Is Germany dragging down the lease industry?
With Brexit and Trump hogging the spotlight, Germany’s economic troubles have passed under the news radar so far. But as shown by LeasePlan’s recent setbacks in Germany, the country’s downturn is now causing real-world pain. How bad is it, and how much will it hurt the fleet and lease industry? Two industry experts share their thoughts - and LeasePlan itself provides some insight.
Economic figures released on Thursday by the Statistisches Bundesamt (Germany’s Federal Statistics Office) show that the EU’s largest economy registered zero growth in Q4 2018. Following the -0.2% contraction in Q3, that means Germany narrowly avoided falling into recession (defined as two consecutive quarters of negative growth).
Analysts link Germany’s weakened economy to a worldwide economic slowdown, and to problems with its domestic automotive industry – one of the main pillars of the German economy. German consumers are less keen to buy new vehicles, due at least partly to ongoing confusion over emission standards. German car exports are threatened by looming U.S. import tariffs and Brexit.
There may be light at the end of the tunnel: Germany could achieve 1% growth in Q1 2019 (still less than the 1.5% in the previous Q1). But meanwhile, the slump seems to have reached the fleet and lease industry. In its annual report for 2018 published earlier this week, LeasePlan mentioned ‘impairments’ on the German market amounting to €20 million, due to contract losses.
As a reason for this, the company points to Germany's more negative attitude towards diesel, compared to the rest of Europe, as an additional pressure point on diesel RVs in Germany. LeasePlan has stated that the impairment relates to a limited number of loss-making contracts, which will terminate in the next two years.
While LeasePlan is the only major lease company to reveal losses on the German market so far, the results do confirm that Germany is a very difficult market, says Pascal Serres, founder and managing director of mobility consultancy Moby-D.
“There are certain structural issues with the German fleet and lease market. It’s not just the biggest market in Europe, it’s also a market dominated by homegrown OEMs. That means captive lease companies have a dominant position – Volkswagen Finance prominent among them.”
However, independent lessors can’t afford to remain absent from the German market: not just because of its size, but also of its prestige. It’s where their main international customers have a major presence. And it’s good for their reputation to get their hands on a share of this highly competitive market.
“But highly competitive means small margins – a fact exacerbated by the German tendency to set Residual Values very high,” says Serres. While other European fleet and lease markets compete more on the overall leasing price (including maintenance, insurance and other services), the competition in Germany, where financial leasing is a much more important factor, tends to be more on vehicle price itself. And that is a push factor for setting high RVs – ultimately a consequence of a captive-led market, Serres says.
Corporate profits are very fragile in high-competition, low-margin markets like Germany. But that still doesn’t explain why only LeasePlan has reported losses – Arval and ALD have not, for instance. Most likely, the company’s negative results are the consequence of business decisions taken one cycle – i.e. about three years – ago, when the decision was made to go for volume, and the way to do that is to adjust lease rates via RV setting.
Euronorms 4 and 5
It’s a theory Wolfgang Reinhold, President of CARA, the European Car Remarketing Association can subscribe to. If you consider the fact that LeasePlan defleeted around 20,000 vehicles in Germany last year, that translates to losses of around €1000 per vehicle. There are of course also other factors. LeasePlan also invested a lot of money in its used-car platform CarNext.com, with its 32 physical outlets.
All of which has to be seen against the backdrop of several negative factors combining, says Reinhold. “First off, the press in Germany is still very negative about older Euronorms 4 and 5. That has consequences for public opinion and policy. Since January, you can’t drive a Euro 4 or 5 into Stuttgart anymore, for example. Of course, this negatively impacts on the value of used diesels”.
And then there’s the WLTP saga. “I warned about this”, says Reinhold: “We were going to have a huge oversupply of new cars in Germany, registered just before the start of WLTP. That happened, and many of those cars are still for sale, at bargain prices. I know a dealership nearby which bought a car last August, list price €30,000. It still has zero km on the counter. They’re trying to sell it now for €19,000, and they’re throwing in free winter tires.”
But where do we go from here? Neither Pascal Serres nor Wolfgang Reinhold is too gloomy about the future.
“Lease companies will develop other means to better manage the weakening of RVs. Used-car leasing, for instance”, suggests Serres. “It can be better to manage RVs over 6 or 7 years than over just 3 to 4 years. Formulas like this will be used, for instance in private lease, to absorb losses made in principal contracts.” LeasePlan, for one, also sees used-car leasing (and its wider Car-as-a-Service offer) as one of the risk mitigation tools at its disposal.
“If you want market share in Germany, you have to take risks. You can do that by playing with RVs. It’s an old game, it’s been going on for 40 years,” says Reinhold. “But ultimately, tough competition is good for the customers. They know this, they benchmark the suppliers, and they use that leverage to get better prices”.
“And it’s a good market for fleet customers now: cars are getting cheap – it’s just that not all models are available, due to WLTP. But that will straighten out by the end of Q2, when the market will normalise.”
Steven Schoefs & Frank Jacobs