Tuesday, 18 March 2008

Industry Practice – Vehicle Leasing – Upturn and Evolution of the Model

With the repercussions of dented economic confidence being experienced in business and consumer circles, most companies are fighting to stay on top of profitability. The auto-industry a prime example of buyer malaise and corporate brain-tapping. But, for investors and astute management, such times offer the opportunity to seek-out alternative and additional revenue streams, re-structuring entities to better fit the future.

Heading into the troughs of any economic cycle – whether regional or possibly global – offer, indeed necessitate, such strategic reviews. So as part of this ongoing auto-motive sector re-jig, there are emerging new and evolved business model propositions.

Under greatly changing political-economic and socio-economic skies, ever changing, fragmented and hectic operational and lifestyle demands are impinging upon business vehicle users and private purchasers alike. Never before have a myriad of vehicle based requirements been needed, especially felt given today’s fiscal pressures for enterprise and individual’s alike.

Set against this tumultuous backdrop, western auto-makers especially are having a tough time, with GM & Ford equities presently hitting a 52 week low. At such a time, VMs will be looking to raise revenues via and extended their customer-base beyond a squeezed dealer-base; itself not keen to overstock. Hence automakers will probably start looking once again at secondary client groups such as fleet and hire-car companies to provide immediate sales lift, But it is perhaps the short and long-term opportunities that exist within the Leasing Sector that might prove tactically and strategically more advantageous - to take on quantities of production to assist through this lean economic and build alternative user-orientated, higher margin automotive revenues streams.

Lease-Cars have historically been the preserve of business users. However personal financing trends have altered so much in recent years that the fallible credit strictures and decreased realisable profits (from ever lengthening purchase contracts of up to 84 months) have driven automakers and dealers to start finding new sales arrangements. As a result Leasing is back on the table in both pure Finance Lease (vehicle only) terms and Operating Lease (expanded running costs) terms, which are usually allotted to private and business buyers respectfully, but the convenience factor of Op Leases means they will be increasingly offered to individuals as a form of more hassle-free motoring.

To very briefly summarise the pro’s for both parties…

Leasing from the Leaser’s viewpoint gives:
- Maintained vehicle ownership
- Greater legal title to the immediate return of the vehicle if payment default(s)
- Stable income stream
- Likelihood of repeat purchase if leasee has been satisfied
- Ability to re-lease or sell vehicle at end of agreement term (depending on market conditions)

Leasing from the Leasee’s perspective provides:
- Lower monthly charges
- Lower credit stricture/qualification
- Finite lease plan term able to fit personal near-term financial circumstances
- Ownership Ease……Possibly as far as an all costs inclusive “One Stop Shop”....
...ie insurance, servicing, road tax, depreciation

This re-emergence of re-defined Leasing for the private user arena opens up a world of possibilities for vehicle use methods which could evolve into any of the following:

A. Mobile Phone type service contracts that would extend the Lease plan to include possibly (discounted) fuel purchase and drive-charges as with London Congestion Charge – these extended charges simply ‘factored’ into the service charge formula

B. Car-Club type service contracts that allow for the user to swap on short & long notice periods the type of car they use. Hence it could be swapped for weekends away, extended family needs increasing passenger numbers, a car-less period such as whilst abroad etc etc, essentially matching the car to the functional or emotional need of the user.
Combine of A & B

Key is the ability to alternate between vehicle types so as to better fit with personal lifestyle and ‘buying power’ requirements, whether as a single, couple, family or for leisure pursuits, work needs etc.

Given the exploration of the topic in industry circles, it is today that the question arises as to whether an automaker would try and develop such a sophisticated service for itself, thereby stretching its own value chain downstream into consumer culture and maximising the turnover and profit margins.

To get to that point, undoubtedly a VM would purchase a car-lease or car-hire company to acquire the basics of business competencies, thereafter re-mouldng that bolt-on acquisition to form the type of advanced Lease Company service offering demanded.

This would also provide the holding group VM with greater inventory and value of automobiles and allow greater control of residual values, through supply constraint, in the used car market-place – a major headache for VMs at the present both in terms of maintaining brand value and in terms of having to reduce new car values relative to plummeted near-new used car values.

Along with the dealer-buy-out initiatives some VMs are considering and undertaking, a full evaluation of such a new business regime must be undertaken, combining creativity and old fashioned ‘devil in the detail’ acumen.

Conversely, Automotive Lease Companies should see the opportunities arising for extended commercial links with VMs and Dealer Groups, and so begin to further court them with ever more imaginative schemes. No doubt some leasing companies will remain traditional, others seriously undertake possible alliance-based relationships with VMs, whist some possibly face friendly or hostile take-overs by peer trade buyers in their own sector (identifying the trend) or by predatory VMs seeking to enlarge their grasp on consumer’s automotive demands and indeed lead them.

Critically, with this ability to stake greater hold in that middle ground (between ‘pumping production’ and ‘enticing buyer’) will allow far greater influence in the costly arena of product complexity, reducing and streamlining vehicle feature and so in turn gaining component supply and manufacturing efficiencies.

At this juncture investment-auto-motives believes opportunities are abound in the Lease-Car world. Thus investors in all related commercial fields should seriously demand that respective corporate managements - individually and possibly collusively – creatively construct new strategically important higher-margin value-adding route-ways forward. Lease Companies, VMs, Dealer-bases and of course Finance Houses should re-visit "what could be" scenarios.

With such a catalyst for change, there are undoubtedly specific companies across all sectors for investors to watch and mark, perhaps first and foremost within the Lease sector itself, with great potential for sector consolidation and improved inter-relations with independent and VM linked Finance providers. Investment banks, private equity and hedge funds are looking for stable investments in today's choppy waters (ie infrastructure funds, commodities funds, precious metals/stones funds) so devising maximum value Leasing models will be welcomed as the auto-sector being proactive.