14 Sep 17

Private lease will bolster competition and innovation

In the past, OEMs tended to use their captives and spend large amounts of money in marketing campaigns to increase car sales in retail markets. Meanwhile, the development of private lease and mobility platforms (including car sharing and ride-hailing) startedchanging the game, creating a new segmentation of the market and threatening retail businesses in the near future. For this reason, OEMs are now rapidly adapting their traditional business models to better service their customers and market trends.

Håkan Samuelsson, president and chief executive of Volvo Cars, commented in a recent interview: "Private car ownership will not disappear, but as a car maker we need to embrace the fact that it will reduce. Today’s notion of mobility and car ownership is changing. By recognising this fundamental and rapid shift in individual mobility behaviour and responding to it, we ensure that Volvo will continue to be relevant in the eyes of the consumer.” It is likely that the winning players in the future of mobility are those that are able to leverage the cross-pollination of innovative business models and technology that radically transform the notion of ownership and usage.

Most manufacturers developed captives that weren’t originally proactive in the corporate market
German manufacturers successfully developed multi-brand leasing captives in the past: Volkswagen with Leaseplan and BMW with Alphabet. Both competed with independent lessors like Arval and ALD on the corporate market. Last year, Mercedes decided to buy Athlon to enter the Full Service Lease (FSL) market and compete on equal terms with its direct competitors, Audi and BMW. Mercedes had previously spent a few years developing a multi-brand company across Europe from scratch with limited success. Meantime Volkswagen sold Leaseplan to private equity funds, but developed an alternative with Volkswagen Financial Services, which is more of a multi-brand finance company within Volkswagen Group.

Renault made an attempt to tackle this market with Overlease in France and the Benelux region over ten years ago and eventually decided to concentrate on its own brand. Ford and GM on the other hand left the market in the aftermath of the sub-prime crisis. Ford sold Hertz Lease to ALD, giving rise to a new world leader, while GM got rid of Masterlease signing a white label agreement with ALD. Fiat and PSA kept some capacity in their captives in Italy and France (mainly) respectively. Other brands have been cooperating with independent lessors for FSL products aimed at corporates, either through white label agreements like the Korean brands, Jaguar Land Rover or Volvo mainly with ALD and to a less extend with Arval.

Whereas the retail market was the main battlefield for manufacturers to defend their market share, the corporate market was left to other players (in particular banks – ABN Amro with LeasePlan some years ago, BNP Paribas with Arval and Société Générale with ALD). However things seem to be changing with banks backing out of corporate car financing and manufacturers or private investors gaining interest.

Private lease development will exacerbate competition
For a long time, independent lessors worked exclusively with corporates, particularly large corporate businesses, because those customers were interested in multi-brand selection and captives could hardly compete. At present, the development of private lease in Europe is a great opportunity for FSL lessors because the product is ready and they simply have to amend their processes to adapt to consumer regulation and specific risk management to compete in this market. OEM captives risk losing market share as private customers switch from loans to FSL while manufacturers may have to review both their pricing policies and organization to manage their profitability in the future.

OEMs may find pressure on their margins if lessors buy cars that were previously sold to private customers. Some have already bought cars in bulk at high discounts to offer a competitive product to the retail market. Lessors (LeasePlan, Arval and ALD in particular) are currently moving quickly into the private lease market in Western Europe, announcing ambitious growth targets for the coming years, which can only be achieved by switching traditional funding (loans or finance lease) away from captives.

Private lease development will help reduce private vehicle ownership and foster a new culture based on car use. Manufacturers are starting to design flexible products to better respond to private customer needs. In big cities, car ownership is often too expensive for young people who have access to collective transportation, taxis and sharing solutions (either hiring or hailing). The latter also eliminate unused costs, including obsolescence and parking. 

Manufacturers are realizing that the threat is very real and investing heavily in private lease offers and disruptive models made possible by technological improvements. Manufacturers are certainly in a favourable position with respect to telematics and connection with the car, which is key for the services that mobility requires. Competition on product will be competition for data usage and quality of services provided through telematics and heavy IT investments.

Data control and communication
Private lease development will help independent lessors to grow and compete with OEMs on the retail market. ALD, Arval and LeasePlan should achieve important growth rates in the coming years in Western Europe. However OEM captives may quickly catch-up as it is vital for them. As a consequence, competition is already expanding in the mobility market and likely to do so very soon in the traditional corporate market, both SME and large corporates. In the heart of that competition, data control and communication with the driver will likely be a key factor.

Authored by: Pascal Serres