A beginner’s guide to TCO

Finding out the purchase or lease price of a vehicle is easy enough, but what about the total cost of running and maintaining that vehicle throughout its life cycle? What different factors do you have to consider, and how do they vary from place to place? We talked to Pedro López Business Analyst e-Mobility of Athlon International about how this information can help fleet managers make decisions to make their fleet and mobility more cost-effective, the pitfalls they should avoid and how Athlon can take this complex process off your hands.

 

    What is TCO?

    Pedro López: “TCO stands for Total Cost of Ownership. It is a financial methodology based on the idea that the total cost of owning something includes all the costs it incurs throughout its lifespan, not just the initial purchase costs.

    “TCO analysis is used in many industries because it has proved to be an excellent way to track ongoing costs and make projections for budgeting purposes. It  is also is a reasonably accurate way to compare similar products or applications over their entire lifespan.

    “In short, it helps you make informed decisions about the solution that will have the greatest positive impact on the corporate bottom line.”

    What is the importance of TCO in fleet & mobility management?

    Pedro López: “I would say it is absolutely essential. Even before the coronavirus crisis, we knew that mobility in general – and the automotive industry in particular – were undergoing significant changes and that our customers’ mobility needs were also changing. Deloitte’s 2020 Global Automotive Consumer Study confirmed that lower operating costs, along with lower emissions, are the main drivers of interest in alternative technologies. People are turning away from traditional combustion engines when it is time for them to choose their next vehicle. What is more, many countries are changing their taxation and incentive rules for vehicles.

    “In summary, cost and cost control have always been important for fleet managers, but we feel this particularly keenly at times when there is a lot of pressure on cash and cashflow. TCO gives fleet managers the potential to make radically different decisions in many areas: efficiency, budgeting and planning, lifecycle management, vehicle & vendor selection and decisions about whether to lease or buy.”

     

    Which elements are important when calculating TCO?

    Pedro López: “Vehicle costs are different in each country, because factors such as the tax system, wage costs and customer demand all have an impact on the purchase price of a vehicle and its value in the used-car market. That makes it crucial for international fleet managers to be able to compare the different countries.

    “Traditional TCO components have to do with financing, taxes and operational servicing (repair and maintenance, tyres, insurance, and fuel or electricity). I should point out that the energy budget is also a key factor, since the relative cost of buying a car and running it is so different for electric cars compared to those that run on traditional fuels. Another important element is driving behaviour, which influences several TCO components. That is why advanced TCO analyses consider this factor in their outcomes. And then there are factors such as specific mileage and the duration of the lease contract, which affect many vehicle-related costs."

    What are some common pitfalls companies make when dealing with TCO?

    Pedro López: “The beauty of TCO is that it’s a tangible figure. It's easy to look at cost accounting and make a decision based on lower expenditure. However, this might be focusing too much on costs. Your company’s goal might be not to choose the cheapest vehicle, but to choose the vehicle that also contributes to additional company objectives: reducing its carbon footprint, for instance.

    “You should also keep in mind that the average TCO doesn't provide insight into the timing of the costs. Over the course of a vehicle’s service life, TCO is subject to change due to the vehicle’s age and many external factors such as fluctuations in energy prices.

    “A third challenge I would like to mention is that it is important to make fair comparisons between different vehicles, but the many possible combinations of models and engine types makes this difficult. So my advice would be to make comparisons based on segment level, vehicle size or engine power.”

    How can Athlon help companies reduce their TCO?

    Pedro López: “At Athlon, we aim to support our customers in times of change by helping them with the wide variety of challenges they face. This includes explaining changes to tax and incentive rules, making the costs of running the vehicle clearer, assisting with complex TCO calculations and alleviating the heavy burden of work required to gather TCO information.

    “Two relevant services we can provide to customers are consultancy and tools. We have extensive experience in consultancy, helping our customers to develop best practices for their car policies, ensure optimal employee satisfaction and get the biggest return on their investments, with TCO consultancy playing a significant role.

    “What is more, we also provide a robust and powerful tool called the Athlon TCO Simulator. This tool offers a quick and easy calculation and comparison of the Total Cost of Ownership of many different vehicles in 5 markets: France, Germany, the Netherlands, the UK and Belgium. It gives a good, general indication of what the most cost-efficient vehicle is for the customer. It takes into account the model, brand, fuel type and expected consumption, contract duration, expected mileage and other leasing parameters, as well as the current tax conditions in each country. It also considers driving behaviour and delivers added value in the form of information about the driver’s impact, tax on the benefit in kind and corporate tax deductions.”

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