Balance Is Necessary To Determine Resale Value
With a build-up of used inventory creating an oversaturated market, companies need to weigh several options when it comes to investing and subsequently selling a commercial truck. Dale Tower of Corcentric offers some advice on what companies can do to maintain resale value.
The used truck market has changed considerably in the last five years. 2015 capped off a nice four-year run (2011-2015) of a healthy used truck market. But by the end of 2015, activity slowed down and at the same time there was a very large build-up of used inventory. The slowdown and inventory build continued until the end of 2016, when the market suddenly caught fire and stayed hot throughout all of last year.
2019 had a promising start but activity has slowed and now the inventory of used trucks is again growing very rapidly— nearly 50% since late last year.
What we’ve seen is an immediate downward impact in the value of used trucks in the wholesale and auction markets. This is what typically happens when there is more supply than demand. With that said, it is likely that retail prices of used trucks will follow this downward trajectory.
The good news is that the general economy is still fairly good, but tonnage numbers have been up and down all year. However, spot rates have been down, and the spot market is what drives owner-operators, the prime buyers of used trucks.
While supply and demand is the biggest factor affecting used truck values in general, there are some variables that can make one truck more attractive than another. The number of miles on the truck is one of the biggest factors determining value. The sweet spot in selling used trucks — specifically sleeper cabs — is those that rack up 100,000 miles a year. With day cabs that number is closer to 75,000 to 80,000.
If a fleet is averaging those types of miles, it can set up a normal depreciation schedule for the asset. More miles than that and the fleet will have to make adjustments or it will get hurt in the secondary market. If a fleet is underutilizing a truck mileage-wise, then it may decide to slow down the depreciation.
Historically the residual value of a truck is determined as a percentage of its original purchase price. As a general rule, a sleeper truck that runs over the road for five years and has 500,000 miles on it would likely be valued in the wholesale market at around 25% of the original value when it hits the secondary market.
This is important for fleets that focus on total cost of ownership. Here’s why:
- Fleet A purchases a bare bones truck for $120,000.
- Fleet B purchases a truck with lots of bells and whistles for $142,000.
- Using the 25% rule at resale, Fleet A should see a wholesale value of $30,000 and Fleet B should see a wholesale value of $35,500. While Fleet B paid more upfront for the truck, it got a bigger payback at resale.
There is no right or wrong choice here; fleets just need to remember to look at the whole lifecycle of the asset when determining how to spec it.
However, fleets also need to be aware that certain specs are likely to be more attractive to the second owner of the vehicle.
Let’s take automated manual transmissions as an example. It was not too many years ago when a truck equipped with an AMT would be dinged in the used truck market. Today, that script has been flipped, and trucks with manual transmission are taking a hit compared to those that have AMTs.
Other components that are adding to a truck’s value are automatic tire monitoring/inflation systems, collision avoidance systems, trailer fairing and telematics devices. Wide-base tires, 6×2 axles and vehicles fueled by something other than diesel are not fairing as well on the used truck market.
This shouldn’t deter fleets from spec’ing components that are not adding value at resale. Rather they need to make sure the math works out so that the value they get operating with a particular component outweighs the fact that they will not recoup the cost of the investment at resale.
For example, a fleet that runs with wide-base tires to save weight in a liquid haul application will make a lot more money hauling with the wide-base tires than it will lose in the used truck market from having them on a truck.
There are also some common sense things that can be done to improve residual value including cleaning the truck, fixing and painting any rust spots, changing the oil, etc. In other words, get the truck up to industry standards.
When we are in an over-inventoried market, as we are now, it becomes more challenging to dispose of used inventory profitably. The trucks that will sell first will have the best, most desirable specifications, be in the best condition, clean and priced right.
Determining proper residual value and depreciation is vital in being able to dispose of a truck when its first useful life has been reached. To balance out market conditions, residuals must stay in the middle of the road and not recognize real down, or up, markets.
Dale Tower is Vice President, Remarketing, Corcentric Capital Equipment Solutions, and has more than 30 years’ experience in the transportation industry. His primary focus is on the development and growth of Remarketing services, which provides Corcentric (formerly AmeriQuest) and NationaLease members with a value-added service that frees them of the responsibility of selling their used trucks while obtaining higher gains. Dale previously held executive roles at TEAM Vehicle Sales, Budget Rent-a-Car, and Ryder System, Inc. Dale attended BYU- Idaho.