Sponsored by Societe Generale Equipment Finance
Equipment finance at the heart of the (R)EVOLUTION
Our industry is living an extraordinary period in terms of transformation trends. One would say that it looks rather as a revolution than a smooth evolution over the years.
Indeed, what is shaping up to match the new consumption needs of the end customers is not only a profound change in terms of assets to be financed. We also observe an acceleration in new solutions development. It seems that say we have all the ingredients for a brand-new recipe: assets and solutions. Right? Let’s look deeper in each of these two pillars.
ASSETS: the next decade will see the widest shift in technologies since the Industrial revolution. Due to the climate transition imperatives - further highlighted by the current severe energy crisis - we absolute need to change the way we live and do business in accordance with the planet defined limits. A full range of new assets is developing. As solution finance providers, we must contemplate new technologies, new depreciation profiles, new assessments of residual values. In certain cases, technologies are competing: it is far from obvious to know today which one will be winning. In some cases, depending on the usage, technologies will coexist. The truck segment is a great illustration in coexisting technologies: Electric trucks for the last mile delivery, in big cities are progressing at a fast pace. On the other side, hydrogen for longer range travel is gaining great traction.
The absence of any planet B not only requires that we find alternative to fossil energy but also that we change the way we manufacture goods: we need to increase our capacity to repair rather than just throw away and purchase a new asset. The concept of circular economy will completely modify the way we approach our equipment finance business. And it is not so easy to grasp. We all understand the need to save the scarce resources of our planet, to give several lives to the same asset and to integrate, in the production process, components of existing assets to increase the overall recycling ratio of our productions. Regulations are increasing the pressure for waste management and recycling while the current inflation context and rising energy costs are adding massive pressure on manufacturers’ capacity to invest and rethink their industrial process. It will only go further as time is of the essence. This new approach will require that we change our standards with manufacturers and end customers. Used equipment and the respective remarketing channels will no longer be a side business. Manufacturers will further increase their vested interest in controlling the secondary market of their products.
Asset revolution is therefore major, as we are discussing equipment finance, after equipment. What about the revolution in the finance solutions part?
SOLUTIONS: The acceleration of the climate change increases the pace of required transformation of consumption models. New models will drive the change in solutions for equipment finance. Indeed, we have to develop our businesses with more frugality and consideration for usage and outcome rather than ownership, especially ownership of brand-new equipment. It looks simple at first glance but in fact shifting from financing an obligor with potentially a portion of asset risk and transferring either initially or at the end the ownership of the asset to owning an equipment and taking the volume risk is a big shift. Of course, financiers could push back this usage risk to the manufacturers, but these latter are looking for sales recognition and light asset balance sheets. This is where data collection thanks to IoT will allow us to model behaviour and build forecast of usage. Services will be part of the overall picture. Financiers will integrate broader ecosystems with more stakeholders than the manufacturer and the end-user. And let’s be clear on this, it is not straight forward. It was much easier to extend a vanilla loan to a prime customer purchasing from a Tier 1 manufacturer an asset he would keep until full end of useful like with well experienced track record in terms of market value. But this time is over. Strongly linked to usage, the performance and output derived from the asset utilization will also have to be considered and the corresponding uncertainty – risk- will have to be allocated. I am convinced that all these consumption models, pay per use, pay as you go, will at last get the necessary traction as they do in the consumers markets. As Ownership loses attraction, single usership may eventually also. Platforms connecting assets and users will flourish, shared usage will develop. We are adapting to this new paradigm with digitalization and innovative solutions.
This revolution in terms of assets and proposed solutions will be carried by our people. And I would like to conclude on this key ingredient. The alignment between the climate transition imperatives and the aspiration of the new generations is strong. If ever you have some doubts on this, I strongly encourage you to spend some time with millennials. As future employees, they will rightly insist to spend their working lives consistently with their values and actively contribute to this new business models and plant protection. Equipment finance is core to the real economy because it addresses financing needs for essential use assets. This gives strong sense of purpose to our staff. Our CSR ambitions are further increasing this aspiration whatever the age of our teams.
Our industry will be facing a huge revolution: new clients’ needs, new sustainable approach, new assets and technologies, new clients to onboard, and new business models. By training our staffs, enriching our offers, integrating our partners and stakeholders, and encouraging diversity and inclusion especially towards new generations and local territories, we will change the paradigm and embrace this revolution. Our future is challenging but together we will find our way.
The future of aviation is strictly tied to several factors
Author: Florence ROUSSEL POLLET – SGEF Chief Commercial Officer – October 2022.