European automotive

Driving the electrification of the auto industry

Summary

The transition to battery electric vehicles (BEVs) comes at a time when there are lots of moving parts in the automotive industry – agency, regulatory changes (including consumer duty), and new mobility products such as subscription and new rental products.

The EV transition saw the UK government and auto industry originally focused on selling new EVs and getting a fully functioning charging infrastructure in place. But while the supply of EVs is starting to improve, demand is suffering as a result of a poor second-hand market.

A panel of industry experts including Professor David Greenwood, CEO of the High Value Manufacturing Catapult at WMG, University of Warwick; Richard Jones, Managing Director of MotoNovo Finance; and Marcella Merli, Head of CA Auto Bank Italy joined Asset Finance Connect’s Head of Content, David Betteley, at the AFC Autumn 2023 Conference to discuss how the industry must now turn their attention to the EV market for the second buyer, focusing on incentives and the type of finance products available, in a bid to ramp up second-hand EV sales and boost confidence in electric vehicles.

The EV revolution

Watch the video below of Professor David Greenwood’s presentation at the AFC Autumn 2023 Conference with accompanying slides.

MotoNovo Finance’s Richard Jones believes that the industry needs to keep perspective on the overall timeline of the EV transition: “Five years ago, EV sales only made up 1% of total sales, but now they are touching 20% which is good progress if we bear in mind that it took diesel (which was a far simpler transition) 20 years to reach its peak”.

Jones notes that the transition to an electric auto industry is a massive change: “Electrification brings huge benefits but also brings real differences in how you have to use your vehicle.”

Fleet v retail EV sales

The conference panel unanimously agreed that, while things are moving forward on the supply side of the industry with the introduction of the ZEV mandate, more needs to be happening on the demand side.

Fleet registrations of electric vehicles are driving the electrification of the auto industry with salary sacrifice (salsac) and Benefit-in-Kind (BiK) incentives. But while these registrations are coming through in the data as fleet, many of them are from private individuals via salsac and BiK schemes, with 60% of UK employees having access to salary sacrifice.

However, there are no incentives for the second-hand electric car buyer and no support for the cost of installing a domestic e-charger. Richard Jones highlighted that, “if the economic case is not there, the demand will not switch to electric.” Incentives need to touch all parts of the second-hand market and move away from new EV purchases.

Second-hand EV market

The EV market will not work unless there is value for the second buyer, according to Richard Jones, who sees “the key to the EV market is getting the second-hand market to be vibrant… If we can’t get the second-hand demand up, then we will see a really choppy adoption.”

And currently there are no government incentives for consumers in a second-hand EV market where volumes are rising.

Professor Greenwood highlighted a recent House of Lords EV report where the need to find the right interventions for the second-hand EV market came through very strongly:

  1. Trust in second-hand EVs – looking at the quality of the battery in second-hand electric vehicles and whether battery passports, for example, can help to increase confidence.
  2. Creating the right finance models – a second-hand EV is still an expensive cash purchase, so the finance industry needs to introduce leasing of second-hand vehicles. Prof. Greenwood noted that more vehicle leasing companies are now offering second-hand leases. Note, the Scottish government is talking about offering 0% interest loans for second-hand EVs.

Residual values

While the methodology for residual values for EVs is the same as for ICE vehicles, Richard Jones noted that the unpredictability of the EV market is very different causing problems for RV setters.

There is a long way to go to build confidence in EV batteries and charging infrastructure, which currently has a massive impact on what a finance company thinks about the value of an EV in three years’ time, for example.

While most vehicles in the used sector are currently financed through a loan, hire purchase agreement or via a rental product, leasing is non-existent in the used sector.

More residual value-backed financing is needed in the industry for the second-hand market according to Jones: “the funding community will need to take on more value risk in an asset that is still nascent and uncertain.”

Integrating incentives for the second-hand EV market into finance products would be a powerful tool for the sector, with subsidised finance or tie-in scrappage schemes. But according to Jones it comes down to the fact that those who take on the RV risk want more certainty, and if the certainty is not there, then you act with caution and price down, causing monthly payments to go up.

Marcella Merli confirmed that this is the current situation in Europe with an obvious correlation between poor charging infrastructure and lower residual values. The lack of confidence has led to low pricing as no one wants to take the risk.

Boosting confidence in EV batteries and charging infrastructure

A big concern amongst retail customers is that, with EV battery technology evolving daily and battery range constantly expanding, an EV bought today could be redundant in three years’ time.

The industry therefore needs to create confidence in EV batteries (from dealers, OEMs, governments) for the second-hand market to thrive, according to CA Auto Bank’s Merli.

Greenwood noted that current EVs are being designed for the environment they live in. With imperfect charging infrastructure, we are currently seeing a ‘race for range’. But in the future with better charging infrastructure, batteries will not need long range so the cost of the battery and hence the EV will come down.

In the future, Greenwood predicts that we will see two types of EVs: Premium vehicles with long-range batteries and high cost, while the majority of cars will come down in range with a fast charge, to go alongside a trustworthy charging infrastructure.

The government is currently pushing for an Open Charging Data Standard highlighting where EV chargers are located, whether they are working, along with an advanced booking facility.

Such government initiatives would help to grow confidence which, in turn, would make the vehicles more affordable. As Jones noted: “Confidence feeds demand, demand feeds stability and pricing.” Technology degradation will be less of an issue once you get increased confidence in EVs.

Negative media coverage on electric vehicles and charging infrastructure and reporting misinformation to the public has not helped to build a positive public opinion of EVs: “As an industry there is a lot we can do to help reinforce reality and to promote the growth and standards and capabilities, and to get more universality in coverage,” commented Richard Jones.

Jones believes that it is essential for the finance industry to look at the financial products it can offer and how it can work with government to get incentives, such as BiK, available to everyone including the second-hand market.

Social leasing

While EVs might be the better option for the climate and path to net zero, they are not the best option for the wallets of those on lower incomes affected by a cost-of-living crisis.

Government subsidies in Europe have been launched in order to make EVs more affordable to lower income people. In France, for example, the social BEV leasing program offers a government-subsidised leasing scheme for low-income households to counter criticism that EVs are out of reach for many and to reduce negative social impact from the green transition.

The leasing scheme stands to benefit European carmakers rolling out new smaller less-expensive electric models, with the French government pushing for more locally-made smaller EVs in addition to higher-end models.

The UK national government by contrast has no (current) plans to support the sale of second-hand EVs to lower and middle-income households. Moreover, the continuing roll out of ULEZs by local governments effectively punishes drivers who can’t afford either an EV or a very new diesel or petrol vehicle. This is a developing social divide and surely an unintended consequence of what the government is trying to achieve.

Will the march of the Chinese change the dynamic of the whole BEV debate?

Chinese automakers are the best producers and sellers of EVs, according to Marcella Merli, with a full range of vehicles, full capability and advanced technology at a reasonable price. But whilst they have an advantage in battery materials, technology and factories, new Chinese brands need to create a name for themselves in Europe with reliability and aftersales.

Chinese OEMs are heavily vertically integrated with the battery, technology and materials, along with very heavy government subsidy. However, in the electric transition, China moved very big very early and are now locked into old technology. As the electric revolution fast forwards around the globe, Greenwood sees Chinese manufacturers losing their technology advantage, requiring them to innovate along with other countries.

Prof. Greenwood sees the march of the Chinese presenting more of a problem for the European auto industry than the UK, as they are competing on lower cost smaller vehicles than high-cost premium vehicles (like JLR and Rolls Royce in the UK).

It appears that EU regulators could see this coming and based regulation – some environmental and some protectionist – around the entrance of Chinese brands into Europe. Chinese manufacturing has very high embedded carbon emissions compared with Europe, so the car industry will likely move from legislation for tailpipe emissions to legislation of embedded carbon emissions in order to negate some of the cost advantage of Chinese brands.

Concluding remarks

The electric transition in the UK is gathering pace with EV supply improving and increased investment in an EV charging network.

With growth in EV registrations driven entirely by fleet investment as a result of government incentives, private consumer EV demand remains stable with cost-of-living pressures and high interest rates constraining growth.

However, EV demand in the UK is suffering because of a poor weak second-hand market, which is in urgent need of attention. Purchase incentives and support for the installation of a domestic charger are urgently required in order to generate demand for used EVs which in turn will lead to increased adoption of new EVs.

Additionally, growing confidence in EV batteries and charging infrastructure is essential to fuel EV demand, providing a stable market that would give certainty to EV residual values.

Analysis from David Betteley Asset Finance Connect's head of content

The transition to electric is the issue that is top of the agenda for all automakers globally, and the cost of fuelling that transition are astronomical. It is almost impossible for traditional western manufacturers to shoulder the whole cost of the transition on their own balance sheet, and this has led to a rash of partnerships and co-operation arrangements between manufacturers.

This activity will in time reduce differentiation in performance and design, resulting in a reduction in “brand snobbery” which will, in turn, result in the erosion of brand premiums. So, at a time when manufacturing margins are under pressure due to the loss of brand premium, higher manufacturing costs, and a price war between BEV manufacturers, the ability to invest in this new technology has become increasingly challenging.

And there is as always, an elephant in the room which is the march of the Chinese brands. It is generally acknowledged that the manufacturing cost of a Chinese produced BEV is c 20% lower than a European/ US produced similar vehicle.

Not acknowledging the threat from Chinese brands may be just one of the issues that western governments have overlooked. Indeed, the rush to electrify personal transport may well have created other unintended consequences.

We discussed in the session the issue of affordability for an average retail car buyer who cannot access either BiK payments or a salary sacrifice scheme. This particular unintended consequence is that there has quickly developed a social divide between fleets and new car buyers with deep pockets and lower income households who cannot afford to “go green”.

Moreover, this latter group are the ones that are unfairly discriminated against as they are less likely to live in a home with a driveway and therefore have to rely on public charging at two times or even three times the cost of domestic charging. To add insult to injury, the proliferation of low emission zones up and down the country discriminates unfairly against this group that can only afford to own an older, often non-compliant ICE vehicle.

There is, however, some good news. The UK charging infrastructure is benefitting from a mix of investment from private companies and a number of government-sponsored schemes. Despite the ongoing negative attention of the media, the UK is quietly becoming a charging infrastructure blueprint for the rest of Europe to follow.

As Prof David Greenwood pointed out, when the public can rely on the charging network, range anxiety will all but disappear and the competition between manufacturers to continually add range will give way to more limited range vehicles, produced at a much lower cost. When this point is reached, the transition to EV transport will be able to be considered as mature.

European automotive
UK asset finance

Introducing the new FLA Chair – John Phillipou

Summary

John Phillipou became the new Finance & Leasing Association (FLA) Chair in Autumn 2023 following the resignation of Rebecca McNeil. He takes on the role at a troubled time when regulatory change is continuing to grow, and uncertainty over the economy continues to attract negative media attention. John’s challenge is to manage the impact of regulators and the Financial Ombudsman Service; to persuade the industry’s many publics of its value to SMEs and the wider economy, and arguably to find ways to engage with regulators which deliver better outcomes for both customers and the industry. John Phillipou talked to David Betteley, head of content at Asset Finance Connect (AFC) and a former chair of the FLA at the AFC conference in November.

John Phillipou started his career in financial services at Northwest Securities. After working in a sales capacity at JCB Finance and Citigroup, John moved to Deutsche Leasing as MD of UK and Ireland and then overseeing 23 countries, where he stayed for 12 years. John then spent two years as CEO at PEAC, moving to Paragon in 2019 as Managing Director of SME Lending. In 2023 John became Chair of the FLA.

In late 2022, John wrote about the 2023 outlook for the asset finance industry commenting: “With 2023 set to present SMEs with fresh challenges, our job is to provide them with stability…The refinancing of unincumbered assets and the financing of used equipment are two trends we expect to see in 2023, and this is understandable. Businesses will be making pragmatic decisions to support their balance sheets and provide themselves with the option of seeing how the year develops before committing to new investments. But it is never too soon to start researching what financial support is available and we will be pleased to discuss their requirements with them throughout the start of 2023.”

Despite unchanging risk appetite measures, 2023 saw a cautious stance from industry lenders and borrowers, brought on from an undercurrent of risk aversion (especially since Covid) and a lack of stability in the market, as a result of government changes and geopolitical conflict.

It was the duty of lenders to keep their feet firmly on the ground during the year, according to Phillipou, and to pass on a reassuring message to SMEs that they would sail through the storm as they had done during Covid. Moreover, Phillipou believes that the industry is “still crying out for that stability message from lenders as we go into 2024.”

Role of government

Jeremy Hunt’s 2023 Autumn Statement brought support and understanding to the asset finance sector from the current Conservative government. And while leasing was not included in the full expensing regime, the government has initiated a review showing a statement of intent which will hopefully have a positive outcome in 2024, with continued FLA lobbying.

In his new role as FLA Chair, Phillipou sees the government taking on a supportive role, listening and taking onboard what the FLA is saying. John Phillipou, along with the NACFB’s Norman Chambers, see that it is vital that the industry’s views are passed to the right people in government.

It is essential that the government recognises that, by lending to SMEs, the asset finance industry is helping to drive the UK economy forward by providing investments for positive business.

Under Phillipou’s leadership, the FLA will continue to lobby government and pass on the views of the asset finance industry, but he believes that it’s about getting the right industry representation to get those messages across; not just FLA board members but engagement from the whole industry because “the more people that plug in the message, the easier it will be”.

As an influential trade body, the FLA seeks representation in government discussions when looking at investment in the economy. Such talks should not simply focus on the ‘big four banks’, but rather look at investment opportunities from other financial sectors such as asset finance.

Media

There has been a lot of negative media reporting across the financial services industry and, as Chair of the FLA, John Phillipou is hoping to change this: “We need to get the asset finance industry out to the media on a front footing and need to promote the industry”.

It is essential for the industry to identify successful client stories in individual areas and regions and highlight these achievements to MPs in local constituencies. This would build a consensus of what the industry does at a local level and get the good stories out there, according to Phillipou.

The media like to paint the finance industry as too risk adverse which is creating negative press stories. The media generally look out for big banking features not small asset finance news stories. There is, therefore, a need for the FLA and its members to collectively get the success stories noticed and promote the industry, highlighting the industry’s relevant standards and codes and its capability for funding green assets.

Regulation

Over the past year new regulation has been imposed on the asset and motor finance sectors. With a particular focus on regulated business, many companies have been left wondering whether the new regulation will filter down to unregulated business.

For John Phillipou, a key word in the regulation debate is ‘proportionality’. Phillipou points to Paragon, where some business is regulated and some unregulated but “we have to look at what is proportionate to the regulated world”.

Phillipou believes that “by the time regulation impacts unregulated business, there will be a different view of the same regulation.”

While the government has encouraged the setting up of challenger banks to break though the legacy systems and bureaucracy of the more established banks, Phillipou commented that “we don’t want regulation to stifle the role of challenger banks and turn them into the old-school banks that they were created to get away from”.

The added cost of compliance has also been causing significant challenges for small independent lenders, as highlighted in the recent Asset Finance Connect UK confidence survey, with some smaller businesses exiting the regulated field.

Like lenders, brokers are experiencing the same problems. Phillipou believes that it is about driving standards, with lenders having a duty of care to make sure brokers are effectively doing business with the customer. The last thing the industry needs is brokers seeing regulation as so onerous that they leave the market.

Brokers and lenders operating regionally on the ground is essential for the industry and something that the sector does not want to lose. It is all about standards, according to John Phillipou: “we’ve got to make sure that the industry functions correctly.”

To enhance the lender-broker relationship, it is fundamental that the NACFB and the FLA work together, giving a voice to both lenders and brokers.

Managing and sharing data

While managing and sharing data leads to better outcomes and enhanced security in the industry, it requires huge investment in technology and people. Again, many smaller lenders and brokers could be left behind due to the cost of systems.

The same applies for ESG reporting systems which can bring challenges for smaller lenders due to high costs and time needed.

Big banks can sign up to more granular green reporting modules, while smaller lenders will adopt a more streamlined version (averaging data). This presents a challenge for scope 3 reporting for non-bank lenders who can’t invest in the relevant technology.

Phillipou pointed out that the FLA is looking into this with a common set of definitions and standards that all lenders, no matter the size, can use when reporting.

Fraud

Since the Arena Television fraud revelations in 2021, the industry has been looking at ways to ‘fix’ the gap in UK asset finance fraud data with technological developments helping the fight against fraud.

However, many lenders report their data to just one agency which isn’t enough. There needs to be a crossover in the viewing of data and sharing it to a central source. Acquis Lumia is one such tool to aid lending decisions and help tackle fraud through industry collaboration and the sharing of data.

However, John points out that the data journey is not so straightforward. The FLA are keen to look at the data that lenders report to the FCA across their three divisions (asset, motor and consumer) as some of this data could be used by the FLA to model, for example, the green journey and see where it is going.

John Phillipou believes that the industry needs to keep evolving its processes to avoid fraud.

The role for asset finance in the coming year

A valid point was raised during the session that despite years of lobbying by the FLA, the Treasury, HMRC and Whitehall do not fully understand the importance of asset finance or its delivery channels, the tax regime doesn’t encourage it, the regulator hinders it, and non-bank lenders are largely ignored.

Under his leadership at the FLA, it is clear that Phillipou wants to drive the asset finance agenda forward with increased communication with FLA members, so they can follow the association on its journey.

Pushing into regions with levelling up, non-bank lenders can reach parts of the UK that other lenders cannot; a message that the FLA needs to reinforce with UK PLC to show that asset finance is a vehicle to influence government economic policies.

However, small non-bank lenders are currently facing a number of disadvantages:

  • Cost of funds is, on average, higher than for mainstream banks
  • Cost of regulation
  • Development of new products
  • Basel III and increased costs

Bank lenders need to bridge smaller, regional lenders, alongside British Business Bank schemes and additional help from government. It is of paramount importance to get the message across to government to get the liquidity through to non-bank SME lenders.

Again, Phillipou focuses on ‘proportionality’: we must apply (FCA) regulation which drives standards in a way that is appropriate to the markets we are serving, that are fundamentally different to consumer markets, rather than lessening regulation depending on the market which can be dangerous.

Over the coming months, the industry needs to address:

  • easier access to wholesale funding
  • different capital requirement options
  • helping challenger banks and small non-bank lenders to fund the green revolution
  • uncertainties of risk
  • creation of new models and products

Phillipou believes that uncertainty in the industry is fuelling some less than positive behaviours. For example, while everyone is talking about the green transition, no one is doing anything about it due to uncertainties of risk related to residual values and an under-developed second life market.

Rather than focusing on negative perceptions of the sector, the asset finance industry needs to be proud of itself as an important part of the UK economy, according to Phillipou, and should stop apologising for its existence!

Concluding remarks

The new Chair of the FLA, John Phillipou, sees challenges facing the asset finance industry in 2024, but as a long-term member of the asset finance community he sees a stable industry that should be proud of its achievements and the role it plays in funding SMEs who are the lifeblood of the UK economy.

To address any issues, John believes that it is paramount that all industry players – whether from trade bodies, lenders or brokers – must unite to present a forward-footed, stable financial sector and a united voice to lobby on issues affecting the sector.

Analysis from David Betteley Asset Finance Connect's head of content

It was a real privilege to interview John Phillipou at the AFC Autumn 2023 conference.

It was great to hear that John wants to be a listener in his new role and hear the views of both large and small operators in the industry whether they are lenders, brokers, intermediaries and whether they are FLA members or not. This engaging approach will serve him well and will enable him to ensure that the FLA going forward is truly representative of the whole market and not just the large banks and captives that are members of the Finance and Leasing Association.

It was refreshing to hear that John wants the FLA to work with other trade bodies in the sector. However, this is sometimes not straightforward – especially where there is a difference in approach (for example, regarding commission disclosure and, more recently, in dividing up the responsibilities between associations as they seek to find the right way to manage and develop the, sometimes, abrasive interaction between lenders and brokers).

John was clear during the interview to make the point that he is a no-nonsense common-sense businessman, and in this respect he has already both identified and understood the challenges that the industry faces.

I know from both the answers given in the interview and from the planning discussions we had before the conference that John has already developed plans for addressing the critical issues that the industry faces: regulatory creep, customer experience, the role of data, AI and ML, and of course the pressure on margins generally.

He also is clearly considering how to find a way to better manage regulators and other more independent quasi-governmental bodies like Financial Ombudsman Service (FOS) (who have more independence than the FCA); and for increased use of the media to win hearts and minds of the industry’s publics. These issues are remarkably topical given the battle between Post Office and postmasters. The industry of course lacks the appeal of postmasters, but the industry certainly has a compelling case to make about the value it delivers to the UK economy.

I believe that I join everyone who reads this in wishing John well in his new role as Chair of the FLA. I’m sure that he won’t mind me saying that he would love to hear from you if you would like to bring any industry related matter to his attention!

European automotive

Chinese BEV dominance – opportunity or threat?

Summary

Introduction

The transition to BEVs comes at an interesting time when there are a lot of moving parts at play in the automotive industry – agency, changes in regulation, new mobility products such as subscription, and the advent of the connected car.

Much of the news we consume about electric cars is around how the vehicles perform on the road in real life situations. And the media is consistently negative about range and charging anxiety both in the UK and across Europe.

The transition to BEVs has also led to a very real challenge from Chinese EV manufacturers who are entering Europe and the UK with their low-cost, high-quality, technologically-enhanced electric vehicles.

There appears to be four main ways in which Chinese brands are going to try to become dominant in the West:

1) Firstly, through the acquisition of Western brands, giving Chinese car makers direct access to a legacy firm with an existing network and established overseas awareness amongst consumers. The big example in the UK would be MG.

2) The second route is the rebadging of cars with Western logos seen by the likes of Chevrolet in Latin America. This is becoming useful practice in developing markets where the Western brands are eager to offer cheaper cars in a competitive package.

3) The third and most challenging method is the direct introduction of the local brand and the current strategy being employed by Neo and BYD in Europe. In addition to the usual high cost of introduction, this approach requires significant investment in brand building and customer trust as many Chinese brands remain unknown in Western markets.

4) And finally, technological collaboration is a trend that started quite recently and has seen a cooperation between Chinese brands and Western brands. The development of new models and technologies can be seen in two examples of strategic partnerships e.g. between the Volkswagen Group and Xpeng to develop new Volkswagen branded EVs while Leapmotor recently signed a memorandum of understanding with Stellantis.

China: The Automotive Godzilla

Michael Dunne, CEO of Dunne Insights and an expert on Chinese cars and the evolution of the Chinese car industry, describes the Chinese EV sector as an ‘Automotive Godzilla’ with the size, strength and determination to win the global EV race.

Building more electric vehicles than the rest of the world combined (for example, in November 2023 China surpassed 1 million deliveries in one month), Michael Dunne believes that “China has accumulated overwhelming superiority when it comes to electrics.”

Battery technology

The Chinese dominate LFP chemistries, and the advantage of LFP batteries is that they are the most affordable batteries. Everyone is racing to build a less expensive EV and LFP is essential to that, which is why the Chinese have an enormous advantage with their LFP battery technology.

China also has a monopoly on mining and processing battery resources, and cell manufacturing.

There is a fear in the West that more supply chains are needed for battery resources which they don’t have when compared with China’s resources.

However, according to Tony Whitehorn, consumers don’t care about the battery chemistry and how EV batteries are made: “people care about the longevity of it, they care about the range of it, and they care mostly about the cost of it.”

The Chinese threat?

Auto Trader’s Commercial Director, Ian Plummer, wouldn’t call the emergence of Chinese brands in Europe a threat; it is merely part of a broader context of what is happening in the EV market. Plummer is quick to point out that the influx of cars from China, including Western brands, has actually accelerated the growth of EV sales in Europe.

Plummer believes that the UK auto industry needs to be encouraging the EV transition with investment in UK EV manufacturing and UK gigafactories. More affordable EVs, whether Chinese or Western brands, are needed to encourage this transition.

Tony Whitehorn sees the UK market as an attractive and appealing option to worldwide manufacturers for a number of reasons:

1. UK does not have an indigenous manufacturer or specific national brands and are not so nationalistic about cars.

2. The UK is fundamentally a free market. Therefore, putting up barriers and introducing tariffs does not support the country’s ethos and help growth in a free market. The best cars should be accessible for the consumer.

Europe has two markets, according to Dunne:

1. France, Germany, Italy with set national car brands.

2. Spain, Sweden, UK where the Chinese are entering as there are fewer national brands.

In the longer term, Dunne sees the Chinese forming joint ventures in Europe in exchange for market access. China needs access to European and US markets in order to grow their profits.

‘Go-to-market’ strategy

China is historically good at copying Western technology, but Western car makers are finding it harder and harder to hold an advantage due to technological advances in China.

Ian Plummer, on the other hand, doesn’t think Western car makers have an advantage. He sees the Chinese having the advantage with some technologically advanced vehicles that are far ahead of Western manufacturers.

Tony Whitehorn, who is currently working with a couple of Chinese car brands, has no issue with the Chinese EV product and exceptional quality. He is challenged, however, by the poor ‘go-to-market’ strategy of Chinese brands which is an issue across the whole of Europe. They don’t fully understand how the European model works and are not looking at the long-term strategy with after-sales care, according to Whitehorn.

Plummer sees this as a ‘learning curve’ for the Chinese, who will learn what it takes to improve the sales and marketing of their cars in Europe.

Michael Dunne believes that the Chinese ‘go-to-market’ strategy is spoilt by their experience in China.

Chinese brands entering Europe are focusing on the dealer network route rather than the direct sales approach, as they are familiar with the franchise strategy and just want the vehicles off their books, according to Whitehorn.

Residual values

Tony Whitehorn sees two determining factors of an RV: (1) the product itself; and (2) the brand. For Chinese EVs, while the product is strong, they need to build the brand in Europe and the UK. A strong and successful brand strategy will hold up the RVs along with good products.

Fleet vs retail

The fleet sector in the UK makes up approximately 50% of the market. The Chinese will therefore need to sell to fleet to get some real volume.

However, Chinese manufacturers have a lack of financial services expertise with no captive finance companies, as well as very little leasing background. There is also a scarcity of service points in the UK for Chinese cars which is an issue for fleets as they need to keep the cars on the road.

So, what do the Chinese brands need to do to enter the fleet market and stay in the fleet market in the UK? The fleet market is split into easily identifiable segments, e.g. PCP, BCH, and Whitehorn advises that the Chinese must look at each segment individually to make things easier and clearer. However, Whitehorn believes that the residual value of the vehicle and the cost of the vehicle outright will determine if the Chinese can actually enter the fleet market.

According to Plummer, the Chinese need to focus on: (1) finance capability with the right people on board who give that awareness and experience, (2) the same with fleet awareness, and (3) ensure they are backed up by good after-sales performance and service.

Concluding remarks

Michael Dunne believes that the Chinese Godzilla will do whatever it takes to win globally. They are a powerful force that holds all the chips: they have the capacity, they have the financing via state and local governments, and they have incentives. There’s no end to their appetite and their ambition to market with their electric vehicles. One way or another, they are going to figure things out and they will find a way to win.

In turn, Europe and the US need to find an urgency in this race, according to Dunne: “I think Europe and the United States have to race. We’re the underdogs. We have to race and be innovative and be urgent about this challenge.”

Watch the full webcast here

Analysis from David Betteley Asset Finance Connect's head of content

This was a great session with Michael, Tony and Ian. It was a real privilege to moderate the conversation. In order to analyse the session, I’m minded to look at the possibility of Chinese dominance in the UK/ European/ US car markets through an old fashioned lens…the 4 Ps +S.

Product. There is no doubt that China has significant advantages in that the country controls the (current) lion’s share of the raw materials required to make the batteries; it has the gigafactories to make the cells and, as Michael advised, the Chinese production costs are in the region of 30% below those of the western manufacturers.

Tony and Ian pointed out that the quality of the cars coming out of China was excellent, the level of tech was, in most cases, higher and the industry had embraced them setting broadly similar RVs (possibly slightly lower) as the mainstream manufacturers.

A couple of questions remain: Can the Chinese brands build brand awareness and integrity and overcome “brand snobbery” quickly and affordably and, secondly, whilst the initial quality is excellent, will Chinese brands prove to be as durable as their Western counterparts?

Place. I was intrigued by Michael’s “one bed, two dreams” analogy. We see many Western manufacturers going down the agency route (although there is some evidence that this is, in some cases, being deferred) but Chinese brands are preferring the dealer route. One Chinese brand (Nio) tried the direct/Tesla route but this looks set to fail and become a dealer route also. Will it prove the case that the dealers get into bed with Chinese brands thinking that it will be a long-term relationship, only to find that once the brand has been established sufficiently, the brand leaves the dealer’s bed to go direct, agency or some other hybrid model?

Price. Despite the manufacturing price advantage, Chinese brands have not, as a rule, tried to compete exclusively on price. Some brands such as MG offer “excellent value” but not at bargain basement pricing. There is, therefore, considerable margin to be had for Chinese manufacturers in the UK and Europe and this margin could be used to counter the effect of tariffs that are beginning to materialise already in some European markets.

Promotion. It was agreed by Michael, Ian and Tony that “sales and marketing” was the Achilles heel for all the Chinese manufacturers at the moment. The learnings from the Chinese domestic market do not travel well to Europe where new cars are bought almost exclusively on a monthly payment and leasing, in particular, is popular amongst business users (and incidentally amongst private purchasers in some European markets). The lack of a captive finance arm for Chinese brands was discussed and it was agreed that this is a potential hurdle for these newcomers to navigate beyond. However, partnering with established dealers was seen as a shrewd way in which to overcome this initial disadvantage. However, investing in an adequate budget for sales and marketing was not presently well understood by most Chinese brands and this may yet have short to medium-term consequences for building brand reputations. It remains to be seen how the ‘one bed two dreams’ strategy develops in the medium term!

Service. This is the “S” of the 4Ps +S. Here, all three speakers agreed that there is a lot of work to do for the Chinese brands; building up sufficient service and repair points, ensuring that spare parts were always available and training enough technicians to fix things when they go wrong. Failure to ensure these three things at least will damage the reputation of Chinese brands very quickly and cause serious damage to their growth ambitions.

So, it’s not a slam dunk for Chinese brands, but the train has left the station and Western brands need to move the threat to the top of their inbox in the coming years and develop the countermeasure necessary to live and survive amongst this new national competitor.

European automotive

How will the delay on the ban on ICE manufacture affect the UK fleet industry?

Summary

Background to the move from ICE to BEV

The average retail price of a battery electric vehicle (EV) in Europe far exceeds (75%) the cost of buying an EV in China, with prices in the first half of 2022 costing €32,000 in China compared to €56,000 in Europe, increasing substantially to €67,000 a year later, while prices in China went down to €31,000.

The cost of buying an EV in Europe is 146% more expensive than buying the cheapest combustion vehicle in Europe, whilst in China the cheapest electric vehicle is 8% cheaper than the cheapest ICE car.

As we can see from these figures, the big overriding issue with BEVs in the UK is the price, both to buy a new EV and run them.

In the UK, the EV market is further distorted by subsidies, unfair competition from China, and through ill-thought regulation and personal tax policies, for example, Benefit-in-Kind (BiK).

Many in the UK would argue that there has been a rush to ban petrol and diesel cars. This was first scheduled for 2040, before being brought forward to 2035 in February 2020. Later in 2020, the then Prime Minister Boris Johnson announced that the UK would stop the sale of new ICE models from 2030 and that only zero-emission cars could be sold as new from 2035. In 2023, the current Prime Minister Rishi Sunak pushed the date back to 2035 for the ban on new ICE vehicles.

And with a general election on the horizon and the possibility of a new government before too long, there is so much confusion surrounding the move to zero emission vehicles.

In our recent Asset Finance Connect webcast, sponsored by Bynx, AFC head of content, David Betteley, spoke to a panel of auto experts to find out how the UK fleet industry is coping with the constant political changes.

UK fleet industry

DriveElectric’s CEO Mike Potter noted that corporates are driving sales of EVs through leasing, while the affordability issue of EVs has hit private sales and micro-business leasing.

New car registration figures for November 2023 from the Society of Motor Manufacturers and Traders (SMMT) highlighted the overwhelming dependency on fleet registrations for growth in the new EV market. Of the 24,359 new BEVs reaching the road in November, 77.4% were taken on by fleets and businesses.

Andrew Jago, General Manager of Fleet and Business at JLR UK agreed that currently three in every five BEVs is sold to a fleet end user, highlighting that less than one in five BEVs are sold to the private segment.

Looking at tax benefits, it is evident where the market pull is. While there is not much certainty in the auto industry at present, fleets are looking to the BiK outlook, confirmed until the 2027-28 tax year, to give the industry a degree of certainty in terms of being able to plan forward and enable fleets to make those changes towards net zero.

Increasing acceptance and adoption of BEVs can be seen in the figures above with fleets moving in this direction, as seen in everyday use cases with increasingly higher mileage in EVs.

The government’s announcement to delay the deadline to ban the manufacture and sale of ICE vehicles to 2035 has not had much impact on people’s decision to go electric.

From a retail perspective, Ian Plummer, Commercial Director at Auto Trader has seen no negative impact on the sale of EVs after the September 2023 announcement. However, a recent Auto Trader survey did highlight that 70% of people are confused about the ban, thinking that the ban on ICE vehicles covers both new and used cars, while 37% are taking on the negativity around electric vehicles and uncertainty over the ban and have decided that they are never going to buy electric.

From a fleet perspective, the Prime Minister’s announcement has had little effect on companies’ decisions to make the move to zero emission vehicles. The fleet sector is currently gearing up for the introduction of the ZEV mandate in 2024 which is driving the market for OEMs and fleets.

Toby Poston, Director of Corporate Affairs at the British Vehicle Rental & Leasing Association (BVRLA) sees an imbalance in the fleet market with two differing sides: one portion of fleet who are holding more BEVs than they can handle, alongside fleets who can’t really make a use case for transitioning to BEVs, particularly relating to electric vans, and are, in turn, worried about the ZEV mandate focusing on BEVs.

ZEV mandate

Owen Edwards, Head of Downstream Automotive at Grant Thornton UK LLP pointed out that there is only a handful of car manufacturers that will need to comply directly with the ZEV mandate, which will see manufacturers having to sell 22% of EVs in 2024, 28% in 2025, rising to 80% by 2030. This raises the issue that by the time you get to 2030 (80% EVs), there will only be 20% (approx. 450,000 units) of new vehicles that are hybrid or ICE, which will then be more costly to produce, raising a big question over economies of scale in the manufacturing process.

Whilst plug-in hybrid vehicles (PHEVs) are not a total leap forward like full electric, they are still a positive step, according to Plummer. The challenge that Plummer sees is that hybrids are not sufficient on their own as they only drive in EV mode for a limited amount of time and therefore still produce CO2 emissions: “hybrids are good but not good enough.”

JLR’s Jago sees plug-in hybrids as a “useful bridging strategy on the road towards full zero emissions vehicles.

Used BEV market

One area where retail sentiment is moving into the fleet sector, according to the BVRLA’s Poston, is in the used BEV market: “No one knows what the long-term prognosis of the used market is, whether it’s going to be a market failure or whether there will be a soft landing.”

Fleets are worried about the health of the used BEV market and concerned about the retail view of BEVs as they will have a number of vehicles coming into the used car environment in 2024.

There is a lot of confusion in the current auto market, with the biggest issue being whether the used car market is sufficiently capable of absorbing the volume of BEVs coming through.

Setting residual values on EV fleet contracts is difficult and a top concern for BVRLA members, according to Poston, as there is not the decade’s worth of data that is available for ICE vehicles. Many fleets are making losses on their EV portfolios, with a 20% year-on-year decline in used values of BEVs. The market has stabilised now due to parity with ICE equivalents, which has been assisted by some recent higher values on ICE vehicles.

However, looking to the future, it is still difficult to set residual values on EV fleets as continued turbulence on the downside will result in more conservative residual values leading to increases in lease rates making EVs even less competitive.

With the BEV market, higher initial costs and lower used car prices leads to a difficulty that the industry will have to contend with.

EV charging

Charging anxiety still exists in the UK, fuelled by negative media coverage. However, the AFC webcast panel are positive about EV charging with increasingly available charging infrastructure that is nowhere near as bad as depicted by the media.

According to Auto Trader research, many retail customers are happy with their charging experience both at home and public, with 8 out of 10 retail customers saying that they are EV ready.

While most people driving BEVs have confidence in charging at home and/or at work, JLR’s Jago believes that the challenge will be to make sure that there is sufficient charging capacity and availability to end users who don’t have access to off-street parking.

There has been large investments for funding charging infrastructure, with the UK government’s £950 million rapid charging fund helping motorways and major A road service area operators prepare the network for 100% zero emissions vehicles. This includes plans to ensure at least six rapid charge points at every motorway service station in England by 2023. The £450 million Local Electric Vehicle Infrastructure (LEVI) fund is also aiding projects such as EV hubs and on-street charging solutions, to alleviate regional disparities in charge point availability, while a £20 million pilot scheme will see 1,000 new charge points installed in areas where infrastructure is lacking the most.

The government has indicated that there needs to be another 300,000 new chargers for people who can’t charge at home, but there is concern that this target will bring in substandard, poor quality chargers and equipment. There also needs to be a focus on the right infrastructure in areas where it is needed the most. To ensure that any lingering charging anxiety goes away sooner rather than later, Edwards believes that a coherent strategy where public and private come together with sufficient funding from government and local authorities is needed.

There is also a differentiation in price between chargers, with a difference across networks which needs to be resolved and clarified. Public charger costs are significantly more than charging at home, while rapid charging prices can sometimes be the same or more than filling up with petrol or diesel. Currently if you must rely on public charging, the total running cost of a BEV is more than an ICE vehicle.

The BVRLA are currently lobbying on the use of the renewable transport fuel obligation, used in Europe, which is a credit that energy companies get for putting biofuels (includes electricity) into their system. The UK government is looking into it as a way of getting more infrastructure installed.

BVRLA’s Poston raised charging issues for fleet van users with accessibility problems leading to productivity issues: “As we move to a mass market environment, we are getting issues with depot bandwidths, connectivity and energy capacity in warehouses, issue that network operators and fleets will need to deal with.”

As mentioned in the BVRLA Future of Fleets Manifesto, there is a growing need for charging infrastructure for large vehicle fleets. More collaborative charging is needed with shared infrastructure by large EV fleets. The BVRLA are campaigning for government, local authorities and network operators to bring large fleets together for shared charging use.

Charging for fleets

Managing the cost of charging for a fleet with the different charging options that are available at home, work, and public is becoming easier with telematics and an increasing number of smart solutions now available, including the recently launched Rightcharge electric fuel card for seamless EV charging for fleets at home, work and at public chargers.

Plummer noted that increased investment along with more entrepreneurs coming into this area at the start of the journey, will lead to an increase in smart solutions.

Telematics and data

While telematics and data that are being produced by EVs can help with smart solutions to monitor the cost of charging for fleets, they also enable options for the measurement of Scope 3 emissions.

The fleet industry is slowly starting to trial fintech solutions to measure Scope 3 emissions, with the BVRLA piloting an ESG data reporting platform for the last year with Omnevue.

The partnership has helped prepare a growing group of forward-thinking BVRLA members for the disclosure regulations that are coming their way, specifically around CO2e emissions. Some of the data suggests that 99% of greenhouse gas emissions (CO2 particularly) in the leasing and rental market is Scope 3, from a combination of 20-25% that is embedded in the manufacture; 55% is the lifetime emissions of the vehicle once it has been de-fleeted/sold; and the remaining 20% is in life with the customer who is renting or leasing the vehicle. Fleets need to report on all three levels: embedded (before you own it), lifetime (after you sold it), and in use (while you own it).

The closer we get to monitoring Scope 3 emissions becoming law, the regulators will get increasingly involved setting more benchmarks. However, with increasing amounts of data and successful reporting platforms, monitoring Scope 3 emissions should become easier for fleets.

How will the government recover funds from lost fuel duty as the move to electricity gather pace?

The AFC webcast panel unanimously agreed that road pricing will not appear in the main political parties’ manifestos in the upcoming general election, as it is not a poll winner.

Auto Trader’s Plummer believes that, if the ZEV mandate works, there will be 6-7 million EVs on the road by 2030, but that still leaves 27 million ICE vehicles on the road who will still pay tax and fill up in petrol and diesel at the pumps, so the government will continue to raise funds from ICE vehicles in the future.

In the accompanying webcast poll, delegates identified road use pricing (39%) followed by the amendment of BiK rules (33%) as the most likely methods for the government to recover lost fuel duty and VAT.

Analysis from David Betteley Asset Finance Connect's head of content

It took 20 years for diesel to reach a 40%+ market share, but it has taken only five years for BEV penetration to go from zero to almost 20%. This increasing pace of change (that we see in many other areas of the economy) can bring with it unintended consequences and unforeseen pitfalls.

The move to BEV is no exception. Firstly, there is the politics of the transition, short termism to appeal to motorists (who have a vote) at the expense of votes from those people with an environmental conscience. Of course, there are more of the former than the latter!

The transition has not been made any easier by the attitude of the media towards electric cars. How many articles have you read about the journey from Lands End to John O’Groats? No-one does that journey, and the fact is that almost all journeys can be accommodated by today’s BEVs, most with a real-life range of over 200 miles.

Charging infrastructure is also heavily criticised, and whilst there is considerable room for improvement in the UK, we are actually in a better position that virtually all European countries.

Regardless of what the media say, the train has left the station and the move from ICE to BEV is unstoppable. Recent political dithering will have little effect as all OEMs plan up to 10 years in advance and had, therefore, made product decisions regarding their portfolio for 2030 long before Rishi Sunak made his announcement to delay the ban on the sale of ICE vehicles.

So, whilst range anxiety and charging anxiety are not showstoppers, the fact remains that BEVs are still more expensive to buy. The UK government have moved away from subsidising BEVs completely for private purchasers (fleet buyers still get a BiK benefit) and the uncertainty over RVs generally results in a higher monthly payment for a BEV versus an ICE car. This has been the major factor in private BEV sales stalling whilst all the growth has been delivered by the fleet market.

Therefore, two questions remain in my mind: When will there be price parity, and when will the current battery technology be made redundant (possibly overnight) by a new discovery, and if that happens, what will be the impact on the value of the current BEV fleet?

Finally, when the webinar took place on the 16th November, we were waiting for a decision on the rules of origin issue. That has now been resolved with a further three years for OEMs in both the UK and Europe to make the necessary changes to their respective supply chains.

Further evidence that the move from ICE to BEV is unstoppable.

European equipment

How the European asset finance industry can address challenges and deliver opportunities for SMEs

Summary

Asset Finance Connect’s head of equipment finance, John Rees, was joined by two senior CEOs – Odile De Saivre, CEO of Société Générale Equipment Finance and Bill Stephenson, CEO of PEAC Solutions – for the latest AFC webinar, sponsored by Acquis.

Nick Leader, CEO of Acquis, which operates in 16 European countries and the US, provided the headlines from the recent 2023 Acquis white paper – Opportunity in change: A market research report on SME business sentiment – compiled from information gathered from April to May 2023 from SME decision makers across Europe.

Opportunity in change: An Acquis market research report on SME business sentiment

The latest Acquis white paper “Opportunity in change: A market research report on SME business sentiment,” highlights that 32% of European SMEs plan to fund investment in new business assets through leasing.

As we progress through 2023, businesses are facing significant socio-economic challenges, and the longer-term effects of the pandemic persist. With the aim of gauging the resilience of the market and its path forward, Acquis conducted an international survey, with the following objectives:

1. Determining the scale and nature of challenges faced by SMEs in 2023 and beyond.
2. Identifying growth opportunities for SMEs and industry innovations.
3. Investigating businesses’ investment plans and priorities.
4. Assessing the growing importance of ESG and the transition towards sustainability.

During their research, Acquis conducted 1,250 interviews with SME decision makers across Europe (UK, France, Germany, Spain, Poland and BeNeLux) from a cross-section of sectors (IT, finance and insurance, manufacturing, medical, retail) within the SME market.

The report research was last conducted in 2021 during COVID, so it was interesting to see how the market was feeling two years on in a post-pandemic world, and look at how the European asset finance industry can address challenges and deliver opportunities for SMEs.

Key takeaways from the report focus on resilience and recovery:

46% of European businesses feel optimistic about their long-term future.
41% of European SMEs have changed their working model since early 2020.
46% of European SMEs see cost and pricing optimisations as their top growth opportunity.
51% of European SMEs will invest in assets or equipment in the next 12 months.
32% of European businesses are planning to fund investment through leasing.
66% of SMEs in Europe would consider subscription-based products.

Download the Acquis white paper to discover how the equipment finance market can support SMEs in 2023 and beyond.

Business confidence and market sentiment

The Acquis SME research found that business confidence and optimism had fallen from 62% in 2021 to 46% in 2023 amongst SMEs, which Acquis’s Nick Leader found surprising after a three-year period of economic turbulence and upheaval for the industry: “if we can survive that, we can survive anything!”

Although optimism had fallen to 46% in 2023, the neutral responses had increased from 6% to 26% highlighting a pragmatic return in the industry to ‘business as usual’.

SGEF’s Odile de Saivre is not surprised that clients are less confident about the future following COVID and a string of other major economic issues. SMEs, however, are still positive for the future, just not as positive as in pre-pandemic times.

During COVID there was a massive injection of funds from governments to help SMEs survive and this has enabled them to come out the other side of the pandemic stronger than before. Odile believes that SMEs have rebounded and want to move forward and see growth in the market by upgrading assets.

The optimism is still there, according to PEAC’s Stephenson, with those companies that survived COVID emerging leaner, but more confident, and in need of growth and assets, equipment and acquisitions.

Considering the effects of a turbulent pre-pandemic world, surprisingly both de Saivre and Stephenson have not witnessed an increase in insolvencies since COVID in Europe which echoes Leader’s thoughts on the UK. It seems to imply that surviving companies from COVID are stronger than before when faced with external challenges. This is also an indication of the ‘state support’ that was provided during the pandemic.

Being a counter-cyclical industry, optimism in the leasing sector goes hand-in-hand with higher inflation and increasing interest rates.

Stephenson highlights that rising interest rates are fantastic for the asset finance industry: “Leasing starts to flourish in a high interest rate environment.”

According to de Saivre it took clients time to adapt and understand a new market with increasing interest rates. SMEs had to learn how to adapt and understand how and where the market was going. While it was difficult to read the market in 2022, SMEs have learnt that high interest rates are here to stay.

Sectors

SMEs were interviewed across a wide range of sectors for the 2023 Acquis Report. Varying levels of optimism were observed across different industry sectors, with various opportunities available across different sectors and countries.

  • Medical and pharmaceutical: 56%
  • Retail: 55%
  • IT: 52%
  • Agriculture: 44%
  • Media and communications: 44%
  • Charities: 41%

It was no surprise to the panel that the agriculture sector was less positive!

On the other hand, 56% of SMEs were optimistic for growth in the medical sector. Investment in medical equipment differs country-by-country on a case-by-case basis, e.g. in France, hospitals need to renew assets every seven years.

Growth opportunities and industry innovations

The asset finance industry is well placed to support SMEs with their growth opportunities. SGEF’s de Saivre highlighted that, while green assets and sustainability are a critical part of the leasing industry’s growth opportunities, green assets tend to be more expensive to buy with a large cost differential between older assets and greener assets, for example, ICE vehicles and EVs.

Green assets present a new era for the industry with a fresh set of challenges and questions surrounding uncertainty of the lifecycle of green equipment, asset management and residual values. As Stephenson notes, “it is harder to give a competitive financial solution when you don’t know what the future holds for RVs”.

If you want SMEs to invest in more expensive green assets, de Saivre believes that the investment gap needs to be reduced, hence we are seeing a lot of subsidies, and OEMs must look at cost to make the product more affordable. The industry needs to find new ways of financing, reducing costs and risk sharing.

Bill Stephenson sees that the green movement of financing assets that are more expensive but bring a more sustainable future is a natural progression in the industry, which is unfortunately being expedited by governments, subsidies and regulation which is making it harder to happen and extremely expensive.

The green transition is also driven by consumers who unfortunately are not moving to green assets as quickly as expected due to high costs and lack of infrastructure. For example, a joint survey of 11,565 drivers in June 2023 by Electrifying.com and The AA showed that consumer confidence in electric cars is falling, with a staggering 87% stating that electric cars are too expensive to purchase, while 66% said rising energy prices had put them off owning an electric car.

During COVID, supply issues led the industry to focus on the value of assets and the second life of assets and reusing assets (which goes hand-in-hand with ESG momentum). Looking at the whole lifecycle of an asset presents new opportunities to finance different assets or finance the same assets in different ways (with a focus on second life).

There are also growth opportunities for SMEs to move to sustainable assets using sustainable usage-based financing products such as subscription and second life leasing. In the Acquis Report, 60% of SMEs said they would try subscription-based products.

Pay-per-use products need three things, according to DLL’s Stephenson, in the video below.

The introduction of usage-based products would require the re-education of sales teams, who frequently default back to selling on interest rates. Along with such training, massive investment would be needed in the product, data and tech system.

According to SGEF’s de Saivre there would only be a demand for pay-per-use financing models if it was a cheaper option for SMEs, hence why we are not seeing a gigantic move in the market towards usage-based products.

Growing commitment to a sustainable future

ESG momentum is broadening with a universal transition towards ESG policies, but according to Odile de Saivre, leasing companies need to help clients with this transition.

Having an ESG policy sets the tone for a business as to what their intentions are towards the environment. The 2023 Acquis SME Report found that 95% of SMEs already have an ESG policy or are planning one in the future, with 80% having an ESG policy now or will have one within the next 12 months. Spain is ahead of other European markets, according to the Acquis research.

The market will naturally evolve towards this, according to Bill Stephenson, and SME clients who are at different points on the ESG journey will need help from their finance providers. Stephenson sees government interaction, regulation and subsidy as an unnatural contribution to the ESG transition, hence why governments are starting to pull back from their aggressive timelines.

For more information or to download the Acquis white paper – Opportunity in change: A market research report on SME business sentiment, please visit https://www.acquisinsurance.com/research-report-opportunity-in-change/

Analysis from John Rees Equipment Finance Community Leader, Asset Finance Connect

The Acquis report provides an excellent document for finance companies to understand SME sentiment. It is a valuable source of data for all lenders.

Again, the asset finance industry finds itself well placed (in its usual counter cyclical way) to help SMEs invest in assets in the coming years. Both our panel guests have a clear vision as to what the asset financiers can bring to support investment. Subscription and usage-based products continue to be talked about but present big challenges to the lenders. ESG policies are a must have for all companies in the next few years.

European automotive

Will Chinese electric car manufacturers transform the UK BEV market?

Summary

There have been many challenges for the battery electric vehicle (BEV) market in the UK auto industry, including supply and demand, residual values, price parity, lack of long-term government incentives, charging infrastructure, and battery manufacturing factories.

The Chinese auto industry, the biggest in the world, with its dominance in car manufacturing and battery technology, is beginning to move its Chinese electric vehicle (EV) brands to Europe and the UK, offering cheaper, high-quality, technologically enhanced models which are seen as a threat to European automakers.

Toby Marshall, Managing Director of GWM ORA UK discussed the entrance of disruptors from the Chinese market to the UK, including GWM ORA’s Funky Cat, with David Betteley at the Asset Finance Connect Summer 2023 conference, and the implications for European car manufacturers.

Headwinds of battery electric cars

Changes in the EV market, including Tesla, NIO and others discounting prices has created added complexity to the EV market, as used EV values falter and stock becomes ever more extended.

As Toby Marshall noted, 2022 saw huge demand for EVs but low supply, while 2023 has seen a dramatic shift with supply picking up with established brands as well as new EV brands coming into the marketplace. Residual values of EVs are also normalizing in 2023 (at a significantly lower level than a year ago) as the EV market becomes more established and stable, with price parity between EVs and their ICE counterparts getting closer all the time.

At the beginning of 2023 there was a lot of negative media coverage surrounding electric vehicles, from range anxiety to charging infrastructure and the cost of public charging, but hopefully this negative blip is starting to subside.

In a recent Lloyds Insight article, Nick Williams, Managing Director for Transport at Lloyds Banking Group commented that, “2022 was a record year for electric vehicle (EV) registrations, with a 40% year-on-year increase despite ongoing supply chain issues – and 2023 is set to see this acceleration get a major boost.

We’ll see more new vehicles, with more choice for drivers than ever before. As well as traditional brands set to increase their electric vehicle ranges and offers, this year we can also expect to see more new manufacturers, including some disruptive new names. Many of these disruptors are coming from the Chinese market.”

Chinese auto market

The UK and European car markets are very different to the Chinese market which is by far the biggest car market in the world, with indications that it will grow to 30 million cars a year compared with 2 million in the UK. China is also the biggest electric car market in the world with a huge offering of electric car manufacturers.

In addition to Chinese car manufacturers, Chinese battery makers dominate the European motor industry, with more factories than any other nation.

Moving Chinese brands to Europe and the UK

Chinese car makers have been working to establish a foothold in the European and UK markets for many years, with an influx of new Chinese brands starting to access the market, including BYD, NIO, Ng, Polestar and GWM ORA.

There are many opportunities for Chinese BEVs in Europe and the UK markets, where they are outperforming western brands with their high-quality infotainment systems, better cameras and sensors, and are likely to lead the way in semi-autonomy and in-car services in the future.

The arrival of Chinese electric brands brings a range of opportunities and challenges for UK and European dealers and finance houses in addition to challenges for western OEMs. A recent survey by Startline Motor Finance highlighted that 51% of dealers expect the arrival of Chinese OEMs will result in some European manufacturers folding and 29% believe it is the European manufacturers that will fare worse in the transition to green.

With many European brands moving away from manufacturing smaller cars to focus on SUVs, for example, Ford has ceased production of the Focus and Fiesta, the European auto industry seems to be opening the door for Chinese brands to enter the European market with their smaller cheaper EV models.

The newest Chinese EV on the block is the ORA Funky Cat manufactured by GWM ORA, owned by the Great Wall Motors group. With the help of UK distributor International Motors, GWM ORA has recently brought the Funky Cat to the UK market.

EU investigation

During her annual address to the bloc’s parliament, European Commission President Ursula von der Leyen said the global market has been ‘flooded’ with cheap Chinese cars, with China’s share of EVs sold in Europe rising to 8% and possibly reaching 15% in 2025, noting prices are typically 20% below EU-made models.

On September 12th, the European Commission launched an investigation into whether to impose punitive tariffs to protect EU auto manufacturers against cheaper Chinese EV imports it says are benefiting from state subsidies.

The Commission will have up to 13 months to assess whether to impose tariffs above the standard 10% EU rate for cars, possibly rising to the stiff 27.5% level already imposed by the US on Chinese EVs.

Toby Marshall sees such tariffs as simply limiting the consumer who deserves the choice of EVs and should be able to buy whatever car fits their wallet and lifestyle the best.

EV purchasing incentives

A major boost for the sale of BEVs is the various incentives that can be offered to prospective customers including home chargers and cash grants for EVs and chargers. However, such incentives have disappeared in the UK, while other countries including China, Sweden and Norway have generous EV incentives which support the sale of electric cars.

In the UK, regulation is pushing consumers along the path to EVs. But Toby Marshall believes that “incentives are needed to pull demand along the route”.

The government’s drive to net zero through EVs and ultra-low emission zones (ULEZ) is creating a socio-economic impact on the country, causing a divide between those who can afford an electric vehicle and those who cannot.

During the recent House of Lords inquiry into EVs, Auto Trader’s Marc Palmer expressed concerns to the committee that a large number of motorists are being ‘held back’ as a result of price concerns and changes to their lifestyle.

Auto Trader’s Palmer told peers: “There are three core groups being left behind by the transition to EVs: those over 55, women, and people on lower incomes.

“And the core reasons they’re being left behind are around cost, which is a big barrier, perceptions around public charging infrastructure and around the changes required to lifestyle.”

Quality of Chinese brands

Chinese electric vehicles are renowned for their high quality compared to previous Chinese car models and are thus breaking down the brand snobbery that exists in the car industry. Consumers are moving to newer car brands for the enhanced quality and technology they offer, with Tesla breaking the mould.

Toby Marshall noted that, “Electric cars have enabled a shift away from legacy brands in all segments of the market which has and will dramatically change things.”

“People see an electric car as a gadget,” according to Toby Marshall, and the Chinese expertise in EV technology is far advanced of European car brands.

Equipment as standard and the level of outstanding in-car tech plus long warranties (including battery warranty) provides a growing confidence in Chinese EVs and gives them a genuine opportunity to grow in the UK and EU markets.

Sales model for Chinese brands

Most Chinese brands entering the European and UK markets are not looking at the direct agency route and are, instead, focusing on going down a traditional route to market with a dealer model or a hybrid route, incorporating online and dealer presence.

GWM ORA has chosen this omni-channel approach of dealer, online or both for the Funky Cat, which most customers are adopting. Toby Marshall highlights that a significant proportion of EV customers do those stressful car-buying elements online, such as configuring finance, but then go to the retailers to view and drive the car, especially with EVs which are new to most consumers.

The franchise models are essential for EVs, according to Toby Marshall, as they add value and confidence as they are experts in EVs and can amplify the marketing message of the car brand.

The service infrastructure for Chinese EV brands in the UK is still developing, but Marshall notes that International Motors owns a large parts warehouse in the UK for a number of EV brands, and around 30 aftersales points (which is constantly increasing) around the country where Chinese EVs can be repaired, although EVs are known to require less maintenance and repair.

Conclusion

An influx of Chinese EV brands is set to enter the European and UK auto markets in 2023, seducing European car buyers with their low-cost, high-quality EVs and superior in-car technology.

With recent changes in the EV market creating headwinds for electric cars in an increasingly stable market, there is a need for more affordable European models to rival these emerging Chinese EV brands, which are seen as a threat to European automakers.

Analysis from David Betteley Asset Finance Connect's head of content

There are always a lot of moving parts at play in the auto industry. We have seen many changes over the past few years, generally speaking driven by a combination of consumer preference and changing legislation. Take for instance the rush into diesel started by Gordon Brown but now totally discredited due to concerns over air quality.

BEVs are seen as the saviour in this respect as they are zero tailpipe emitters, and whilst there are no national incentives in the UK for the purchase or financing of BEVs at the moment, there are a growing number of examples of penalising ICE and, in particular, diesel vehicles. These include ULEZ in many towns and cities and also a new trend of councils charging more to park a diesel (or in some cases an SUV) when compared to a BEV.

All these developments are promoted as “green” by their respective local authorities, but there is growing evidence to suggest that whilst almost everyone supports green initiatives, this support dries up as soon as the initiative begins to hurt the pocket.

Therefore, it is safe to say that the transition from ICE to BEV is a dilemma for the national government. Low to middle income households are receiving no (national) support to make the transition to more expensive BEVs and, to add insult to injury, these households are having to pay more to use their (in most cased pre 2016) existing diesel vehicles.

There is some evidence that this message is beginning to land. A topical example is the London Mayor submitting to pressure from his local and national party and hastily introducing a means tested scrappage scheme, in an attempt to make the London ULEZ expansion more palatable for voters.

Additionally, Kemi Badenoch (Secretary of State for Business and Trade) is lobbying hard against the 22% rule (22% of production to be emission free) that is due to take effect from January 2024 on the basis that it will destroy investment in the industry and that the targets should either be reduced or extended.

Following the announcement to defer the ban on ICE vehicles to 2035, there will be a further announcement on the ZEV mandate on the 22nd September. It wouldn’t come as a great surprise to see some further watering down of this (also cast in stone) initiative!

However, the issue raised by the deferment of the ban on ICE vehicles is what will happen now to demand for new and used BEVs? With the phasing out date for ICE pushed back, there will be less customer urgency to make the change which may well result in weaker demand from the private sector with the fleet sector hopefully taking up the slack, driven by continuing attractive BiK taxation treatment. The other knock-on effect will likely be a further weakening of RVs on used BEVs which in turn will make them more affordable as a second-hand purchase….so perhaps a silver lining here for customers at the expense of the industry.

So, lots of challenges ahead for the sale of BEVs. One thing is for certain however; at the end of the day, it will be the customers voting with their feet and/or their financial firepower that will decide the winners and losers. The Chinese brands with their combination of wide choice, high quality, class leading tech and competitive pricing would seem to currently hold most of the aces in the pack.

It will be up to Toby Marshall and his colleagues to make sure that they play the strong hand they have been dealt skillfully. And I have no doubt that he will do just that!

European automotive
European equipment

It’s all in the foundations: microservices architecture

In today’s rapidly evolving business landscape, organizations face a multitude of challenges when it comes to addressing threats and opportunities with agility, scaling their operations, adopting new technologies, and delivering value to customers efficiently. Many software architectures pose obstacles to business growth and agility.

In this article, I’ll explain some of the pitfalls that you should watch for when evaluating your technology partners’ software architecture.

The original architecture is the monolith. Characterized by tightly coupled components that are compiled and deployed together, the monolithic architecture is considered a closed architecture that is expensive to scale and modify.

Monolithic architecture has been used for decades, dating back to some of the earliest commercial software. While products with this architecture are relatively simple to install and operate, their architecture often hinders scalability and agile delivery of new functionality. In an era when most commercial software was hosted by customers in their own data centers (on premise installations), monoliths were common because they required less administration from the IT team. However, they have limited options for scaling and use their hardware inefficiently, requiring more IT infrastructure to run at scale.

As they grow in complexity, they require exponentially higher amounts of development and testing to make changes, which impedes agility. Monoliths typically have limited integration options. While they may offer APIs or file-based integration points, their tightly-coupled nature often leads to difficulty in providing clean interfaces for external integration. These issues often yield high hosting costs, delayed product releases, limited integration into customers’ ecosystems and missed opportunities to capitalize on emerging market demands.

Other popular architectures that have been used for commercial software include layered (or tiered) architectures and service-oriented architectures (SOA). These architectures became popular in the 1990s and 2000s. Compared to monoliths, layered architectures improve scaling and code maintenance. They usually separate into 2-3 tiers, and each tier is usually hosted on separate servers, which allows IT teams to optimize each server specifically for its job. Some layered architectures support horizontal scaling, allowing the IT team to add servers to share the load for any of the application’s tiers.

Service-oriented architectures take this a step further and allow specific functions or services to run independent of each other. When designed well, each of these services can be maintained and scaled independent of the others, which improves the system’s overall agility and scalability. The cost of getting these benefits comes with the added complexity for the IT team, who now has more components and servers to maintain. While these architectures reduce the impediments for customers to scale and adapt, the improvements are small compared to more modern architectures.

Two architectures that have become popular in more recent years are low-code and microservice architectures. Low-code architectures are meant to provide extremely agile change by taking the vendor out of the process. While this can sometimes work, they sometimes lack the ability to scale and to remain agile as they become more complex over time.

Low-code applications provide means for customers to essentially develop their own custom application on the vendor’s platform without using traditional software code. Instead, they use drag-and-drop visual tools, rules and simple domain-specific languages to customize the platform for the customer’s needs. This usually allows the customer to quickly adapt the product to meet changing needs. However, it is common for these changes to have a negative impact on scalability and performance because low-code tools don’t offer the same level of support for managing these more technical features of a product. Also, complex configurations on these platforms tend to become difficult to maintain.

At a basic level, ‘low-code’ is still code and these platforms tend to lack the sophisticated capabilities needed to maintain many layers of dependencies and changes that occur during the life of the product. For some, difficulties in maintenance can even show up during the system’s initial implementation.

Many of the challenges noted above with monolithic, layered, SOA and low-code architectures can be overcome with a well-designed microservice architecture. A well-planned microservices architecture means that the technology provider develops and tailors independently deployable microservices to serve specific business capabilities, promoting modularity and decoupling between components. This modular approach facilitates the development and integration of new technologies and functionality, as each microservice can be developed, tested, and deployed independently.

Microservice architectures are inherently open because each service communicates with the others through APIs, and these APIs can provide integration points with the customer’s ecosystem.

Microservice architectures go hand-in-hand with software-as-a-service (SaaS) in the cloud. They make it possible to take advantage of the extreme scalability of the cloud. Usually, each service is set up to ‘autoscale’ (automatically scale horizontally with the load placed on it).

When managed in the cloud by a SaaS provider, the deployment, monitoring, scaling and upgrading of microservices can be automated. This allows the partner to seamlessly deploy updates without taking the system down. This approach is used by many of the technology platforms that we all use on a regular basis, including search engines like Google, media platforms like Spotify and Netflix and social media platforms like LinkedIn and Facebook. These platforms are continuously upgraded and improved, and we almost never experience downtime or other negative consequences.

Through a reliable and innovation-minded technology partner, secured finance providers will be able to capitalize on the latest architectures, tools, frameworks, and technologies for specific services without being constrained by the limitations of the monolith and other dated architectures. This technical flexibility enables secured finance lenders to capitalize on emerging technologies and stay ahead of the competition, whilst offering their customers tailored solutions which fully meet their requirements and needs.

At Solifi, we have taken the microservice approach. We have found that this architecture allows us to provide the agility, scalability, quality and efficiency that our customers require. We have the added benefit of improving our internal development scalability and quality, which we pass on through improved responsiveness and quality to our customers. With the loosely-coupled, independent nature of our services, we can make changes and deploy them safely in minutes and hours instead of weeks and months. The quick response time to market demands positions Solifi as an adaptive and customer-centric organization.

When you evaluate partners for your next technology upgrade, remember to look beyond the functionality provided by the products you evaluate and also consider the ability of the software and partner to enable your company’s growth and agility.

About the author

Eldon Richards joined Solifi’s Executive Team as Chief Technology Officer at the start of 2020, bringing more than 20 years of enterprise software product development and global technology leadership. In this role, Eldon leads the development of the company’s product portfolio, including Solifi’s Open Finance Platform.

Eldon joined Solifi from Recondo Technology, an enterprise SaaS platform providing revenue cycle management for healthcare organizations. As Recondo’s CTO, Eldon was responsible for all aspects of their SaaS technology platform including integration of advanced technologies like machine learning (ML) and natural language processing (NLP). Eldon was a key contributor to the company’s success which led to the acquisition by Waystar. Prior to Recondo, Eldon held executive technology leadership positions at PatientPoint, Optum, and United Health Group.

Eldon holds an undergraduate degree in computer science from the University of Utah, MBA from the University of Minnesota Carlson School of Management, as well as graduate level certificates from Stanford University, Washington University in St. Louis and is a Six Sigma Green Belt.

European automotive
European equipment

AI innovation in financial services

Summary

The next big thing in tech – generative artificial intelligence – is promising to change everything from the world economy to our personal lives. The hot topic was discussed in depth in several sessions at the Asset Finance Connect Summer 2023 Conference.

Sulabh Soral, AI Officer at Deloitte said: “At its most basic, AI is software that mimics and generates human behaviour – planning, generating ideas, understanding speech and visuals. Its ability to scale human intellect will have a profound impact.”

Forms of AI in use today include digital assistants, chatbots and machine learning amongst others. As humans and machines collaborate more closely, and AI innovations come out of the research lab and into the mainstream, the transformational possibilities are staggering.

As a source of both huge excitement and apprehension, AI and its limitless potential operates at a superhuman level. While the applications of generative AI are in the early stages, the capacity of these AI models is doubling every three months.

There is huge investment potential in this complex and highly intelligent technology. PwC’s Global Artificial Intelligence Study: Exploiting the AI Revolution describes AI as: “the key source of transformation, disruption and competitive advantage in today’s fast changing economy.”

According to PwC, AI can transform the productivity and GDP potential of the global economy with global GDP rising to 14% higher in 2030 because of the accelerating development and take-up of AI. However, strategic investment in different types of AI technology is needed to make that happen. 

ChatGPT is a generative AI model developed by OpenAI and is at the forefront of this revolution. It is nearly on par with the human brain and it is only getting smarter.

Shaping up to be the most revolutionary technology since the internet, the full implications of generative AI are still untold. This latest innovation in AI will drive an explosive growth and value creation in the technology sector over the next couple of years and vast potential implications for the financial services sector.

Generative AI

The launch of ChatGPT, an example of a Large Language Model (LLM), has sparked an explosion of interest in AI technologies. The development of LLMs allows the access of natural languages, unlocking vast amounts of information, for example, scientific, historical accounts, literature.

Generative AI is not just about linking data and databases but trying to behave like humans to create responses that make sense with, for example, conversation and human-like dialogue; instantaneous responses; and being able to act in a nuanced way with cultural references and adapt to the tone of the conversation.

ChatGPT can be trained to operate within a particular industry knowledge foundation. For example, in retail, AI language models have a number of benefits including accessing a lot of information, interacting in a natural way, assisting with complex data tasks, and solving a number of problems and issues.

New findings from Deloitte’s 2023 Digital Consumer Trends research found that a third of those who have used Generative AI in the UK have done so for work, equating to approximately four million people.

Paul Lee, partner and head of technology, media and telecommunications research at Deloitte commented: “Generative AI has captured the imagination of UK citizens and fuelled discussion among businesses and policymakers. Within just a few months of the launch of the most popular Generative AI tools, one in four people in the UK have already tried out the technology. It is incredibly rare for any emerging technology to achieve these levels of adoption and frequency of usage so rapidly.

“Generative AI technology is, however, still relatively nascent, with user interfaces, regulatory environment, legal status and accuracy still a work in progress. Over the coming months, we are likely to see more investment and development that will address many of these challenges, which could drive further adoption of Generative AI tools.”

Implications for UK businesses

As generative AI further develops, more and more services can become automated. AI can understand mass amounts of data so can reduce the workload of humans, make speedier decisions, and be more personalised.

In the business world, AI can be used in:

  • Customer service – enhance customer service and increase customer loyalty
  • Fraud detection – AI can be used to detect intent
  • Tax service – improve customer service and help file taxes
  • Process optimisation – credit and loan decisioning, process automation, internal document tagging. AI can help accelerate slow application processes, improve loan collectability and user experience, personalised loan collection communication, segment credit users.
  • Improve decision making – in areas such as portfolio management, asset allocation and investment strategy. Roboadvisors are widely touted as one of the highest potential technologies involved in AI in fintech.
  • Regulatory compliance – ensuring transparency and security, anti-money laundering, KYC systems, compliance mentoring.

AI provides the potential to enhance quality, personalisation and consistency, and save time.

In a recent analysis of the potential long-term impact of automation – Will robots really steal our jobs? – PWC determined that almost 30% of UK financial services jobs could be replaced by automation by 2030, offering big gains in productivity and customer experience. However, the report also predicted that the nature of some occupations would change rather than disappear. It added that automation could create more wealth and additional jobs elsewhere in the economy.

PwC’s Global Artificial Intelligence Study: Sizing the Prize highlighted just how big a game changer AI is likely to be, and how much value potential is up for grabs. AI could contribute up to US$15.7 trillion to the global economy in 2030. Of this, US$6.6 trillion is likely to come from increased productivity and US$9.1 trillion is likely to come from consumption-side effects.

According to the study, the adoption of ‘no-human-in-the-loop’ technologies will mean that some posts will inevitably become redundant, but others will be created by the shifts in productivity and consumer demand emanating from AI, and through the value chain of AI itself. In addition to new types of workers who will focus on thinking creatively about how AI can be developed and applied, a new set of personnel will be required to build, maintain, operate, and regulate these emerging technologies.

In the near-term, the biggest potential economic uplift from AI is likely to come from improved productivity. This includes automation of routine tasks, augmenting employees’ capabilities and freeing them up to focus on more stimulating and higher value-adding work.

More and more businesses are turning to automation, investing in AI to replace staff and cut costs. The 2023 McKinsey Global Survey – The state of AI in 2023: Generative AI’s breakout year found that one-third of survey respondents said their organisations are using gen AI regularly in at least one business function and 40% of respondents said their organisations will increase their investment in AI overall because of advances in generative AI.

Recently, telecoms giant BT announced it will be shedding about 10,000 jobs by the end of the decade as it digitises and relies more on AI automation.

However, the ultimate commercial potential of AI is doing things that have never been done before, rather than simply automating or accelerating existing capabilities.

The potential for advances in artificial intelligence will be one of the areas researched at the recently launched Gillmore Centre for Financial Technology at Warwick Business School. The aim of the Centre is to spearhead cutting-edge research and innovation for the UK’s financial and technology sectors, with leading research on AI development and machine learning.

Ram Gopal, Director of the Gillmore Centre for Financial Technology, said: “The Gillmore Centre for Financial Technology will act as a beacon for industry leading research across fields such as AI, blockchain and machine learning, helping to elevate government policy, inform regulators, and guide businesses through the safe development of these areas.”

AI: Not a new concept in the business world

We are seeing a proliferation of AI tools and applications in the business world, including digital assistants, chatbots and machine learning amongst others.

Despite recent advances in generative AI and the explosion of public interest in AI with the launch of ChatGPT, the AI data modelling concept including machine learning and statistical models has been around in UK businesses for many years, developing further since the emergence and development of Cloud technology, a key component for AI allowing it to evolve due to the need to store and process large volumes of data.

AI is already being used by retailers for metrics for pricing, writing advertising copy, and service booking systems, for example.

Fintech Innovator presentations

The Fintech Innovator session at the recent Asset Finance Connect Summer 2023 Conference provided four use cases for artificial intelligence in the auto and equipment finance sectors.

AI in onboarding: In auto finance, AI can use browser behaviour data to predict car brand and buying intent. AI will enable the ability to segment customers by data and enable better customer journeys in a real-time solution.

Currently, there is a revolution in the way cars are being sold which could be enhanced by incorporating AI in all ecommerce platforms.

AI in manual underwriting: AI can be used to predict the outcome of manual underwriting. There are many opportunities and challenges of using AI to progressively automate credit decisions to reduce cost to service and decision times. AI has the power to automate the majority of the manual underwriting process, reducing time, saving costs and enabling growth.

AI in origination: Generative AI solutions based on ChatGPT allows customers to ask detailed questions about their finance contracts. AI can be used as a copilot to take away drudgery and unlock a new wave of productivity, without losing the human element. AI can be used to solve a communication problem across the industry.

AI in retention: AI can be leveraged for enhanced customer retention and OEM success in the auto finance sector, and can be used to optimise the timing and offer for auto finance customers at the end of finance contracts and ability to retain the customer mid-term.

By incorporating AI into various aspects of the customer journey, retailers and financiers can improve customer satisfaction, anticipate and address customer needs, and ultimately enhance customer service and retention.

Limitations

With the unprecedented growth in AI technologies, it is essential to consider the potential risks and challenges associated with their widespread adoption, for example, security, privacy, bias, hallucinations, and repetition.

A 2023 Forbes article, highlighted the 15 biggest risks of artificial intelligence:

  • Lack of transparency
  • Bias and discrimination
  • Privacy concerns
  • Ethical dilemmas
  • Security risks
  • Concentration of power
  • Dependence on AI
  • Job displacement
  • Economic inequality
  • Legal and regulatory challenges
  • AI arms race
  • Loss of human connection
  • Misinformation and manipulation
  • Unintended consequences
  • Existential risks

The article notes that, “To mitigate these risks, the AI research community needs to actively engage in safety research, collaborate on ethical guidelines, and promote transparency in artificial general intelligence (AGI) development. Ensuring that AGI serves the best interests of humanity and does not pose a threat to our existence is paramount.”

The AI industry is working to solve these problems in a number of ways including focusing on more specialised models, such as BloombergGPTTM. This new large-scale generative AI model is a large language model that has been specifically trained on a wide range of financial data to support a diverse set of natural language processing (NLP) tasks within the financial industry.

Case study: Evolution AI

Evolution AI is using artificial intelligence in the financial services sector to assist with expedient, accurate lending decisions.

Set up in 2015, Evolution AI specialises in intelligent data extraction from business documents. Evolution AI rejected the traditional OCR (optical character recognition) technology as it failed to extract data from a lot of business documentation and is now using modern AI based methods.

Humans are no longer needed to read bank statements and balance sheets or go through business documents for underwriting purposes. Such boring repetitive manual work can now be fulfilled using AI algorithms.

Evolution AI’s CEO Dr Martin Goodson highlighted that you can’t 100% automate a process as you will always need people and human relationships, but you can automate elements of the process to reduce risk and drive efficiency.

Finance provider Novuna Business Finance and specialist commercial lending bank DF Capital both use Evolution AI software to simplify such business processes.

Novuna faced challenges with supplier invoices and extracting information using standard OCR technology. They decided to use Evolution AI software to extract data from business documents but had to address the orchestration of Evolution AI into Novuna’s system.

The successful implementation of Evolution AI’s software has allowed Novuna to extract from even more documents (for example, for sustainability reporting) and to use functionality during other stages of the process, such as with proposals earlier in the process.

Adam Crockford, Senior Change Manager at Novuna Business Finance said, “AI is not a threat but a tool to be used.”

DF Capital use Evolution AI software for the commercial lending side of their business with dealers and manufacturers. Previously DF Capital had to manually extract data from invoices and upload into their core banking platform. However, DF Capital wanted to scale up their business and use more automation going forward.

DF Capital are now taking the Evolution AI solution to the next level and are building API integration between Evolution AI and DF Capital’s core banking platform, linking to pre-existing automation from dealer and manufacturer portals. This allows for processing times to be reduced by 90%, increased even further by straight-through processing, an automatic solution for seamless electronic transactions and interactions without manual intervention.

For DF Capital, taking people on the AI journey with them is as important as bringing in the new automation technology.

Next steps

Artificial intelligence is constantly evolving. The financial services sector is planning to increase their AI investments across infrastructure, model development and deployment over the coming months and years. The industry therefore needs to look at AI use cases using a design thinking approach to enable financial service organisations to respond to this rapidly changing tech environment and to create maximum impact.

Are jobs at risk? This is always asked when a big technological change happens. While artificial intelligence will replace some human jobs as the technology advances, this evolving tech will in turn create new roles and new opportunities. AI can take away a lot of the repetitive drudgery, but it cannot take away all human roles.

With AI technology rapidly advancing, Evolution AI is further developing their use of AI for the future. Evolution AI’s Goodson commented that, in his 20 years in technology, there has never been a time when things have moved so quickly with weekly breakthroughs.

“AI combines excitement with anxiety in a shifting landscape of hands-on exposure to modern AI capabilities. Big changes are afoot,” concluded Goodson.

References:

More than four million people in the UK have used Generative AI for work – Deloitte | Deloitte UK

Will robots really steal our jobs? (pwc.co.uk)

Report – PwC AI Analysis – Sizing the Prize

The state of AI in 2023: Generative AI’s breakout year | McKinsey

The 15 Biggest Risks Of Artificial Intelligence (forbes.com)

Find out whether AI can change everything from the world economy to our personal lives by reading our review of the Asset Finance Connect Summer Conference 2023 Session

Analysis from Dr Martin Goodson CEO of Evolution AI

Perhaps the biggest impact of the rise of generative AI is on the credibility of the big four consultancies’ ability to predict the impact of AI on jobs! Only a few years ago, PwC predicted that education and healthcare were among the industries least likely to be affected by automation. Yet, today, we witness AI models like GPT-4 outperforming humans in medical examinations and chatbots usurping the roles of human tutors. The inconvenient truth is that the redrawing of the future landscape of employment by AI defies neat forecasts.

What is certain is that AI will become an integral part of operations in the commercial lending industry. Its potential for optimising tedious and error-prone business processes is too massive to be ignored. We should embrace this, as it means greater employee and customer satisfaction – and increased productivity.

The adoption process will take time. It’s a long way from a chatbot interface to a complete, well-designed product for the automation of a complex business process such as underwriting. Along the way, it will be important for AI vendors to recognise the importance of developing their AI technology’s capabilities in collaboration with businesses and end users.

Another consideration is the reliability of generative AI in the context of a highly regulated environment like the financial services industry. Generative AI suffers from hallucinations and is subject to bias, meaning that its various outputs – credit scoring models, predictive models, compliance reports and so forth – are less than 100% dependable. Human oversight, therefore, remains an indispensable component.

For businesses eager to leap into automation, the most immediate windfalls lie in the mechanisation of rote tasks: think data extraction from financial documents or reconciliation of invoices. As AI’s role morphs from the theoretical to the practical, the watchwords for industry should be collaboration, caution, and a healthy dose of scepticism about what lies ahead.

Register now for future related webcasts
European equipment

Power of partnerships to enable a sustainable transition

Summary

Creating partnerships and ecosystems between lenders and specialist partners to provide strong client-facing asset finance solutions is increasingly becoming the norm within the asset finance industry in order to support the move to net zero.

At the recent Asset Finance Connect Summer Conference, a panel of industry experts from DLL, Lombard, Dell Technologies and Lloyds Banking Group looked at the potential of the asset finance industry to help businesses go through a sustainable energy transition and to help parent companies and partners on their path to a decarbonised economy.

“The whole energy transition is about the orchestration of partnerships.”

Leo van den Dungen, DLL

Partnership between parent company and subsidiary

Stuart Clark, Head of Climate Transition at Lombard sees the relationship between the parent company and subsidiary as fundamentally important to both sides of the business. Lombard is fully aligned with the values and purpose of their parent company NatWest, highlighting their “natural synergies” in working together on their strategy to support their customer base.

As Stuart Clark confirms, “Lombard can enable a faster transition for NatWest customers, for decarbonising transport or stronger and quicker investment in green technology, highlighting the unique role Lombard play in the NatWest Group.”

As part of their green asset finance proposition which was launched last year to support the transition to a low carbon economy, Lombard are playing a key and fundamental role within the NatWest Group with their corporate partnerships.

The partnership with large corporate client McCain, who are increasingly conscious of their ESG commitments, helps to reduce supply chain emissions and also allows Lombard and NatWest to help SMEs and sole trader farmers with access to capital and critical knowledge about the sustainability transition and green assets.

In another example parent company Rabobank joined together with DLL (their asset finance subsidiary), whose partnerships are core to the company. As Leo van den Dungen, Head of

Transformational Growth at DLL confirmed, “without partnerships, DLL would not exist.” Through their partnership, DLL can offer the food and agricultural specialist bank the impact needed for their energy transition through existing partnerships.

Leo van den Dungen noted that DLL and Rabobank wholeheartedly believe that “the whole energy transition is about the orchestration of partnerships.”

Richard O’Donohue, Senior Director, Partner Solutions at Dell Technologies pointed out that, through the partnership with their parent, they are able to leverage a big organisation and access insights into customers’ channel partners, and insights into various parts of the tech business.

Tim Biddle, Head of Asset & Invoice Finance Sales at Lloyds Bank Commercial Banking highlighted the “genuine” partnership between the asset finance product specialist department and the wider Lloyds banking group. Creating an interesting dynamic between parent and subsidiary, Biddle explained how asset finance customers can be introduced to a broad range of products and services from the wider banking group as well as expertise and consultation services, making the sustainable journey for SMEs clearer and more accessible.

Customer benefits

When starting on their sustainability journey, many SMEs are time constrained and don’t have the relevant knowledge and capital. Faced with risk and funding issues, SMEs require guidance and expertise from their trusted banking partner.

The trust relationship that parent companies have with their customer base can be leveraged by the specialist subsidiary companies and their partners, leading to additional business and consultation services for the customer.

For example, Lombard has partnered with specialist green companies to bring services to their clients that can help them to understand their energy usage, reduce costs and take action to save money and cut carbon. For example, through their partnership with Absolar, specialists in renewable energy services such as solar panels, Lombard can offer their clients guidance, funding and energy solutions – a ‘one-stop-shop’ providing a unique, bundled, aggregated green solution for the customer.

Importance of partnerships

Partnerships go beyond a transactional relationship and can plug-in to long-term business strategies within the ecosystem, according to Lloyds’ Biddle. Collaborations are becoming increasingly important in the energy transition in areas where specialist companies can excel and are more knowledgeable with more experience than the partner business.

During sustainability consultations, many banks and finance houses saw the benefits of third-party partnerships leading them to restructure their sustainable propositions. Plugging in partnerships during discovery phases can bring up some surprises and can change the original vision of the company.

Richard O’Donohue sees “a real opportunity for more and more partnerships” going forward as the world becomes more complex and more expertise will be needed.

However, he notes that it is important to know your strengths and what you can bring to the ecosystem before entering into external partnerships. For example, Dell dissolved some partnerships in areas where they themselves had better skills and expertise or where partners were not comfortable in new spaces. To be impactful in the energy transition, you need to know the strengths within your organisation and appreciate that there is room for failure, before engaging in new partnerships.

Leo van den Dungen discussed a soon-to-be-announced partnership between DLL and a major parcel delivery company who want to make a difference in sustainability by migrating their subcontractors to electric vehicles, highlighting the need for partnerships to share data and broaden the credit bandwidth to support the energy transition.

Emerging risk

While banks are used to analysing credit risk, new products and services to enable the sustainability transition come with emerging risk, for example, project related risk, supply chain risk, uncertainty around asset values, behavioural risk and usage risk that are unknown and challenging for banks.

Tim Biddle noted how the asset finance industry is becoming better at acknowledging their inherent capabilities and strengths as well as their weaknesses where support and partnerships are needed to plug in the gaps.

Lombard’s Stuart Clark sees the “biggest transition as a cultural transition,” with banks and finance houses needing greater cultural awareness to see opportunities in partnerships whilst not having a fear of failure.

When discussing the risk transfer mechanism, banks and finance houses need to look at things from a forward view, innovate and turn a problem on its head, according to Stuart Clark: “We need to think about future propositions and innovate, it is not just about the rear-view risk”.

When educating themselves in new models, processes and risks, banks and finance companies must allocate the emerging risks to companies who are best positioned to deal with them. With new risks arising on the road to net zero, it is unlikely that just one party will provide the overall end-to-end solution. Partnerships are needed where you can allocate risks and specialist roles.

Shift to consumption-based models

As we transition to a decarbonised economy, the asset finance industry is evolving, not just by decarbonising assets but with new funding models that need to rapidly develop to help the sustainability transition.

However, many banks and finance companies are cautious of the high risk-reward profile of new consumption-based products and services, such as subscription and pay-per-use, as they need more historic data to understand the usage and the accompanying risk.

As the industry starts to adopt consumption-based models, data will become imperative. DLL’s Leo van den Dungen believes that asset financiers must partner with AI data companies to provide the necessary data and analysis for new usage-based models.

With the launch of a tech-as-a-service partnership proposition on the horizon, Lombard’s consumption-based model links to circularity and the repurposing of an asset for a second life and the reuse of parts and material. New funding models and links to shared asset ownership will be a transition to a transition, according to Stuart Clark, and will be hugely dependent on successful partnerships.

The pace of development of new products and services is increasing quite rapidly, according to Biddle, particularly with changing industry attitudes towards risk, and consideration of behavioural understanding of asset use and client behaviour.

Concluding remarks

Partnerships are an essential requirement for the asset finance sector in the energy transition as businesses move to greener assets and new consumption-based financing models where uncertainties, challenges, data and emerging risks can be shared amongst members of the ecosystem, all with their own unique area of specialism.

Find out how the asset finance industry is helping businesses on their path to a decarbonised economy by reading the review of our Asset Finance Connect Summer Conference

Analysis from John Rees Equipment Finance Community Leader, Asset Finance Connect

It is clear from our panel with representatives from major global asset finance providers that partnerships will be crucial to the transition to net zero.

Single entities, even if large, will not have the expertise or credit appetite to provide all of the solutions that the move to net zero requires.

It is positive to hear representatives of global companies acknowledge that the need for partnerships is crucial in their development to support the transition to net zero.

Register now for future related webcasts
European automotive

Will the UK be ready for the 2030 ban on the manufacture of ICE vehicles?

Summary

The UK Government’s decision to ban the manufacturer of ICE (internal combustion engine) vehicles by 2030 and hybrid vehicles by 2035 appears to be set in stone.

With 2030 just seven years away, representatives from the EV (electric vehicle) and charging industries gathered at the Asset Finance Connect Summer 2023 Conference to discuss what the industry must do to be ready for the ban on ICE vehicle manufacturing.

Education to dispel negative EV myths

There is a critical need for education due to the misunderstanding and bad press surrounding EVs. The UK media are doing a terrible job to support the EV sector and transition, highlighting so-called problems such as range anxiety and charging anxiety.

For example, a recent BBC Panorama programme left Andrew Leech, founder and managing director of Fleet Evolution “fuming and frustrated” over the “total distortions about electric vehicles”.

Leech noted, “It was typical sensationalist TV journalism with no preparation, no planning and no thought on how to manage a road route of that length. It seemed its only intention was to paint EVs, and particularly charging them, in a poor light.

“Anyone who regularly drives an EV will tell you that they are much more convenient than ICE models for everyday use, so why do journalists persist in using them for only a few days on trips most would only attempt once a year, with no preparation,” said Leech.

Car manufacturers and their dealers must assume responsibility for informing their customers about the conversion to EVs, including:

Plan your journey – look at your route range and charging facilities along your route. Vehicle range is irrelevant now as it is constantly being extended with improving battery technology.

Home charging – there is an ongoing debate about how many UK households have a driveway with estimates ranging from 20% to 70%, but those with driveways will allow 70%-80% of charging to happen at home. Home charging is a lot cheaper than public charging with many energy providers now offering “smart chargers” that charge your car overnight on the very cheapest tariff available Drivers able to charge at home pay just 5% VAT to power up their EV, compared with 20% for those without access to a driveway or designated private parking space who are reliant on the public network.

Cost – there are a growing number of EVs that are much more price accessible in addition to price reductions and discounts for electric cars. The initial purchase price of an EV might be more expensive than an ICE vehicle, but consumers need to focus on the overall lifetime cost of ownership, e.g. general maintenance is lower and more efficient to run if you can charge from home.

In a recent article – EVs set for major boost in 2023 – Nick Williams, managing director for transport business at Lloyds Banking Group, said: “Directly comparing an EV with its closest ICE equivalent can lead to some misleading conclusions, beginning with the price tag. Although the upfront cost of an EV might in some cases be more expensive, the total cost of ownership is likely to be less, and sometimes significantly so. As well as the obvious savings to be made on fuel, EVs have fewer moving parts and therefore need less maintenance.

“Even in the face of rising electricity prices, the cost argument for switching to an EV, when considered in the round, can be compelling.”

The Green Finance Institute actively engages with lenders about different product offerings for consumers on the EV journey and raising awareness of TCO. There is a perception that making the switch to electric is difficult, so through their financing models, lenders need to make the transition more appealing with product bundles combining EV and home charger.

Have EVs reached price parity with their ICE counterparts?

The initial cost price has always been a major factor in the EV purchase decision, with many consumers believing that an EV is beyond their budget. However, price parity between EVs and ICE vehicles doesn’t require the initial purchase price to be exactly the same.

For EVs, the total cost of ownership (TCO) — the full cost to own and operate the vehicle, accounting for purchase cost, fuel prices, maintenance — needs to become the most important deciding factor for consumers.

Some industry experts believe that TCO for EVs is already lower than its ICE counterpart with price already reaching parity if you consider subsidies in various markets and TCO, according to Deloitte in their Electric Vehicles – setting a course for 2030 report.

Other pluses for EVs also include the fact that EVs’ driving range is already comparable to that of ICE vehicles, and the number of models available is increasing.

Other industry analysts expect TCO parity between EVs and ICE vehicles as soon as 2024 to 2026 for shorter range EVs and 2027 to 2030 for longer range EVs.

Whilst there is a large depreciation gap between the cost of used BEVs and their original purchase price, the price gap of used BEVs is closing with their ICE equivalents if factors such as clean air zone charges are considered.

However, there is still uncertainty around the depreciation of EV residual values. Lauren Pamma, Programme Director at the Green Finance Institute believes that residual values are the big uncertainty surrounding EVs at present, but this is improving with data becoming increasingly available.

Charging infrastructure

In the UK, there is still work to be done on improving public charging networks so that EV drivers have access to infrastructure where it is convenient and at a fair price. Funding and investment models are needed to enable infrastructure at scale to cope with the increasing EV demand.

While charging infrastructure is currently not ready for the ban on the manufacture of ICE vehicles, by 2030 we will be ready as we still have seven years to prepare, according to Charlie Cook, CEO of RightCharge who sees solutions to the challenges.

We are constantly seeing new and improved solutions in technology, software and charging infrastructure, and as we approach the ban deadline there will be more and more investment.

In 2023 ChargeUK, a new trade body for the EV charging industry, was launched bringing together 18 of the country’s largest charge point installers, which collectively will invest more than £6 billion installing and operating new EV charging infrastructure by 2030.

Tens of thousands of new chargers are due to be installed this year, with the aim of doubling the size of the network through 2023.

ChargeUK will work collaboratively with the government and other stakeholders to help drive charge point investment and delivery, including shaping policies and regulation.

In July 2023, the UK Government published new regulations for public charge points, outlined in the Public Charge Point Regulations 2023, including a 99% reliability standard for rapid charge points.

The Public Charge Point Regulations aim to improve the charging experience for electric vehicle (EV) drivers in four key areas: payments, pricing, data and reliability:

  • Government is mandating contactless payments and payment roaming to reduce the number of apps.
  • Charge point operators will be required to be transparent about their pricing.
  • All public chargers will have to provide charge point information and data including live availability data.
  • New regulations include a 99% reliability standard for rapid charge points to build public confidence.

Charging issues also focus on the supply of power from the National Grid, with media reports raising concerns over whether there is enough power to fuel the increasing EV demand.

While National Grid are not worried about the demand from EVs, drivers need to be educated in off-peak smart charging overnight when it is most economical and uses cleaner energy.

Ben Boutcher-West, Chief Digital Officer at Connected Kerb noted that with the flexibility of electricity you can shift around charging behaviour with the use of software models: “the power supply is not a problem if technology can shift and provide those services to offer a blend of different charging options at different times.”

Battery manufacturing

The main cost of an electric vehicle is the battery, making up 55%-60% of the total cost. EV batteries are evolving with changing components and updated software and technology, all helping to reduce the cost.

However, negative media coverage about the quality and life of EV batteries has resulted in many retailers postponing their decision to purchase an EV, instead choosing to wait until there is more data about EV batteries. However, as Lauren Pamma, passionately declared, “we don’t have time, we need to make the change now!”

To meet the demand for EVs by 2030, the UK currently lags behind and needs to urgently invest in battery manufacturing and the supply chain, with only one small-scale battery plant currently up and running.

The global shift to electrification and EVs, in particular, to decarbonise the transport sector is creating a huge investment opportunity to meet the rapid increase in demand for batteries in the UK, according to the Green Finance Institute’s Guide to Investing in the EV Battery Supply Chain.

The new report discloses how the EV transition has the potential to grow the automotive battery market to GBP 12 billion in the UK as early as 2025, with growing battery supply chain capacity – upstream, midstream, downstream and end of life – presenting a significant opportunity for a wide range of investors across the financial spectrum, both those familiar with, and those new to the sector.

The UK has a window of opportunity to play a key role in the transition and grow its current battery manufacturing pipeline. Increasing investor understanding of the sector quickly is critical to seize this opportunity.

Concluding remarks

With only seven years until the 2030 ban on the manufacture of ICE vehicles, a lot still needs to be done to ensure that the UK is ready for the next step in the transition to electrification.

Investment is needed in charging infrastructure as well as UK battery manufacturing plants and supply chains as we move closer to the deadline.

Education of all parties is a necessity in the electrification transition of vehicles. Retailers need to be educated in the benefits of EVs and dispel some of the myths arising from negative media attention, for example, range and charging anxiety. Lenders too need to learn about different product offerings for EVs, while investment companies must see the potential for investing in battery and EV manufacturing in the UK.

Find out whether the UK will be ready for the 2030 ban on the manufacture of ICE vehicles by reading our review of the Asset Finance Connect Summer Conference 2023 Session

Analysis from David Betteley Asset Finance Connect's head of content

The transition to BEVs comes at a time when there are, in addition, a lot of moving parts at play in the automotive industry, such as agency, changes in regulation (new consumer duty), new mobility products such as subscription, the re-birth of old products such as rental, and the advent of the connected car. Connected cars offer the opportunity to completely change the pricing model once and for all from ownership to usership.

Whilst a connected car can be petrol, diesel or BEV, the question I think is whether the electric car revolution is the catalyst for the acceleration of the connected car and the use of the data produced by the vehicle to drive new finance products and usage-based pricing models.

There was much talk at the session about price parity between ICE and BEV and whether it will become a reality sooner rather than later. Parity has come quickly to some markets, but this has been due to the high level of subsidies for BEVs and this (as in the UK’s case) cannot continue forever. I must admit to being sceptical about some of the more bullish predictions about price parity, however, there can be no doubt that as the price per Kwh of electricity goes down, the appeal of BEVs will go up.

The winners in the ICE to BEV race will be those people that can charge from home, and whilst there is an ongoing debate about how many UK households have a driveway, the fact is that if you are a low to middle earner then you are more likely to live in accommodation that doesn’t have a driveway and will be forced to rely more (relatively speaking) on public charging which in many cases can be double the cost of home charging. In addition, if you are a low to middle income earner, you are more likely to be driving an older car that will incur high tolls to drive to work in a ULEZ.

Therefore, there is an element (as usual) of unintended consequence in that the drive to ban ICE vehicles will favour the better off! This could be offset by some kind of means tested incentive, but we will have to wait and see if the government (of whatever persuasion) wakes up to the social divide they are creating.

Continuing on the theme of charging, there is no doubt that the previous discussions about range anxiety have now been replaced by charging anxiety. The strong feeling of the panel was that charging anxiety has been over-blown by the media and that with education and a bit of route pre-planning there will be enough juice in the national grid and enough chargers (both public and private) to deliver it by the time 2030 comes around.

In conclusion, may I turn to the elephant in the room…..there always is one! This particular elephant is the loss of fuel duty and VAT on petrol and diesel and how HMRC will recover that loss. The favoured solution is road pricing, but this is unpopular with Brits who resent paying tolls. Road pricing today is a relatively simple solution to implement, supported by the “connected car” and the ability to re-price enabled by the data feed from the vehicle. This could of course impact the TCO of an electric car, but by 2030 the customer will have no alternative!

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