Inside the pieces of the TCO pie
So what exactly are the segments that make up Total Cost of Ownership? Let's have a look at the pieces that make up the TCO pie and find out what segments represent the biggest pieces .
Finance and depreciation
This is the biggest slice of the pie. For Europe, this segment needs to be viewed together with another TCO segment, the End of Contract.
The End-of-Contract charge is essentially for the physical and mechanical condition of the vehicle, as well as any excess mileage charges that it has incurred, when it is returned for resale after the primary period of use.
In its segmentation, the European pie chart is a bit more comprehensive than the U.S. one. This additional segmentation, which is mainly due to the influence of Operating Leases in the E.U. markets, is useful in that it allows at least a partial insight into the driver's influence on TCO.
The depreciation (i.e. residual values, or RVs) that is actually achieved partially reflects the effectiveness both of a fleet user's Car Policy is, and of his continuous driver management controls. The total cost of fuel of a vehicle also is a partial reflection on the way a driver has handled the vehicle provided. In the U.S., some very effective fuel management systems are in current use, as an expression of U.S. fleet users' focus on driving actual costs down.
Service, Maintenance and Repair (inc. tire replacements)
Not unsurprisingly, the European and the U.S. segments are the same in this case. But students of TCO pie charts should beware. They need to take into account the segment in the European pie chart headed Out of Contract (3%). A large part of this cost – and in some cases all of it – relates to the Service, Maintenance and Repair (SMR) of a vehicle.
Insurance represents 6% of the TCO pie in the U.S., 4% in the E.U. When comparing the European insurance costs with the American ones, the segment Accident needs to be taken into account.
Taxes represent 7% of the U.S. pie, 8% in the E.U. In Europe, the Benefit in Kind (BiK) levies as well as the CO2 taxes (which are often combined into one) vary considerably per country. The same goes for the allowable offset of VAT (sales tax) levied on the monthly rentals. France, for example, has 20% VAT, of which 100% is disallowed to offset. Of course, this increases the Tax slice of the TCO pie.
Fuel represents 23% of TCO in Europe, and no less than 44% in the U.S. This difference clearly shows how much Europeans are focused on fuel efficiency – increasingly so, as CO2 taxes take effect.
The application of a Management Fee has always been a confusing aspect in European light vehicle circles. In some organisations, this cost is included within the interest margin that finance houses (i.e. the Operating Lease companies) apply as an additional percentage over the cost of borrowing. Others show it as a separate entry. The 1% on both the U.S. and E.U. pie charts is very low. On a $14,000 On the Road (OTR) price for a common fleet vehicle, this would equate to a €140 admin fee over a total three-year period. That's not a feasible (or satisfactory) result, so the true management fee may well reside elsewhere in the pie chart.
The U.S. pie chart is more transparent, as it clearly shows a funding element – which probably contains an additional management fee (i.e. profit opportunity). The management fee clearly shown as 4% on the U.S. pie chart is refreshingly open, and realistic. But there may well be an additional profit margin percentage applied to the finance cost of borrowing.
Remarketing remains a key segment within TCO. However, in our humble opinion, neither U.S. nor E.U. fleet suppliers, nor indeed fleet managers and/or procurement personnel, are open enough to allow for a refined cost analysis. Some important issues remain unresolved:
→ Driver Management
Bad drivers increase operating costs of company cars by up to 15%. The U.S. now measures driver behaviour very carefully, taking action to drive down cost. The E.U. is still behind in this respect. Driver behaviour can significantly impact on:
- Service, Maintenance & Repair
- Insurance premiums
- Out of Contract charges
- Residual value achievement
→ Vehicle Resale Costs
Every day an unused vehicle remains unsold, it incurs a cost. The average period before used vehicles are sold varies greatly in the E.U. In the U.K., it's 11 days, while in France it's 22 days. Those 11 days difference are an expense that the fleet user pays for, whether the vehicle was acquired by cash or Operating Lease.
→ Optimum Delivery Dates
In Europe, it's important that fleet vehicles are delivered in an optimum calendar period. An additional calendar year means additional depreciation. An example: a car delivered in Q4 and terminated after the stocking period has elapsed four years later, may be considered by the buyer as a five-year-old car. Optimum calendar period delivery is well-developed in the U.K., the Netherlands and Belgium, but less so elsewhere in the E.U.
U.S. fleet management again has the edge, due to the flexible termination decision making processes in place.
TCO pie charts are not that different between the U.S. and the E.U., except for the size of the fuel segment. One point of growing divergence, however, is Environmental Taxation. This is starting to bite in Europe, and will significantly alter the vehicles that company car drivers can choose from.
The U.S. has yet to focus on these 'green' taxes, or indeed on BiK taxes. This is mainly because most fleet vehicles in the U.S. have a purely functional business use. This means that there are far less emotions attached to U.S. company cars, and also that the decision to terminate a vehicle can be very flexible. U.S. vehicles can be kept on as the principal car until the used market improves, or terminated early. Of course, this approach significantly and favourably impacts TCO.