Roland Dane: The Depreciation Devil is back

The COVID influence on the car market here is well and truly over. And, with a return to relative normality comes the return of more traditional depreciation curves on almost every car. Maybe the LandCruiser 70 Series V8 is the only exception!

There are more microchips available than the world can use, plus shipping is largely back to normal, what with the Panama Canal gradually resuming full access, plus vessels are circumnavigating the Horn of Africa rather than using the Suez Canal much of the time. This adds a week or so to shipping times but isn’t the great impediment that a lack of capacity was in recent years.

Hence, supplies of new vehicles into Australia are no longer hindered by the constraints that flowed from the pandemic. With that though, has come a return to the reality of the effect of depreciation on the true cost of car ownership. We got used to a period of limited falls in the value of our cars as supplies were constrained and prices have been regularly increased due to a combination of inflation around the world and exchange rate fluctuations, in some cases.

But there’s another factor coming into play in the Australian market. And that’s the biggest influx of new brands we’ve ever seen in a condensed timeframe. There’s been the likes of BYD, GWM and Chery (re-entry in that case) and Polestar to name some, and they’ll be followed by another half dozen, unknown, Chinese brands in the next couple of years.

They all offer enticing deals one way or another; pricing, financing, servicing etc. But there’s one huge unknown with all these fresh brands, and that’s depreciation. Exactly what is the used market going to look like for Chinese built mass market cars and utes in years to come? I’d guess it’s going to be very ordinary.

Used car values are heavily affected by issues such as:

• Desirability of the brand.
• Reliability track record.
• Warranty availability – including quality of the warranty over the full term.
• Access to parts and service quickly and at economical rates.

Frankly, none of these new brands can really say that they’ve ticked any of these boxes to any meaningful degree in Australia to date. In the fullness of time there may well be several that become recognized for all the right reasons, but that’s not the case as yet. It’s too early to definitively make a judgement; the onus is on them to prove themselves.

However, right now, anyone buying a vehicle from a brand that’s relatively new to this market is taking a bigger gamble on the residual value than with the well-established ones, good or bad.

And that’s without throwing into the equation the ‘EV factor.’ Plenty of these new Chinese products are electric and the used market for pretty much all EVs, regardless of origin, is shaky, to say the least.

If a Chinese built new car is $10k cheaper to buy than the Japanese equivalent, but then is worth $20k less in three years’ time, then the first owner is saddled with that extra $10k of depreciation. And that depreciation will almost certainly be the largest single component of the car ownership cost. It shouldn’t be ignored.

It’s simply a false notion to automatically assume that the cheaper vehicle is going to be cheaper to own, over a period of time, than the dearer comparable one. It may be, but it’s not always true, by any means.

I believe that the used values of many of the recent Chinese entries into the market are going to be very low in years to come. And that’s not just a reflection of potentially poor back up or reliability. It’s also a reflection of desirability. Does the brand name resonate with buyers in the secondhand market? Building any brand, whether it’s automotive or otherwise, isn’t the work of moments. It takes years.

Even a brand as high profile as Tesla is struggling to establish itself in the used car arena. So, how are the likes of BYD and GWM going to fare in years to come?

Personally, I don’t want to be a guineapig with these brands.

But it’s not only the Chinese products that are questionable in the depreciation world.

Now that new car supply lines have normalised, for the most part, there are going to be some huge hits coming on used values of many of the prestige European models. That’ll only become apparent when owners go to trade their cars after three or four years of ownership, so there’s a delay in this realisation for many consumers. This fall in residuals for Euro prestige marques is already very apparent in the US and the UK markets, whereas there’s a time lag here in Australia as our supply lines, being so long, took longer to correct, post pandemic, than those closer to production sources.

I sometimes think that I’m running a promo for Toyota in this column (which I’m certainly not), but the fact is that, when the economy is under pressure, it makes sense to go with tried and tested products in the market, both new and second hand. Hence Toyota residuals are amongst the very best year in year out. They’re certainly not infallible at all, with some questionable products slipping into the market from time to time, and some of their cars are as boring as batshit. But they mostly do exactly what it says on the tin, and continue to do so for years.

They’re not the only strong brand of course, but they are the benchmark these days in so many sectors. No wonder their market share is hovering around 20 per cent even with this tide of new, cheap, brands coming into the country.

The bottom line is that consumers need to look much further into the total cost of ownership than just that rosy looking initial showroom deal. Depreciation can be a killer.