Crisis in Turkey: light at the end of the tunnel
A couple of months after the outbreak of the crisis in the operational leasing sector in Turkey, we take another look at this challenging but at the same time promising market.
The operational fleet leasing sector in Turkey has grown very fast over the last 10 years. During this growth period, operational fleet leasing companies performed very well. All companies have very aggressive pricing in the market as they have the ambition to grow. They may have taken too many risks to achieve this.
While taking these risks, Turkey's economy was going well. However, when the economic conditions deteriorated and the Fleetcorp effect came into the business, the risks were getting higher.
Here's a look at some of those risks:
1. Euro contracts and euro financial costs: the sector borrowed in euro and gave euro prices, continuing its path without problems for many years.
But the high and sudden increase in the euro exchange rate affects the amount of euro debt for the operational fleet leasing company too much. How did they manage this euro risk in the past? Some of them used hedging strategies but this strategy has a cost and reduces profitability. Most companies used the “natural hedge” method, which they believed would protect them. Most cars were imported and car prices were raised when the exchange rate increased, so the cars were valued second-hand. When the economic condition is positive, this strategy works. But during this crisis, the exchange rate went up two times while second hand cars did not see a similar increase. Companies and individuals leave to buy second hand value as the recession began with the crisis. Credits had balloon payment and the crisis made it very difficult and for some (Fleetcorp) even impossible to make the last balloon payments, making it impossible to sell second hand cars. In return, this led to a cash flow shortage.
2. Unprofitable contracts: In the past, pricing was only done to get the project and project profitability was deemed less important. Consequently, sector profitability has reached very low levels making the sector very vulnerable at a time of crisis.
3. RV Risk: As mentioned above, depending on the currency rise in Turkey, second-hand car prices always increased. Some leasing companies, taking this for granted, foresee high RV values for their second hand vehicles. But during the crisis, things turned out to be different.
One of the most important triggers in the crisis was the Fleetcorp effect. Yes, the sector is fragile, the economic crisis had come, too many risks were taken. However, the sector had found a way to continue working, there are challenges in the dynamics of this country.
The image of Fleetcorp was so strong that the bankruptcy sent a shock through the banking sector. The whole financial sector saw Fleetcorp as one of the well-managed companies in the industry. Financial institutions had noticed that Fleetcorp had been having problems for the last 1-2 years, but they thought it had a strong partner backing it. When Fleetcorp suddenly went bankrupt, this was a real shock. All of a sudden, all banks cut the flow of money into this sector. They started to see this sector as very risky and stopped giving money. Suddenly, the sector caused a recession. As a result, companies cannot give leasing offers, because they could not find the institution to finance the cars they offered.
In its essence, this was probably a soft crisis for the sector but combined with the Fleetcorp effect, it resulted in the toughest days for the entire sector.
How the crisis impacted the fleet industry
Car companies in particular felt the shock from this crisis. Operational fleet leasing companies were buying one of every five cars sold. With the crisis in the operational fleet leasing sector, car sales fell automatically by 20%. In addition, this was added to the retail crisis which caused a sales drop of 40%.
What new opportunities and trends could or will arise with what consequences
This crisis caused the fleet management product to shine even though it was not the option customers preferred.
Leasing companies that could not buy vehicles were unable to quote. Operational leasing companies have started to quote very high rent prices due to rising costs. Companies that could not find a suitable rental offer began buying cars. But this posed a problem as these companies had been leasing for a long time and they do not know how to manage their fleet, so the demand for fleet management service has increased sharply.
At this moment, fleet management is the shining star of the new era.
Outlook and conclusion
In fact, Turkey's economy is strong and doing well. The operational leasing crisis is similar to the 2009 banking crisis in Turkey. After this crisis, the banks cleaned up their acts which made them one of the most reliable sectors.
This crisis will affect the operational leasing sector and will lead to the elimination of some companies. But at the end of the tunnel, operational leasing companies will come out stronger than ever.
With the introduction of new TL laws and other regulations, many companies and banks will probably enter the sector. As the sector and customers have learned much from this crisis, it is now becoming very profitable for new entrants.
Author: Nevzat Girgin
Image: Bosphorus Bridge, Istanbul