THE DEFINITIVE TRUCKING SITE

April 2009

A good used truck can be purchased at around two-thirds of the price of a new one and still be good for another 500 000 kms, allowing operators to realise greater profits from the unit from the outset.

The global financial meltdown has hit everyone to varying degrees, some hard in the pocket, others merely in the head. What’s for certain is that no-one really knows what to expect next, least of all our local banks who have tightened up their lending criteria in abject panic as the so-called ‘financial tsunami’ continues its run on world markets. As if the National Credit Act wasn’t bad enough in 2007, now transporters wanting to buy vehicles either have to plough deeply into their cash reserves or make do with what they have, which does little to spur their growth. Relief is sorely needed and perhaps used and rental trucks are the solution to the credit crunch right now. Paul Collings investigates. 

Ask any entrepreneur looking to procure capital goods right now about access to finance and he/she will probably spit blood. For truckers, the situation is no better. While haulage contracts continue to be negotiated and signed, fleets need to be augmented to handle the work but this cannot happen effectively because banks have become increasingly reluctant to finance commercial vehicles. 

Used Trucks

According to Rodney Keiser of Mercedes-Benz Used Commercial Vehicles, “the credit squeeze is affecting both new and used truck markets. Banks are asking for at least a 20 percent deposit (sometimes as much as 40 percent) with as much as prime plus six percent interest, which makes it difficult for most operators to expand or upgrade their fleets.” 

Johan Strachan, Volvo SA’s Used Truck Division manager says: “Essentially, the Volvo used truck division experiences the same challenges and requirements to finalise a transaction as would be the case for a new truck. As such, Volvo is doing whatever it can to adapt positively to the current market circumstances to provide customers with the best possible support.” 

Support and positivity are what’s needed to sustain business confidence in any fiscal climate and given the pressure on operator cash reserves right now, the question must be asked - are used trucks a viable alternative to buying a new vehicle? 

“Most definitely! A good used truck means a much lower initial outlay but in most instances, will earn the same income as a new truck,” says Don Vale of The Truck Man. “A new truck can easily come in at over R1 million whereas there are some real bargain buys available at the moment in the used truck market, especially clean late model units. The same applies to trailers, although many of the trailer builders are sitting with high stock levels and have dropped their prices accordingly.” 

These views are shared by Desmond Bothé, group manager, Business Development, MAN TopUsed: “There is less risk in buying a used truck because the depreciation rate is fixed. A new truck loses 20 percent of its value the minute it leaves the showroom floor while the used truck will only depreciate at a fixed rate of 1.6 percent per month, offering more security on capital investment.” 

Despite the lower capital cost and depreciation rate of used trucks over new models, banks are digging their heels in to the extent that only large/corporate fleets stand a chance of procuring vehicle financing, says Vale. 

“Most of my customers are finding it extremely difficult to get finance approvals from the banks. This is a problem across the board, with all banks. Many of The Truck Man’s good customers who have made many truck purchases over the years, have been unable to source finance this year. For example, one excellent customer has had his application declined for the first time in 47 years! It seems that the banks are also only approving finance for their own customers and offering customers their own repossessed vehicles at lower prices than dealer vehicles, which is a little unethical.” 

It’s not all doom and gloom out there in ‘used-truck-land’ however. Bothé states that in January and February of 2009, 77 units were sold off the three TopUsed dealerships in South Africa. 

“One particular bank will only look at financing operations with an annual turnover exceeding R100 million, which obviously hampers the smaller fleet operator and effectively bars new entrants to the industry. At MAN TopUsed, we realise that banks regard trucking to be a highly risky business, a perception we are hoping to change by adding risk-mitigating products to the truckpurchase in the form of maintenance contracts, extended warranties and driver training.” 

We need creative financing solutions…don’t turn down customers outright, but offer them a vehicle they would otherwise qualify for, but with a bigger deposit.  Don Vale, Truck Man

Market shifts 

From the heady days of 2005 to 2007 where truck sales figures hit record highs, the last quarter of 2008 may seem like the worst possible ‘wake-up call’ for many truckers, be they on the supply or the service side of the industry. It has not gone unnoticed that many leading haulage firms have closed up shop in recent months. What happens to their trucks? 

“We don’t get many used trucks coming from folded operations,” says Vale, “but we are often offered vehicles by operators who are running into trouble. Many fleets have rigs standing in their yards, not earning. Most of the bank repossessions are going directly to the auctioneers but we are able to make offers on some of these vehicles before they are offered for auction.” 

The national economy plays the all-important role here as far as dictating what kind of truck is most needed. Construction vehicles continue to be in demand, while general freight trucks, for example, are not quite so needed due to the drop in consumer spend, says JP Venables of Edan Traders.

“Despite this macro economic trend, business continues, albeit a bit slower and we are moving a variety of models for various applications. We have a solid client base which is growing with ongoing purchases from customers north of our borders.” 

Says Vale: “Customers vary from transport operations, large and small, to the butcher or the baker who needs a truck to move his products around. We have a lot of cash buyers from across the border too. This year we have seen fewer first time buyers seeking to enter the transport industry, presumably due to fewer contracts being available to them.” 

Bothé comments that he has seen several smaller fleets offloading trucks, particularly coal tippers and longhaul vehicles, which are being snapped up by the trade “at ridiculously low prices, which kills the business if left unchecked.” 

There is less risk in buying a used truck because the depreciation route is fixed. A new truck loses 20% of its value immediately, while a used truck will only depreciate at 1,6% per month  Desmond Bothé  Group Manager, Business Development, MAN TopUsed

Adding value

It is clear that innovative procurement solutions are needed to sustain the used truck industry and buyers should seek suppliers that offer everything from full service histories on vehicles, quality parts and service support, as well as budget-friendly warranties and insurance premiums. 

“We need creative financing options,” says Vale. “For example, it would be helpful if customers were not turned down outright but told if they could qualify for a cheaper vehicle, perhaps with a higher deposit to lessen the risk. It also makes no sense to us that the banks are more willing to finance the really big fleets as opposed to smaller, well run operations. The banks have historically been most burned when the big fleets go down. We all know that many big fleets have only kept themselves solvent at times by refinancing their fleets with the purchase of new vehicles.” 

Venables espouses the ‘in-house’ financing solution to used truck procurement: “Edan Traders, via its in-house finance arm, helps the procurement process and we go to every length to ensure our customers buy a vehicle that has the right specifications for the application as well as service and repairs support in its region of operation. 

“We cover our risk by asking for a bigger deposit, a shorter payback term and we hold the registration papers of the vehicle until the loan has been paid off. It may sound a bit more onerous compared to what the banks ask for, in their ivory towers and on paper, but the difference is, we actually go ahead with the deal and put trucks into fleets.” 

MAN TopUsed, Edan Traders, Mercedes-Benz and many other used truck dealers execute full refurbishment on trucks as well as varying degrees of customisation. 

“All vehicles on our lot undergo a full health check in our workshops including diagnostics, compression and oil checks. We then do a full chassis sandblast and recoating, reupholster cabs, fit new tyres and re-spray the vehicle in the colours chosen by the customer,” says Bothé. “Doing this allows us to not only offer a clean vehicle but much needed peace of mind to the customer.” 

TopUsed trucks from MAN can be purchased with extended warranties and maintenance packages that deliver preferential parts prices and expert servicing around southern Africa.

Rental options 

For operators needing a quickfix  truck procurement solution, there’s always the rental route. While generally limited to vehicles under 15 ton GVM, rental can offer flexibility and low risk to the transporter. 

The market downturn has affected the rental industry in much the same way as the new and used truck arenas, says Martin Breedt, managing director, Imperial Truck Rental.

“We’ve seen a substantial downturn in light delivery vehicle rental and our FMCG trade has also slowed. However, our construction vehicles continue to be fully utilised. There is also a marked reduction in the number of kilometres notched up by respective customers. As cashflow becomes more critical, fleets are looking at ways to reduce fuel costs so they’re optimising their routing and scheduling.” 

Avis Truck Rental’s Sharon Cooper states that business has slowed considerably over the last few months but that she remains positive that things will turn for the better by the end of 2009. “The rental market serves as an effective barometer for the trucking industry and despite the fact that our distribution trade is feeling the pinch, be that steel, timber, plastics, FMCG or general freight, our construction side is as buoyant as ever. We have had to sell off old vehicles but will not replace them until the market picks up.” 

Edan Traders has positioned itself smartly by adding a trailer rental division to its used truck operation and Venables says that business on this front is brisk. 

“In times like these, operators need to adapt to market changes and tying capital up in trailers that may not be fully utilised is very risky. Having a trailer rental service available allows them to service short-term contracts without the financial burden of buying the trailer. It’s a really effective way of streamlining fleet costs.” 

The upshot on the downturn 

We know that SA’s banking industry is not nearly as badly undermined as its counterparts in the USA and Europe. It is, however, seriously nervous about lending money to businesses that are new, unproven or recalcitrant. Trucking, as an industry, needs to convince finance providers that it has the mechanisms in place to ensure satisfactory repayment and ultimately, this means providing buyers with sound vehicles to successfully service their contracts - that all the required support structures are readily available from the dealer. 

Whether it’s purchased from an OEM dealership or a reputable independent dealership, a used truck should come with a solid value proposition from the supplier, one that treats the buyers as if they were procuring a new truck. For operators who opt for truck rental, due diligence is also required to avoid being financially hampered. 

“Price undercutting is rife in this industry with smaller players looking to grab market-share while overlooking the quality of their services and their vehicles. Uptime is everything in this business and the reputable dealers have proved over many years that they facilitate this with solid support and reliable vehicles,” adds Cooper. 

The bottom line, as it has always been, is to consider the overall lifecycle cost of the vehicle and remove operational risk as much as possible. A quality used truck properly maintained will save you money and help you realise a better immediate margin. For those suffering the stonewalling bank, the rental truck and trailer will keep you in the game.