, supporting the RV. Used cars with a manufacturer-sponsored warranty still in effect, generate higher demand as this increases the confidence in the model and the brand and reduces running costs and risks for the owner in terms of potential repairs. It also increases the worry-free ownership experience. Asian models are the most advantageous and highly appreciated in the used-car market in this regard, helping their RVs; for example, Kia models will benefit from this offering, as the seven-year standard warranty for new models will offset potential future costs in the used car, and the budget-conscious used-car buyers will factor into the purchasing decision.

In summary, the overall expected performance of the car considering expenditure plays an important role, as many purchase decisions in the used-car market are based on potential cost savings; therefore, vehicles with more efficient performance and lower costs will be in higher demand, sustaining healthier RVs.

Contributors to this article include senior market analysts Guillermo Iniguez and Stefano Adami and market analyst Ludovic Percier. Part 1 in the series can be accessed here and part 2 here.