Everyone – aside from a few smaller independent players, perhaps – agrees that the fleet contract market is consolidating in a rather predictable direction, namely towards players with deep pockets and ready access to cheap finance. In real terms, this boils down to the banks on the one hand, and the motor manufacturers on the other.
From an outsider’s perspective, this might look like an interesting tussle for supremacy in the fleet contract market – a battle of car savvy versus financial acumen. After all, if car manufacturers don’t know and understand the motor game better than anyone else, who does? The same goes for bankers and money matters.
Indeed, there is a fuzzy sort of truth to this view, though it is far from the whole truth. To stay in this game you need a deep understanding of both disciplines. Mike Baldry, managing director of Alphabet GB, the Rover- and BMW-owned fleet supplier, points out that every player in this market has to confront the question of whether they are predominantly a car company or a finance company. “Most,” he says, “generally conclude that they are both.”
Baldry explains that the reason smaller players find it so hard to stay the course is obvious when you look at the money spread – the difference between the cost of money to the leasing company and what it can put it out at. The law of the market dictates that the biggest players command the best spreads. Add this to net profits and the smaller player finds himself starting a few steps back in the profit game even before the first roll of the dice.
The temptation for the smaller players is to try to overcome this by riding the yield curve, playing Russian roulette with interest rates.
But the purposive, sensible way of running your business in this game, Baldry argues, is to borrow money at the same effective maturity rate as the money you are lending, which means you protect your margin and you are not at the mercy of interest rate movements.
What it all comes down to is that contract leasing companies have considerable scope for massaging their profits for a year or two by playing about with spreads and residual values; but over a three- to four-year period, they can be sure that all their chickens will come home to roost. Those in the game for the long term have to play straight or they risk seriously weakening their position. This holds true irrespective of whether the company is backed by a bank or a motor manufacturer.
What it does mean, however, is that the market can acquire a certain cyclical fuzzy quality, in which medium and even larger players can play games with end-user prices. They can undercut the competition and buy business for a year or two, and then hope for salvation from a sudden upturn in residual values or through a favourable swing in interest rates.
While some user organisations can undoubtedly get good deals out of these machinations, the net effect is to confuse matters for the serious players who take a “strategic partner” view of their business and who look to build long-term relationships with their clients. Both the banks and the manufacturers are obviously in the heavyweight category, which makes it difficult for either to claim too many unique selling points. Both are looking to grow by writing more business and through acquisition. A consolidation of the market therefore looks inevitable, though nobody knows quite how the league table might look in five years’ time. Baldry thinks it will probably move from the top ten players having 20% market share, as they do at present, to around 50%.
One dilemma that is obviously unique to the manufacturers is that they have to decide whether they are going to run “own marque” or “multi-brand operations”. Running multi-brand puts them in the odd position of boosting their competitors’ business, but it does mean that they overcome the problem of how to service clients who see merit in offering their staff the widest possible choice of vehicle as part of their overall employee reward package.
Another route, that taken by Peugeot and Ford among others, is to set up two separate contract companies, one dealing specifically with own-marque, the other being indistinguishable from an independent, multi-marque company owned by a finance house.
Andrew Scarborough is the marketing manager at Axus, Ford’s multi-marque contract arm. He reckons that as an “independent” the chief benefit Axus derives from its manufacturer parent is credibility and financial standing.
Other than that, it gets the same treatment from Ford, as far as buying vehicles are concerned, as that accorded to any other leasing company.
“Ford has all the other companies as customers and they have to maintain a level playing field,” he notes.
One of the virtues of running an own-marque operation, as Gervaise McMahon, general manager at Peugeot Contract Hire, points out is that the manufacturer’s contract operation has a very persuasive case to put to business customers about its ability to respond directly to their needs. While it is unlikely that many clients fall for the idea that they have a direct link to the ear of Peugeot’s designers, the manufacturer can at least demonstrate that it has the mechanism to respond in this direct way.
More practically, manufacturers frequently play the dealer card. Because they have nation-wide dealer networks they are able to offer users a wide choice of service centre.
McMahon argues that a manufacturer such as Peugeot has two additional advantages over an independent fleet management company. Firstly, it understands the life cycle and maintenance costs associated with its vehicles in far closer detail than would be possible for an outsider, which enables it to price more keenly when it comes to building maintenance into the contract.
Secondly, the manufacturer is better placed to handle residual values, he claims, since it has more options for absorbing market fluctuations in the second-hand car market.
Tony Williams, director at Vauxhall Masterhire, makes much the same point.
“Many of the independents would take a broad view across similar makes of vehicle. We focus in very closely on individual makes within our product family, looking at engine sizes and all the details to arrive at highly accurate operating costs,” he claims.
Williams says that people have been anticipating a shake-out in the industry every year for the 16 years that he has been in it. But he agrees that it is now starting to happen. “Part of the problem is that this is a cyclical industry, with profits rising and falling on the back of factors such as the buoyancy or flatness of the second hand car market. However, the City does not like cycles. It likes nice, linear profit projections where the earnings waves are all smoothed out of the picture. You can only start to do this when you have a certain critical mass,” he notes.
Williams foresees the industry segmenting into the equivalent of a premier league and a first division, with the gap between the two segments widening continuously. “Information technology has become an absolutely critical differentiator in this business, and spending on IT is rocketing. You have to be big to absorb these costs,” he says.
WHO’S WHO IN FLEET MANUFACTURERS’ FLEET COMPANIES: own-badge
BMW Leasing; Ford Contract Motoring; Peugeot Contract Hire; Vauxhall Masterhire; Volkswagen
MANUFACTURERS’ FLEET COMPANIES: multi-badge
Alphabet Leasing (Rover/BMW); Axus (Ford); International Fleet Mgt (Volkswagen); Robins & Day (Peugot)
FINANCE-OWNED & OTHER FLEET COMPANIES:
Avis Fleet Services (GE Capital); Cochranes (GE Capital); Dial (Barclays); Godfrey Davis (Bank of Scotland); Leasecontracts (GE Capital); Lex Leasing/Lombard (NatWest); PHH (Cendant); Swan National (HSBC).
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