Used Equipment pricing: beyond the percentage of the new price

During the fourteen years with Caterpillar quoting daily used machines, the most frequent question from the marketing specialists was:
What percentage of the new price worth the machines after one, two, three, four, five years?
I was definitely a bad boy refusing to answer straight to this question.
People got even frustrated because it must be a depreciation schedule for each model, shouldn't it?

Actually I have drawn hundreds of depreciation curves for every model in more than fifty countries but they were not all following the same pattern and I was often arguing with my american colleagues about specific market trends that they wanted to be similar to what they were watching over-there.

Now I am a praneo consultant. In this little team we share this:
We don't like when everything is reduced to the most simplistic form.
It is not for the sake of making the things complicated but because we believe we must be conscious of what happens in this world and adopt a holistic approach which I personally think is very ambitious.
Still the most important is to start to identify all the influencing parameters.

There we are back to the price of an used equipment.
What are the main parameters?
We are going to benchmark the most mature market regarding used pricing: the automotive industry that I watch carefully as well.
Quoting an used car is crucial since this business really soared at the time financing was made available based on the collateral value, same concept as the mortgage value when financing real estate.

1/ The new price 

Usually the manufacturer launches a model in order to gain market share against a targeted competitor. Basically the goal is to make a better car for a comparative price.
It means controlling the production, marketing and distribution costs while bringing innovations.
Nowadays, new cars are more fuel efficient, safer, more performant and reliable than the previous models and, thanks to the engineering, they are cheaper to produce even when they are made in Germany...
As a result, it becomes very questionable whether it is still rational to purchase an used model when the new one is so much better.
The pace of progress in the industry plays a key role in the devaluation of an used model.
This applies fully to the construction machinery.
 

2/ The size of the market: where are the needs?

We just saw that the new products become affordable, even more when financing solutions are offered, but still not everybody has got the access to that money.
Two solution then:
- Paying less for an used car / equipment
- Going to a second level of quality (Dacia for Renault, Skoda for Audi - VW, SEM for Caterpillar...).

I am going to address it at the global level because it becomes impossible to limit the view to the close neighborhood that becomes no less than the whole world.

For very long, the old Peugeot and Mercedes were massively exported toward Africa for a third or even fourth life but the Japanese manufacturers started to flood the market with their second hand good quality cars.
 Now, there, we see the Chinese brands with copies of German models.
It is no immediate threat on the new market share but this one had to be protected in Europe and other mature markets.
An efficient way was found: making the entry ticket to developed countries expensive enough to postpone this fierce Chinese competition by enhancing the anti-pollution norms.
Cars in Europe are now tier 6, Construction machines tier 3B which is very good for the environment but the ultimate goal is rather to keep the cheap Chinese products at bay.
Sorry for my cynicism...
In the other hand, the major manufacturers have identified a huge potential new market in developing countries.
Chinese car market is with a double, even triple digits growth and the volumes are now bigger than in the US market.
The temptation is big to participate to the feast.

Through industrial partnerships (the only way in China), the large manufacturers get present there and shift most of their efforts (PSA through Citroen and DS produces more cars in China for the local market than in France.
Not talking about VW that is just a giant over-there.
Caterpillar in its way is doing the same by producing more 20 ton excavators in China than for the American market.
Chinese know they can attract the latest technologies. They are full of cash and could even afford to get the latest safety features of Volvo cars that belongs now to the giant Geely.

The change in the frame of the world market is at its beginning, if we refuse to understand it, we'll never be able to anticipate the new parameters influencing the markets and the prices.

Back to the basic anticipation of the future resale price of the used machine:
It is still a nice room for all good products with a well known brand but the selection of the consumers going to be with other alternatives making the only brand is not sufficient to guarantee the sale.
We just need to be aware that the world is changing, the consumers will become more demanding and the prices more difficult to sustain at a high level either locally or for export because everything is connected.