2 May 19

Ph. Bismut and P. Serres about the future of car leasing

Individually, Philippe Bismut (recently retired as Arval’s CEO - left on picture) and Pascal Serres (formerly deputy CEO at ALD) are highly experienced car lease experts. Combined, their knowledge approaches that of an industry oracle. Let’s hear them out on the financial models that are shaping the lease industry of the future.

Philippe Bismut: “Two years ago, people were predicting the end of operational leasing (i.e. full-service leasing) because of the introduction of IFRS16, the new lease accounting standards. Nothing of the sort happened. That’s because the value proposition remains compelling: vehicle rental with services included, for a fixed cost. That will also be the basis for its continued success. Even if over time there will be some changes, as people expect more flexibility.”

Pascal Serres: “Let me be a bit more radical and look to where we may be in 30 or 40 years. I think we’re on the brink of an Autonomous Vehicle (AV) revolution. Just as an AV doesn’t need a driver, drivers won’t need to own a specific car anymore. Owning a car will become a rarity, like owning an airplane today. The AVs will be a collective tool, owned by big platforms. We drivers will rent cars for anywhere between a few minutes to a few years.”

PS: “But I also think it’s important to ensure short-term growth, over the next three to five years.  The capacity of leasing operators to find partners – distributors, manufacturers, insurers – is important, because the growth of private lease will not just be on the internet. Partnerships with OEMs will gradually disappear, because growth in private lease will be at the expense of car loans and financial leases, their key products. OEMs will soon face the choice between boosting their own brand or becoming mobility leaders. I think the second option is the right one.”

"So, do both of you think a monobrand has less prospect of success than an multibrand tool?”
PB: “Definitely. The most relevant brand for the end user will be that of the fleet operator, because of the services they provide. The brand of the vehicle itself will become less relevant.”

PS: “This is already the case in the rental business: you rent a car by category. If you don’t get your favourite brand when you pick up the car, it’s not a big deal.”

PB: “Private leasing will accelerate. The only obstacle is the sense of ownership that many still have when it comes to a car. My sense is that we’ll have fewer company cars of the benefit kind, and that instead we’ll have either a mobility budget or a cash for car option, but for more employees. Those two trends combined are still good news for the lease industry, as the number of eligible employees will increase.”

“Private leasing means private customers, means higher potential risk. How does that factor in?”
PS: “You’re right, but that’s just how retail works. That’ll be a challenge for leasing companies, who are used to B2B. They’ll have to invest. But retail is profitable in so many ways. So why not for cars?”

PB: “Used-car leasing will not be popular with big corporates, as the car is an element of revenue. But it’s a possibility for SMEs and private consumers.”

“Will lease companies see the benefit of used-car leasing, for example because it can help them better manage residual value risk?”
PB: “I think used-car leasing is very interesting, both from the supply side and the demand side. There is a common interest in further developing this.”

PS: “People who are well off can afford to lease premium cars with premium service. But there is another segment of people who would be interested in used-car leasing, at good prices and with good service. It doesn’t have to be Ryanair.”

PS: “If you forget about those people who buy an EV to be politically correct, and if you want an EV to save money, you need to do more than 25,000 to 30,000 km to get a benefit. That’s a fairly limited group of potential buyers. I think EVs are more suited to being rented than to being owned, at least at the moment.”

“Is it smart for some companies to announce that they’ll completely electrify their fleet by this or that target year?”
PS: “I think you’re referring to LeasePlan. They participate in important global initiatives on electrification, they focus on pricing when it comes to EVs and they communicate well on this topic. Personally, I do think it’s smart.”
PB: “Yes, the communication is good. But I don’t think the idea of going 100% electric is something I’d recommend to all customers, at least not today.”

PS: “Subscription is just a right to access, so it can mean everything. Even full-service leasing is a kind of subscription. What is mostly meant by subscription, however, is aggregators bundling various mobility services at for a certain fee. Most models I’ve seen – whether they’re including public transport of bicycles on top – all had only one profitable component: leasing.”

“There is another way to define subscription as well…”
PB: “Yes. Basically, you subscribe to a car service, and you can switch cars when you want. Of course, that’s already possible via rental, whether, short-, mid- or long-term. At the moment, if you factor what it costs you as a supplier, subscription models are very costly. There are some subscription offers out there, but for me, those are manufacturers making marketing expenses to promote their brand. I don’t think it’s sustainable.”

PS: “Internationalisation will remain paramount for car lease companies, as it generates economies of scale. But only if you create synergies between your different subsidiaries. Of course, different countries will have different cultures, and that must be respected. But you can aim to share as much back office as possible.”

PB: “I fully concur. We see local lease players disappearing. But the remaining global lease players will have to work with mobility partners which are to a large extent local. Public transport companies, for example.”

“Some lease companies have subsidiaries in Asia-Pacific. But will it ever be as important a market as Europe?”
PB: “The market in APAC potentially is much bigger than in Europe. The question is strategic: is it feasible for a European company to take the lead in that market?”

PS: “There are two good reasons to partner: if the price to enter the market on your own is too high, and if the market is too small to be profitable on your own. The question in APAC is whether either of those conditions applies. So let's examine the four main markets in APAC. First, Japan. Highly dominated by local companies, a bit like the US. None of the leading companies wants to enter the market, as the entry price is too high. Then, Australia and New Zealand. Why not – but it's far away, which makes running a subsidiary difficult. Third: South East Asia. We instinctively think those countries are small, but remember that Vietnam alone already has more than 100 million inhabitants. Finally, China. I think it's too complicated a market.”

PB: “China is a very tough market for outsiders: culturally speaking, and just to understand the nuts and bolts of doing business. That's why it's good to have a Chinese partner.”

“Does the same apply for Africa and the Middle East?”
PB: “A lot of criteria have to align right, including feasibility, size, risk, infrastructure, ethics, political environment and stability… And when you take all that together, there aren’t that many countries that tick all the boxes.”

PS: “When you invest, you need a reasonably large amount of money to spend, and a quick return on equity. In the finance businesses, you expect to make a profit in 2, 3 years. If you have to create the market, that’s difficult. If the market’s too small, it’s impossible.”

Authored by: Steven Schoefs