South Africa's economic cloud has silver lining for fleet & lease

 

A recent market study shows that 33% of corporate customers purchased their vehicles cash, 58% financed them via one of various corporate financing options, and 9% made use of Fleet management companies.

 

Corporate financing options, offered either by a bank or a captive financing institution, include business loans, instalment sales and financial leases. Fleet management companies offer services including operational lease or rental and full-service lease, which includes service, maintenance and tyres. The preferred financing method in South Africa is an all-in-one cost option, i.e. which is a full service lease on a prime linked interest rate.

 

Roughly 100,000 units of the 1.3 million lease cars are operated under full-service leasing. At around 8%, that is a relatively small segment of the total – but awareness of the advantages of the products and services offered by the fleet and lease industry are rapidly increasing. 

 

Traditionally, many South African companies purchase their fleets, others offer their employees cash allowances. These so-called ‘cash takers’ are then beholden to finance, maintain and insure their vehicles privately. Due to the economic downturn, many companies are cash-strapped, and are looking at leasing as a viable alternative. As elsewhere in the world, younger generations of private customers are preferring usage over ownership. This is promising for the future of leasing in South Africa. 

 

Full-service leasing customers in South Africa are looking for providers that can take care of the entire range of fleet management aspects, from financing over driver management to vehicle maintenance and fine and toll payments. 

 

About half a dozen companies dominate the full-service leasing business in South Africa. They include Absa Vehicle Management Solutions, Zeda Car Leasing (trading as Avis Fleet Services), Bidvest Bank, Eqstra Fleet Management, FleetAfrica, Imperial Fleet Management, Standard Bank Fleet Management, and Wesbank. 

 

Both the rise in fleet management costs (+12% p.a.) and the fall of the Rand (expected to increase overhead costs further) will push fleet management companies to acquire companies in their value chain, and to drastically cut costs. With much of sub-Saharan Africa undergoing significant economic expansion, moving into the rest of the continent will be considered as a strategic growth opportunity – especially since the local competition is still weak, thus increasing the likelihood of high returns.

 

For the near future, the overall economic outlook for South Africa is turbulent. GDP growth is near zero. The currency remains weak and the exchange rate is volatile. It is not unthinkable that South Africa's international credit rating will be adjusted downward. In response, wait and see seems the prudent attitude for many corporates. It helps explain why the new vehicle market is down by 10%, compared to last year. 

 

Paradoxically, this is economic cloud has a silver lining for the fleet and lease industry. Partly, companies will postpone decisions to renew their fleets, and hold on to their current stock. But other corporates will consider leasing as an option instead of purchasing, as it keeps vehicles off balance and frees up cash flow – among other advantages. Furthermore, in South Africa company, repayments on vehicles used in an income-generating capacity are tax-deductible.