Vehicle Capital Costs Around The Corner

As much as they try, businesses can’t control everything that happens to them, including those businesses that make up the Auto Industry. Tons of outside forces like regulations by the government, labor laws, and even stock markets can affect a company’s operations. In comparison, capital cost trends aren’t so different from spending trends. There are many factors, both economic and outside factors, that influence how people spend their money; and, in turn, consumer behavior and market demand affect the behavior of businesses. With another brand new year building up ahead of us, it is expected that there will be continued trends in vehicle capital costs.

What Are Vehicle Capital Costs?

Vehicle capital costs are one-time, fixed expenses, which are incurred by an auto manufacturer with the purchase of any vehicle used in the production of vehicles or in services that are vehicle-related. Costs include expenses covering the purchase of plants and machinery as well as the purchase of any intangible objects or assets, such as trademarks and software.

3 Trends in Vehicle Capital Costs

Below we’ve provided insights on the top three vehicle capital cost trends in 2018 and how each affects automotive companies, manufacturers, and dealers alike.

1. Prices Of New Vehicles Are Expected To Rise

If you are planning to buy a brand new car by the end of 2018, you better prepare yourself, financially, because new vehicle prices are expected to rise. Price increases are expected to happen, moderately, and not immediately, by 1 to 2 percent. Production costs for fuel efficiency and innovative safety features continue to rise; hence, sales in new vehicles are expected to decline. Because of this, car manufacturers raise the prices of new vehicles to sustain the demand.

Other factors playing into the price increase include the following:

  • Sales are expected to soften in the coming years. In order to sustain, car manufacturers will pass their high production costs to new vehicle buyers.

  • There is an increase in production costs for new and innovative features.

  • New vehicle prices have increased, gradually, over the years, and more rapidly for SUVs and trucks, which are favored by most.

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2. There Will Be An Increase in Depreciation

For the past year, depreciation is attributed to over 36.8 percent of the total cost to buy, own, and operate a vehicle. Two years ago, it only accounted for 35 percent of the total cost. Depreciation is expected to increase up to 1 to 1.5 percent, starting this year and will increase as the year continues.

Because of this, the resale value of cars will fall, and businesses will receive less return of investment than normal when it comes to reselling or trading in their vehicles.

3. There Will Be A Drop In Residual Values

For the next twelve months, residual values are expected to decrease by up to 3.5 percent as the inventory in the used vehicle market continues to increase. Ever since the Great Recession, there has been a steady increase in residual value because car owners are deciding to keep their cars longer. Residual value is major contributor to capital costs. With its gradual decrease, businesses will not get as much resale value for vehicles sold within the next few years.

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