6 Jun 17

Expert Insight: From Corporate to Global Leasing

Over the past five years, Full Service Leasing (FSL) has had the fastest growth in the corporate car registration market, worldwide. FSL also appears to be a great opportunity for the private market, as demand for alternative models of mobility grows. Does this mean that leasing is the panacea to sell cars in the future? If so, what are the consequences for leasing companies, rent a car companies and OEMs?

1. FSL for corporate clients has been a fast growing and profitable business so far
Full Service Leasing (FSL) has been very popular in Europe and has financed a growing portion of new car registrations. The share of FSL among new car registrations reached over 50% in both the UK and the Netherlands. It also represents over 30% of corporate fleet registration in Southern Europe. FSL has progressively replaced purchase, financial lease and allowed a complete outsourcing of fleet management for corporate businesses. Outsourcing has represented a win-win for corporations and leasing companies, which have enjoyed a profitable business since 2009. LeasePlan and ALD both reported around 20% after tax return on equity in their published accounts three years in a row (these results are based on a combination of financial and service margins, leveraging on 10-15% equity). Arval doesn’t publish accounts, but its profitability is assumed to be comparable. BMW  (Alphabet) and Mercedes (since Athlon acquisition last year) are also very profitable. Other manufacturers have limited market presence and operate mainly in their home country or through white label agreements with independent lessors.  As a consequence, the market has been somewhat oligopolistic. In Europe, five or six players (Lease plan, Arval, ALD, Alphabet, Athlon and VW finance) are competing on the international corporate market, while manufacturers concentrate leasing activities for SMEs through dealers. In all cases, FSL is a profitable activity and competition remains limited.
Notwithstanding, the competitive landscape is changing rapidly, as it is being disrupted by the development of private lease and more flexible solutions made possible by telematics applications and the generalization of smartphones.
2. Private lease and flexible products are changing the competitive landscape
Demand for private lease is being boostedby marketing campaigns that encourage customers to enter leasing schemes, thus generating immense opportunities and risks. Private lease offers huge potential for leasing companies in a context where consumer finance captives have a dominant position, but in most cases don’t have the capacity to offer FSL company services. However, FSL companies are not used to dealing with private customers. OEMs and independent lessors are preparing to compete for this new market segment and the leasing business will likely take a greater share of new vehicle registrations. This is a sensitive situation for car manufacturers, as this model will likely cannibalize existing sales (consumer finance). Lessors, on the other hand, may loose their white label agreements and compete on the corporate market with manufacturers. OEMs will likely have no other choice than to enter as fast as possible on this market and heavily invest into product development to compete against specialized leasing companies, which will also have to invest in new products to remain ahead. Web quotation tools and smartphone applications, low cost FSL, flexible mileage and flexible contract length will also be necessary to address the private market.
3. New operating models are underway to address the competitive landscape
The connected car is making flexible lease, car-sharing and car exchanges a reality. All actors in the mobility area are aware of this and working on it: FSL companies, manufacturers and Rent a Cars. The objective is to offer drivers, whether private or corporate, a vehicle for every situation and recycle cars among different drivers. These new products are already threatening the traditional Rent a Car business: FSL companies and OEMs have started to manage their own fleets and invest in car-sharing applications. This would seem paradoxical at first, given Rent a Cars are the most sophisticated businesses (central booking, complex price structure, usage management), but at the same time, they are very much under threat. FSL companies are moving toward shorter term leasing (6, 12, 18 months) and some Rent a Car companies are extending the term of possession to up to 24 or 36 months. In both cases, they are moving toward a required management of assets across different drivers and/or customers.At present, they start to compete on a marginal portion of their business, but may progressively become competitors rather than partners.  FSL companies are offering pre-delivery cars and already own fleets. Car sharing for private or corporate clients is becoming a battlefield for independent FSL companies, Rent a Cars and obviously manufacturers. Some of them are developing their own platform; others are buying start-ups like Europcar with Ubeeqo for instance.
The distinction between corporate and retail markets will fade awayand manufacturers may have to adapt their selling price policy in the near future. As car owners will no longer be car users and the retail market potentially disappears, users will subscribe to mobility solutions rather than lease a car. A report from RethinkX forecasts that on-demand autonomous electric vehicles owned by fleets will serve 95% of all US passenger miles travelled by 2030. It might be exaggerated, but the transition to a new world of mobility (car-sharing, multi-modality platforms, etc.) is underway and all existing actors need to innovate and adapt in order to remain relevant. As new players emerge, we may see a new constellation of partnerships develop, while exponential technology accelerates the pace of change.

Authored by: Céline Gilson