If there’s an edge to be had in fleet leasing, one would expect it to lie with the manufacturers themselves. Bank-owned leasing companies can try to differentiate themselves on service, but they can hardly turn to their stock-in-trade, money, or the cost of money, for an advantage.
After all, a big manufacturer’s finance arm is going to have the same access to capital as a bank. But manufacturers make cars, so whatever advantage is to be had, should lie with them.
However, one point to get straight at the outset is that, when it comes to the vehicle purchase price, the law is clear. There’s no way that a manufacturer can offer its own vehicle leasing arm better terms, for the same number of cars, than it’s prepared to offer a bank-owned leasing company. Nor, to be fair, would manufacturers wish to. After all, the bank-owned leasing companies are some of their biggest customers.
This point means that, when you ask the leasing arms of car manufacturers such as Peugeot, Ford and Vauxhall on the record, what it is they have that the banks don’t, they get a little nervous. None of them want to upset such good customers as Interleasing or Lex. However, every company likes to sing about its unique selling points, so they are able to put a persuasive case.
John Taylor, sales director at Peugeot, notes that, if one strips the leasing game to its basic revenue streams, it becomes easier to see why a manufacturer might have an edge. There are only a limited number of possible sources of profit. There’s the finance profit, the profit on the car, the profit on the management of the customer’s fleet (if this is included as part of the deal) and the profit derived from associated services such as accident and travel insurance. There’s also the profit which comes from the maintenance and servicing of the vehicle.
Taylor argues that it’s difficult for a bank-owned leasing company to capture all these profit sources. Certain revenue streams, such as the profit on the vehicle itself and the profit derived from maintenance, remain with the manufacturer. Since the manufacturer’s fleet leasing arm is still, ultimately, the manufacturer, it can pool all these profit streams when bidding for business. “This concentration of profit gives me the ability to be more aggressive when I am bidding for a deal. A large fleet customer, coming to the market for a large fleet to be leased, say upwards of 100 vehicles, will find that the manufacturer can generally take a sharper view than a conventional leasing company – not because it’s getting the cars cheaper, but because it has this concentrated pool of profit which it can take a view of,” he says.
Andrew Thirkettle, marketing manager at Ford’s fleet lease finance company Business Partner, takes a different line. In essence his argument rests on two planks. First, there’s the fact that the Ford Trust Mark brand now embraces marques such as Jaguar, Land Rover, Volvo, Mazda and even Aston Martin, as well, of course, as the Ford range. Operating over so many marques gives it a comparable range to a manufacturer-independent, multi-marque, bank-owned fleet leasing company, when it comes to matching a customer’s requirements. Second, he argues that Business Partner’s real skill lies in its ability to tailor financing schemes to match the exact needs of its customers.
“We take a consultative approach to financing fleet customers. This has become a very complex area and it’s important that customers are given the opportunity, either via our people, or via the dealer network whom we train, to see all the opportunities, the benefits and attributes of the various financing options,” he says.
The basic starting point with any plan, he says, has to be the lease/buy decision. Ultimately, fleet leasing comes down to a few major benefits.
These reduce to not tying up capital, getting rid of the residual risk, and getting rid of fleet management issues (though a wholly-owned fleet can also have its management outsourced). The point about residual risk simply refers to the fact that it’s very difficult, starting with a new vehicle, to guess what its residual value will be, as a second-owner product, three years down the line.
On the other hand, all purchase decisions have in common the fact that they leave the owner with the residual risk. True, purchasing can be done in a variety of ways, some of which, with financed monthly payments that include whole life maintenance costs, look a great deal like lease plans, but the risk is central. And it is in the area of residual risk that manufacturers like to claim that they have an edge over the big leasing companies. This comes down to two factors: knowing the product to the nth degree and being in command of a large dealer network that can shift second-hand vehicles more efficiently and at better prices than would be obtained on a trade auction. Clearly, if you know that you can get a better residual value for a vehicle three years hence, you can factor this into the contract you write today. The result of this will be a cheaper contract for the customer.
Taylor says: “Having a ready-made source for our returned vehicles is invaluable and enables us to write a sharper deal than we would otherwise be able to.” However, he admits that, when it comes to second-guessing what the overall market for second-hand vehicles is likely to be three years hence, car manufacturers and banks are both in difficult territory.
There are so many factors that can influence prices and cause decisions made three years earlier to look way off the mark.
This is something the entire industry struggles with. You can get different views from everyone you speak to, for example, on what impact the EU’s insistence on the lifting of the Block Exemption is likely to have on residuals. (The Block Exemption is the legislation that enables manufacturers to prevent dealerships from selling more than one make of car.)
If ending the exemption makes new cars cheaper, there could be a glut of new vehicles, which means a glut of second-hand vehicles three years hence, and depressed second-hand prices. If, instead, market forces move to raise the price of cars in countries that currently enjoy protected, lower costs, that could dampen demand for new vehicles and, conversely, it could improve residual values.
Nevertheless, Graham Rees, business development director at fleet-leasing consultancy Fleet Logistics, reckons that, when push comes to shove, residuals are a manufacturer’s best shot at undercutting bank-owned leasing companies.
“For my money, the dealer network is what makes the difference, and it is why manufacturers will generally give you a sharper price than an independent leasing company,” he says.
Rees adds that, over the past two years, the major bank-owned fleet leasing companies have been taking a very conservative view on residual values.
“The bank-owned leasers have realigned their businesses to reflect a reduced appetite for risk. Manufacturers, on the other hand, have to show confidence in their vehicles ability to hold their value,” he explains.
Rees also argues that car manufacturers’ finance arms are sometimes under pressure to “shift the tin” by not being as careful about the margins on their financing as an independent leasing company might wish to be.
“When the manufacturer’s priority is to gain market share and to get more of their wheels outside the punter’s doorstep than the competition, their finance arms can find themselves ordered to design deals that make their cars look very attractive to the market. Again, the business model and business pressures that shape the way the finance house operates are often different for a manufacturer than they are for an independent or bank-owned leasing company,” he says.
However, manufacturers do have disadvantages to contend with. Fleet operators know they can get better lease prices by going direct to a manufacturer, but where they are shaping their fleet strategy by giving employees a choice across a number of marques, they don’t want to get into the business of negotiating separate contracts with 16 different manufacturers.
This means that a large company will find it better to do business with a multi-marque fleet leasing company than it will to go direct to each manufacturer. The alternative, where companies decide that even though they want to go multi-marque, they still want to deal direct with the manufacturer, is for them to outsource the contract management role.
Barry Chaplin, director of fleet sales at Arval PHH, which is owned by BNP Paribas reckons that its edge comes from a unique source. For a start, the company owned three of the best known multi-franchise fuel cards: AllStar; Dial Card and The Overdrive Card.This gives it a good range to its revenue stream. It also has a vast managed fleet which it doesn’t own.
“Our point is that we can fragment our services to provide exactly what a client requires,” says Chaplin. “We believe that not having a direct tie to a particular motor manufacturer is a strength, since it seems clear that independence has a role if you want to provide consultancy advice.”
For many companies, the decision whether to lease its fleet from a bank or a manufacturer will come down to whether circumstances allow it to stay within a single manufacturer’s model range, or whether it’s more important to give employees freedom of choice. The manufacturer route may be slightly cheaper, but that won’t cut much ice with a top sales rep who values his or her ability to choose from the broadest possible list.
WHO OWNS WHAT
Major fleet companies owned by car manufacturers
Alphabet – BMW
Citroen Contract Motoring
Daimler Chrysler Fleet Management Services
Ford Business Partners
Hertz Lease – Ford
Interleasing – General Motors
Peugeot Contract Hire
RFS Overlease – Renault
Saab Finance – General Motors
Volkswagen Financial Services
Major fleet companies owned by banks
ALD Automotive – Societe Generale
Arval PHH – BNP Paribas
Custom Fleet – National Australia Bank Group
First National Vehicle Holdings – LloydsTSB
Godfrey Davis Contract Hire – HBoS
HSBC Vehicle Finance
Lease Plan – ABN
Lombard Vehicle Management – Royal Bank of Scotland
Source: Fortune magazine.