Rob Hoysgaard from Corcentric discusses financing alternative fuel vehicles. Financing the latest round of technological innovation is following the historic pattern of financing any new technology.
The terms clean, near-zero emissions and zero emissions are cropping up more and more in conversations about the future of the trucking industry. While California was one of the first to declare zero emissions zones, it is no longer alone in prohibiting emissions-producing vehicles from operating in certain areas. Cities across the U.S. and the globe are setting up near-zero or zero emissions zones in an effort to improve air quality for their citizens.
This movement, along with a growing number of environmental concerns, is leading to a host of developments in alternative fuel vehicles. From compressed natural gas to propane to battery power to fuel cells, both existing truck manufacturers and new entrants into the field are developing and testing vehicles powered by something other than traditional diesel fuel.
While the market is not currently flooded with these alternative fuel vehicles, fleets are ordering them so they can get comfortable with the technologies and determine how the vehicles will perform in their particular duty cycles.
Financing the latest round of technological innovation is following the historic pattern of financing any new technology. Captive lessors — affiliated with the truck makers themselves — are the first line of financing. They are financing the vehicles as a way of getting more vehicles out into the marketplace.
Whenever a new technology comes on the market, it is nearly impossible to gauge its value in the secondary market. Residual value is one of the key factors in the financing decision, but when there is not enough historic knowledge about the value of a vehicle once the first owner trades it, it is difficult for finance companies to accurately gauge their risks. As a result, they become more averse to financing these assets.
An added wrinkle to the financing of alternative fuel vehicles is the government subsidies that are offered in order to get these vehicles with lower emissions into the market. Municipalities, local, state and federal governments are offering grants, rebates, incentives, etc. to bring the initial purchase price of these assets down in order to stimulate purchases.
CNG is a good example of that. When CNG trucks were first coming into the market, there were a host of ways available to fleets to bring down the high initial cost of these vehicles, which oftentimes was tens of thousands of dollars more expensive then a diesel-powered truck. Typically those incentives are only available for the original purchaser of the vehicle.
What makes this time particularly interesting is that there are a number of competing technologies vying to replace diesel. In its recent Guidance Report, Class 7/8 Electric, Hybrid, And Alternative Fuel Tractors, the North American Council for Freight Efficiency identified more than a dozen options to diesel.
While it looks like battery electric powered vehicles will dominate the market in the long-term, the short-term will continue to see development of some if not all of these other options. Gambling on the wrong technology to become the fuel of choice can have serious financial ramifications. That is why it is imperative to have a lending partner that works with your financing and fleet groups to provide the analysis to effectively manage your vehicle mix and the life cycle of each type of vehicle.
All of these options further complicate things because with more choices there are likely to be fewer of each option coming into the market. That will extend the time it will take to get enough volume in the secondary market to accurately predict residual value.
Until alternative fuel vehicle sales grow, lenders won’t be able to gauge and understand what is an acceptable level of residual risk.
If the financing experience with CNG powered vehicles is any predictor, lenders will step in and finance alternative fuel vehicles but most likely only through TRAC (terminal rental adjustment clause) leases where the lessee is 100% responsible for the residual at the end of the lease term.
As fleets purchase more alternative fuel vehicles and residual values become clearer, more companies will begin offering a variety of ways to finance those vehicles. Until then and beyond, make sure you have the right partner to help you navigate the options and make recommendations on the best return on investment.
Barry Shafran, President and CEO , Chesswood Group Limited
Barry Shafran shares the story behind Chesswood Group’s journey from a Canadian new car dealership business with automotive lease receivables of just $80 million in 1999, to a North American public equipment finance business with a portfolio of $1.0 billion in 2019. He says the one constant and key ingredient in Chesswood’s journey is its amazing team of tenured and committed people.