Steering a path through uncertainty

Asset Alliance Group CEO Willie Paterson puts great store in the belief that businesses can only survive if they are on the lookout for the next big trend. He tells Steve Hobson how future planning continues to yield results

Asset Alliance Group (AAG) has been a long-term supporter of Motor Transport’s annual state of the trucking nation report Industry Monitor, and in the 2022 edition CEO Willie Paterson described himself as an “optimist”, as 70% of operators said they planned to add extra trucks to their fleets this year.

But the launch of the 2023 edition in this issue of MT coincides with inflation in double figures, rocketing interest rates and the UK economy teetering on the edge of recession. MT’s first question when we met in March this year was ‘are you still optimistic about 2023?’

“We will continue to develop and thrive and joining Arbuthnot was a really smart decision for both of us,” he says. “Covid-19 accelerated that as we needed to rethink our business model and it put us in a position of undoubted financial security. They have invested heavily in our business and expect us to take full responsibility for managing it.”

Asset Alliance was founded by Paterson in 2010 and merged with ATE Truck and Trailer Sales in 2012 to form AAG. It was acquired by 190-year-old private bank Arbuthnot Latham in 2021; that year the bank made

£4.6m pre-tax profit on turnover of £88.7m and had net assets worth £200.9m. Its 2022 results were far more impressive, with a pre-tax profit of £20m on turnover of £137.4m and net assets of £212m.

A former banker himself, Paterson is confident that, despite a handful of banking failures around the world, UK banks are solid. And, despite strong criticism of the government’s mismanagement of the economy, Paterson says financial services remain a key powerhouse for the UK.

“The financial sector is incredibly strong,” Paterson says. “That is the only thing really propping up the UK economy. We have huge businesses that support the automotive sector – do we manufacture anything? No. Do we assemble things? Yes, lots.

“The thing that galls me as an economist is that we have to be taxing people better. No one wants to be taxed but we have to pay the bills and too many young people think they can have what they want when they want it. All we are doing is passing debt down the line.

“If government thinks all they need to do is take on more debt and inflation will deal with it, that is commercial suicide.”

Buy and by

But AAG’s UK business remains in good health and, with the help of Arbuthnot’s backing, it is slowly catching up on its asset replacement programme, which was delayed by Covid-19. It currently has 4,200 owned vehicles on the road plus another 1,000 on fleet management contracts, all managed from five sites. Paterson takes pride in having the youngest contract hire fleet in the market.

“We replaced 1,700 vehicles last year and we are planning to do another 1,700 to 2,000 this year,” he says. “A lot of that will be replacement of existing fleet plus some growth.”

AAG is expanding its presence in the bus and coach market it acquired in 2016 when Forest Asset Finance was merged into the group. The PSV market is adopting zero-emission technology much faster than HGV operators, helped by public subsidies and local authorities keen to clean up air pollution.

“We have hydrogen, electric, hybrid and gas buses and have had for years,” says Paterson. “We’ve just done our first replacement cycle on electric buses with a battery swap after seven years. So there is learning there.

“The reason it works is that it is a subsidised market sector where the councils have control over or own those fleets. TfL has a mandate to meet certain objectives and will make it happen. I had hoped what was happening in London would spread to other cities with low emission zones. It hasn’t happened as quickly as I thought but it is starting to happen now.

“Glasgow has moved the First Bus fleet to electric, Edinburgh has hybrids and Manchester is the next major conurbation to go.”

In the 2022 Industry Monitor 61% of truck operators said they expected to be operating alternatively fuelled vehicles soon and Paterson admits that electrification is moving faster than he expected.

“We are playing catch up and have had something of a rude awakening,” he says. “I had thought the change was a little further away but in the last year things have been happening quicker than we expected. We speak to all the major manufacturers at European level and are guided by them.

“Some are still in the dark and don’t know how they are going to reach the targets – but they simply have to reach them because the fines will be huge. So some are driving the change and we are very close to that.

“We are actively looking at the supply of green hydrogen as we think it is the only economic substance available. We have a small taxi business in the group with 1,000 taxis in London and looked closely at putting a hydrogen generation system in there. The numbers stacked up but the risk was that we would need to put in around 10 small containerised generation stations that would be plugged straight into the mains. That was the deal breaker for us as the big variable is the cost of electricity.”

Paterson now believes AAG will at some point be able to offer its customers a turnkey green hydrogen solution encompassing vehicles and fuel.

“We think we can potentially move to supplying a vehicle and a fuel supply contract at a fixed price,” he says. “If you have wind turbines and solar panels plus battery storage that can be a solution to the problem, as it gives you fixed price hydrogen for a long period of time.”

While some observers believe only government can decide which direction to take the UK energy sector in to deliver net zero carbon emissions by 2050, Paterson is not waiting for the politicians.

“I wouldn’t want to trust the government to make that decision,” he says. “I don’t think they are capable of making it. They are capable of incentivising it and acting as a catalyst – regulation is the biggest catalyst and the manufacturers have signed up to it and have to deliver.

“The innovation will then come from the manufacturers, possibly helped by government or university-funded research and grants, for example. In Glasgow there is a new hydrogen truck business that has had huge grants given to it and that hopefully will lead to something.

“We don’t want to be the first adopter but we definitely want to be an early adopter. I want to be able to go to my customers and say ‘if you want electric, we can give you electric. If your payload is high and you are not back-tobase, then you are a hydrogen customer’.

“In the space of three months, I changed my view from thinking I was a year away from having to do anything about this. I am now seeking a senior individual to come into our business to steer us through this period of change.”

AAG needs to be able to offer its customers the right tool for the job and recently placed an order with DAF Trucks for 1,500 vehicles worth more than £160m, which will include at least 75 trucks from DAF’s electric range.

While the bulk of the order will be a mix of diesel New Generation DAF XF and XG tractor units, there will also be a tranche of XD tractors and rigids with both electric and diesel drivelines.

Deciding what zero emission vehicle is right for which application won’t just depend on range and payload, however. “We have just started a data management project with some consultants, looking at how we analyse the data we have in the business to better understand the needs of our customers against the capabilities of the products available,” says Paterson. “Then we can go back to the manufacturers and say ‘we think we are best placed to do this, you need to give us the data on what you can do and keep working with us’.

SPLASHING THE CASH: AAG has put its faith in DAF recently with a £160m order for 1,500 vehicles, including at least 75 electric trucks

“The benefit we have is that we own a massive used truck business – probably one of the top three in the UK – so we are agile enough to take more commercial decisions on residual values. We are not a bank that has to have a fixed price at a fixed time. We can steer through that in a way that some of the vendor finance companies just can’t.

“I previously ran a bank’s commercial lending division and I know how difficult it is for them to be flexible. The model for our business is to deliver that flexibility and agility.”

While Paterson understands the view that banning the sale of all new diesel trucks from 2040 is not feasible, he points to the rapidity of technical developments in recent years.

Holding up his smartphone he says: “We run our lives with these. They’ve only been around for 20 years. We have lived through an incredible 20 years of progression and battery technology is moving dramatically. So I think we will be there in 17 years – we will have to be. It is coming so much faster than we thought it would.”

Paterson also points out that the parc of diesel vehicles will continue running for “seven to 10 years” after the 2040 deadline and predicts there will be a surge in internal combustion sales in the run up.

“I am seeing buying patterns slowing down at the moment and I’m convinced it is to do with people pushing that churn back to one or two times,” he says. “If you look at residual values, they normally follow a five-year wave. Depending on what happens in the next year with

TREND SPOTTING: Diesel vehicles will continue to play a major part in the sector well beyond the 2040 ban on new sales, and Paterson believes operators will prefer to ease slowly into the switch to alternative fuels new vehicle pricing – and they are starting to soften – I think we will see an unusual residual value curve in the next five to 10 years.

“Residual values are at their peak at the moment. I believe that, while they will soften, they won’t go back to previous levels and will hold up for the next three to five years. Depending on how efficiently the change is introduced, they will then either hold up or even go back up again.”

A lot of operators were spooked into buying Euro-5 trucks ahead of the switch to Euro-6 in 2014 only to see residual values crash, and Paterson believes lessons may have been learned about investing too heavily in outgoing technology. “That has spurred some of the larger businesses to say ‘let’s just adopt this and use it as a USP for our customer base’,” he says.

“We are owned by a private bank and people have a choice of where they invest their funds. ESG definitely has a role and I am being asked ‘What part are you playing in our zero-carbon agenda?’ That is why I’m employing someone to steer us there faster and smarter.

“But we have to be pragmatic and understand we can’t fix the problem overnight. There is a balance in there somewhere.”

This new world order will present particular challenges to the contract hire sector as upfront costs of zero-carbon vehicles will be much higher, while running costs in theory should be lower. How will this shift be shared between the funder and the operator?

“Over the past 10 years we have seen new truck prices double,” Paterson says. “We are bullish on residual values because we have to be, but if I have to pay £300,000 for an electric truck and my customers are in the habit of paying £600 a week for a truck, they are not all of a sudden going to be able to pay £1,000.

“Some of them have an agile model and can, but the majority can’t. So we have to work with the manufacturers and say for the first period we will take a commercial decision on it, try to hedge some of that initial risk with our back book and hope it will all balance out. The change in technology can’t be too rapid – we have to find a safe pace to do it.

“I can’t go out and order 1,000 electric trucks right now but I can order 150 and start placing them through our business.”

■ The 2023 edition of Industry Monitor is free with this issue of Motor Transport. It will also be online at motortransport.co.uk

While electric vehicles are said to be simpler to maintain than their diesel equivalents, it will be a brave workshop manager who wants to mess with high power 400V or 800V battery packs, let alone hydrogen fuel tanks pressurised to 300 bar.

The arrival of Euro-6 with its complex electronics had already seen many operators and leasing specialists withdraw from in-house R&M and AAG was no different. It rented out its 120,000sq ft Wolverhampton workshop five years ago and now relies on dealer R&M packages for its fleet.

“We have moved entirely to buying fully maintained contracts from manufacturers,” says Paterson. “We monitor them very closely and gather the data so we can manage the relationship with our suppliers. We think it is the right thing to do and a natural hedge against inflation. It is just one less thing to worry about at the moment.”

This approach helps reinforce the close working relationships AAG needs with its suppliers as the industry enters a period of unprecedented change and maybe instability.

“The major manufacturers we work with understand what we are trying to achieve and it ticks their boxes,” says Paterson. “To get the supplies we need we have tried to understand their needs too, and we have had a meeting of minds on this. I can’t use their finance because we are a bank and I’m cheaper than them, but I will buy their maintenance and look at extended warranties. That helps them to help us.”

By and large Paterson is happy with the R&M service he receives and says the six-week waits for service slots are starting to ease. His key priority remains communication from the dealer.

“If the vehicle can’t be fixed, as long as we have absolute clarity in that communication, that can be dealt with,” he says. “What you can’t do is tell someone who has a £2m load of salmon on the back of his truck that it will be fixed in three hours when it clearly won’t be. The biggest challenge is when they don’t trust what they are hearing and start interfering. Then everything goes wrong and we have tried to use technology to shorten those lines of communication.

“We had a period of having major issues with supplying relief vehicles to customers because we simply didn’t have vehicles to give them. But ordering large numbers of new vehicles and taking a lot of used ones back has given us the ability to support those customers and the dealers better.”