Residual Value and Risk Management

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Residual Value and Risk Management

• Bukarest 2008

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Agenda

• Introduction EurotaxGlasss
• Motivation why residual value and risk
  management ?
• Two most common mistakes
• Ideal approach and possibilities to influence
  residual value performance

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EurotaxGlasss Group Strategy
The leading provider of data, solutions and
business intelligence services to the European
automotive community
Integrated pan-European organisation providing
exceptional local support Single source for
European valuation, specification, repair and
estimation data and systems Decision-critical
intelligence to all key sectors of the European
automotive lifecycle
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EurotaxGlasss Coverage
New subsidiaries Rumania Sweden Turkey
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Decision Critical Intelligence
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Comprehensive range of products and solutions
Product selection
Product group overview
Specification and valuation
Repair and calculation
Service and maintenance
Advertising
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... For a wide range of customers
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Leasing Eurotax Supports the full value chain
and all supported by a common, international
and unique code
Major leasing operations
Sales
Operative Fleet management
Cash risk management
De-fleeting
Product Management
One common unique Eurotax Code
Valuation data
Fleet revaluation
Valuation data
New car price data
New car price data
Repair calculation information
Repair calculation information
Service Maintenance data
Service Maintenance data
Total cost of ownership
Total cost of ownership
Service Maintenance data
Light damage estimation
Remarketing benchmark information
Forecast
Forecast
Current Core products
Further products to be launched in Rumania later
The one-stop shop
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Agenda

• Introduction EurotaxGlasss
• Motivation why residual value and risk
  management ?
• Two most common mistakes
• Ideal approach and possibilities to influence
  residual value performance

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Depreciation is the biggest cost block during
owning a car Example German market
Cars up to 180 PS
Cars up to 130 PS
Source Autoflotte Germany
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and individual Depreciation has a significant
impact on the Leasing attractiveness
... example
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Agenda

• Introduction EurotaxGlasss
• Motivation why residual value and risk
  management ?
• Two most common mistakes
• Ideal approach and possibilities to influence
  residual value performance

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The most common two mistakes when setting
contract residual values

• Relying on Fair Market Values While Not Analyzing
  Actual Selling Prices
• Relying on Selling Performance While Not
  Analyzing Market Dynamics

• THE BEST PREDICTIVE APPROACH COMBINES
• USED CAR MARKET UNDERSTANDING
• OWN RE-MARKETING KNOWLEDGE

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Ignoring Actual Selling Prices
DistributionExample
Contract 3 years / 120.000 km RV Calculated as
per Market Reference 9.045 (incl. Options) RV
Calculated as per Market Reference 8.640
(excl. Options) Remarketing performance normally
is 100 However if you analyse the latest sells
of the same vehicle - WITHOUT options it sells
around 8.000 FEATURING all of the options it
sells around 10.000 !
Pricing Gap
Potential Loss
Contract RV Incl. Options
Contract RV Excl. Options
10.000
8.000
Actual Selling Prices Span (Distribution)
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However the difference is no mistake nor on
purpose it is simply unavoidable
External market benchmark depends on
Actual sales result depends on

• Make
• Model
• Technical data
• Age
• Mileage
• Moment of Sale
• Equipment value
• Average colour
• Average condition
• Average dealer retail/ trade in
• Average sales person
• Average buyer needs
• Domestic market only

• Make
• Model
• Technical data
• Age
• Mileage
• Moment of Sale
• Equipment value
• Equipment type and combination
• Exterior colour
• Interior colour and materials
• Exterior and Interior combination
• General condition
• Channel through which sold
• Sales Person
• Buyer needs (stated or not)
• Concentration on parking lot
• Time pressure to sell/buy
• Special deals and agreements

Miss- match
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Market dynamics influencing residual values
Overview
1. Supply demand
8. Life cycle position
2. Distribution strategy, marketing, pricing
discount policy

3. Configuration strategy policy, standard
optional equipment
7. Fulfilment of expectations
4. Segment allocation, communication of benefits
6. Image
5. Design, communication of values
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Evolution of residual values Example UK
Backup
small Diesel engine
Audi A3
Mercedes Benz A class
VW Golf
Toyota Corolla
large Diesel engine
Audi A3
Mercedes Benz A class
VW Golf
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Evolution of residual values and national
differences
Backup
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Correlation between product life cycle and
residual value
Backup
LaunchGolf IV
LaunchFord Focus
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Influence of Image Example Toyota Yaris /
Starlet
Backup
ADAC AutoMarxX 2005
ADAC AutoMarxX 2002
TOP 3German premiums
Rising starToyota
LaunchToyota Yaris
Toyota Starlet
Improvement Also impacts RVs
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Agenda

• Introduction EurotaxGlasss
• Motivation why residual value and risk
  management ?
• Two most common mistakes
• Ideal approach and possibilities to influence
  residual value performance

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Residual value and Risk Analysis Ideal Approach
Data
Analysis
Market benchmark (external source)
Hist. Benchmark (external source)
Relation own sales to Benchmark
Adjust for Individual performance
Adjust for excess mileage rates, etc.
Hist. sales results (internal)
Difference Contract values vs. adjusted forecasts
Contract values
RV risk exposure
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Example of Risk Analysis

• FORD MONDEO 5DR HATCH 1.8i ZETEC, UK Market

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Influencing RVs From the Leasing Companies
Perspective
Influencing RVs or Maximizing Re-Sale Value
and Remarketing Performance ?

• Influencing the Market ?
• Not possible for all players
• Very large volumes, nearly monopolistic
  situations
• May have a certain cost and bear significant
  risks
• Making the Most of the Market ?
• Flexible, cost effective strategies
• Process and performance based
• Can be implemented at all levels of the business

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Influencing RVs From the Leasing Companies
Perspective
Maximizing Re-Sale Value and Remarketing
Performance
Understand drivers of used car selling prices
MARKET(S) VEHICLES INDIVIDUAL FEATURES SELLING
PROCESSES
Identify drivers with maximum impact
INVOLVE IN-HOUSE EXPERTS USE BENCHMARK
Select drivers t.b. operated at sensible cost
ANALYTICS NEEDED DO THE HOMEWORK
Take action !
CREATE BUSINESS AWARENESS ALIGN OBJECTIVES
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Influencing RVs From the Leasing Companies
Perspective
1. Understand ALL the drivers affecting used car
selling prices

• Make
• Model
• Technical data
• Age
• Mileage
• Moment of Sale
• Equipment value (not just worth)
• Equipment type and combination
• Exterior colour
• Interior colour and materials
• Exterior and Interior combination

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Influencing RVs From the Leasing Companies
Perspective
1. Understand ALL the drivers affecting used car
selling prices

• General condition of cars
• Presentation
• Concentration on parking lot
• Sales People
• Buyer needs (stated or not)
• Weather
• Time pressure to sell/buy
• Channel through which sold
• Special deals and agreements

Re-Marketing Experience is a major asset in
relation with adaquatemarket benchmarks
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Influencing RVs From the Leasing Companies
Perspective Example influence factor colour
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Influencing RVs From the Leasing Companies
Perspective Example options
Audi A4 Avant 1.9 TDI
BMW 320 D touring
MB C220 CDI
Passat 1.9 TDI
Price new
28.730
29.650
31.505
26.375
Metallic
630
670
806
465
Lether
3.950
1.990
1.850
1.990
AC
serie
serie
1.636
serie
Sun roof
920
950
1.172
860
RV Basis
14.950
15.250
17.950
12.600
RV total
16.100
16.050
19.550
13.350
Already few extras can increase used car value
strongly
Quelle Eurotax Händlereinkaufswerte 36 monate,
120 tsd KM
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But keep in mind - options have different
depreciation behaviour
Depreciation with diferent Desirabilties
Depreciation, Basic car and desirability cluster 1
RV in
Depreciation options Desirability cluster 7
Age in Months
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Significant Differences in the RV dependent on
desirability of options
Quelle Eurotax
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Influencing RVs From the Leasing Companies
Perspective
2. Identify drivers that have the biggest impact
on achieved prices
This depends very much on the business e.g. 1
-- Local market performance relative to
neighbouring countries ? Is acceptance of
makes, models and equipments good ? e.g. 2
Optional equipments / required equipments ? New
car options watching lists / monitor
evolution e.g. 3 Car concentration ? What
is the actual observed difference on a repeat
basis ?
Information best tapped from the people actually
selling cars But how to benchmark results ?
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Influencing RVs From the Leasing Companies
Perspective
3. Select drivers that can be operated at
sensible cost
e.g. 1. Can we consider promoting certain car
configurations ? e.g. 2. Should we recondition
terminated vehicles? e.g. 3. Is a showroom a
good investment ? e.g. 4 How to motivate
driver to purchase at the end of lease ?
Cost / Benefit Analysis
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Influencing RVs From the Leasing Companies
Perspective
4. Take action !
Involve people on the job Look at
cross-functional impacts e.g. How to set-up a
deal for a large number of the exact same model ?
REMARKETING
SOURCING
SALES

• Make
• Model
• Fleet Concentration
• Required Equipment
• Exterior colour
• Interior colour and materials
• Buy-back negociations

• Vehicle re-conditioning
• Concentration / parking lot
• Sales Talent
• Moment of Sale

• Make
• Model
• Age
• Mileage
• Equipment types and value
• Fleet run-off profiles

Align Cross-Functional Objectives
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Influencing RVs From the Leasing Companies
Perspective
CONCLUSIONS
Business Critical Issues Cross-functional
Impacts On-going Monitoring / Benchmarking
Essential Understand STATISTICAL
DISTRIBUTIONS Technology and novelty DO NOT
generate SUSTAINABLE RV/SP increases vs
 natural  RV position any advantage is
TEMPORARY Technically outdated assets LOSE
GROUND vs up-to-date assets
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Thank you very much for your attention