Small to medium sized truck operators are the worst hit with banks and finance houses saying that anyone wanting finance in this sector, particularly those at the lower end of the market, are going to find it extremely difficult.
Transport consultant Derek Moe says entry levels into road transport for owner-drivers and SMMEs are now very difficult if not almost impossible and warns that the conservative approach by the banks in providing credit for commercial vehicles will result in a “severe cull” among smaller transport operators.
Nissan Diesel chief operating officer Johan Richards concurs: “The current situation totally blocks new entrants to provide a service to the industry.
“These smaller operators do not have the 25 - 40% deposits to start the deal, not even comprehending the cash-flows required for the first 60 days of operations. Existing small business operators, depending on how they manage their business, cannot sustain the lower economic activity and we believe they will be faced with liquidation, if the economic situation does not improve soon.”
Naamsa says the continuing weakness in medium and heavy commercial vehicle sales underline a downturn in investment spending by the private sector and reflected business confidence under pressure. The lower sales in the sector also reflected continuing difficulty experienced by truck operating businesses in obtaining finance.
Banks and finance houses say, in addition to the recession, credit availability in this sector has been affected by the National Credit Act, aimed at restricting “reckless” lending as well as the high rate of what they describe as “impairments,” among small-to-medium sized road transport companies.
Banks are extremely cautious and take a very close look at an applicant’s business model, credit history and ask a lot more questions than was the case in the past.
MAN Financial Services MD, Michael Kaiser, comments: “The days of one off, stand alone transactions are over.
“Right now the banks need to be assured that the person or company seeking credit actually understands the trucking business. This is why they prefer to deal with established clients.”
Although banks differ on how long the current situation will last, they do not expect any recovery in the vehicle finance market this year and straightening out current anomalies in commercial vehicle finance is a long term issue.
Wesbank executive head of sales and marketing, Chris de Kock, says confidence levels had dropped to 4,2 % in the quarter ended April, representing an 18% decline year-on-year.
While it has been widely claimed in the media that both the economy and business confidence levels have bottomed out, De Kock concedes that it is difficult to forecast what may happen in light of the volatility in global economic conditions.
“While dealers are expecting the remainder of this year to be tough, they are hoping for an improvement in trading conditions in the last quarter of the year and early 2010,” he says.
Linda Kotze, national manager – Nedbank Strategic Business Unit: Fleet, reiterates: “The economic recession has necessitated credit to operate very differently to what it did just two years ago.
“In the current circumstances credit’s credo is all about the “now”. The introduction of the National Credit Act, aimed at restricting “reckless” lending as well as the high rate of impairments, among small-to-medium sized road transport companies, has added an interesting dimensions to how we lend money these days.” says Kotze.
“When it comes to commercial vehicle finance, Nedbank like most banks and finance houses in South Africa, are extremely cautious,” she adds. “We take a very close look at the applicant’s business model, credit history and ask a lot more questions than was the case in the past. It is important that we understand how the credit crunch has affected the company we are lending to. We consult with our clients and ask for projected cash flow statements for the following year as well as signed audited financials. Cash flow, as we all know, is vital.
“It is important to ask pertinent questions around how much income the asset/vehicle will produce. Another vital aspect is the projection and planning of future repair and maintenance costs pertaining to these assets.
“The sustainability and “health” of contracts our clients have is investigated. We also explore exit clauses. If it is a banked client we look at track record and account management. It is important for both parties to play absolute open cards,” she says.
Just how long the current vehicle finance crisis will last no-one can say. While sharing Wesbank’s sentiments on commercial vehicle finance, Kotze says she is not so sure about the timing of a turnaround. “We are optimistic that the turnaround time will be ooner rather than later.”
On a more cheerful note, Richards says there are positive signs of a revival in the market: “While preparations for the 2010 World-Cup could drive an earlier recovery for South Africa, other sub-Saharan developments are also required to uplift the whole Southern Africa region, but the latter will only support longer term growth, rather than the short term.”
Kaiser also says it is impossible to give a finite answer on when the market will return to normal: “Any recovery will depend on what the global economy is doing,” he observes. Kotze says a word of advice for anyone wanting finance in this sector, particularly those at the lower end of the market, is to come prepared; the more information clients can provide the better. “Nedbank’s strategy is to partner with our clients and to enable us to do this we must understand and add value to their businesses.”
Getting back to the owner-drivers whose demise nullifies years of effort to empower emerging operators, Moe comments that one of very few options available is for the principal contracting company to purchase a vehicle on behalf of an owner driver. A number of companies have already opted to do this.
“While this does provide an opportunity for an owner driver to get his or her foot in the door to some extent, it also restricts their independence.” Moe says the current recession is also having a negative effect on those companies managing owner driver contracts.
“Existing owner drivers are under pressure as the demand for their services from their principals is diminishing at a rapid rate,” he says. “If you take the FMCG sector as an example, there are plenty of goods available, the warehouses are full, but the demand for them has significantly decreased resulting in an over capacity in the transport sector.
“When an owner driver goes to the wall, the principal who negotiated and managed the finance contract with the banks gets caught up in the debacle as well.”
An added problem for operators running into financial difficulties is, of course, the resultant adverse credit record they end up with, making it even more difficult for them to access financing in the future.
According to Kaiser it is not just a lack of financing that is hurting the smaller operators. “Until recently, there has been an oversupply of transport contracts,” he says. “Faced with shrinking demand, the larger haulage companies are now cancelling the sub-contracts they have with smaller operators, ownerdrivers and SMME’s."
While hauliers are feeling the pinch, truck dealers are also under pressure. Richards says turnover must be generated or huge fall-outs by dealers and manufacturers are just around the corner.
While the recession takes its toll on small trucking companies, Kaiser says there is some relief for dealers: “Truck operators are holding onto their vehicles longer, a trend that has resulted in an increase in spares and maintenance in the aftermarket.”
Both Kaiser and Richards say transport operators should exercise greater responsibility and apply tighter control on their cash flows to ensure their vehicle fleets are running at optimum levels of productivity and efficiency.
“In addition to this, hauliers should approach their clients with a view to re-negotiating their rates based on changes in the overall transport market,” Kaiser comments.
Richards adds that the only long term solution is that viable, cost effective road transport services are provided. “Those that cannot sustain tough times should look at their transport rate structures, and that applies to contracting companies as well,” he says.
“Both operator and contractor should take the high road for a long term sustainable transport solution. Financial managers should identify what the true and total operating costs are for trucks, and cost their retail products accordingly.
“In general,” Richards continues, “when productivity in the factory or in another area of the manufacturing chain is suspect, the problem should be solved there.Managers should not look to cut transport costs simply because the investment in trucks appears to be higher than the rest.”
Kaiser says hauliers shouldn’t wait until there is a dip in the market or recession before measuring and evaluating operating costs. “Transport costs should be measured and managed right down to the final CPK figures on an ongoing basis."
Richards says, in addition to quantifying costs, truck operators should make sure other key factors such as optimum route planning and choosing the correct vehicle for the job on hand will result in more productive transport operations.
Whatever happens in the immediate future, one thing is sure: the way small truck operators purchase and dealers/OEMs sell to this market will never return to how it was in the past. According to De Kock, until now, the risk which was carried 100% by the banks will now be transferred and will be shared by the operator – in the form of a deposit or other forms of security – by the issuer of the contract who must provide certain obligations like not being able to simply cancel the contract at will, by the dealers and OEMs who must buy back the units at a decent price and finally, by the banks who will take the risk for the shortfall that will invariably happen even after all these factors have been put in place.
2009 FleetWatch magazine and FleetWatch On-Line.
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