Leasing in the Car Industry: Advantages and Challenges

Marketing expert and Toyota Sales Manager Garo Dzaghigian discusses the advantages – and challenges – of Leasing. 

Leasing has for many years been a fairly widely spread practice for companies in Europe. The idea started with companies looking to outsource their fleet needs, so as to save time, money, and resources. So, rather than purchasing and maintaining vehicles for company use, with all that entails (tying of a large amount of cash flow, as well as other physical and financial resources) companies began looking for a long-term hire program, turning specifically to third parties whose specialization is to provide complete solutions to corporate businesses, for all kind of vehicles, for a fixed monthly cost. As I write, the trend is especially strong in central European markets such as Poland, Belgium, and the Netherlands, where over 50% of the industry is fleet sales. What this means is that dealers of new cars sell have of their products to established fleet companies, which in turn offer these vehicles to business companies for their fleet needs.

The practice of leasing is something we see in Cyprus, too. This is unsurprising, given its many advantages for all stakeholders. Perhaps the most important is that leasing allows each party to specialise on their core business – on what they do best. A company that leases its fleet from a third party is free to capitalise on its main business areas, specialization and growth; it will have enhanced capital and it will save itself from a lot of financial and administrative hassle. 

When it comes to making a decision over whether to turn to a leasing company or not, there are various factors that a company must take into account. Some of these factors concern the size of the fleet, the range and type of vehicles needed, the market spread that has to be covered, the specific field of business of the organization concerned, and, finally, the general infrastructure of the country. As regards the latter, the latest trend in Belgium is for companies to offer Cash for Car (C4C): that is, encourage employees to use public transportation by offering, instead of use of a company car, added cash in their salaries. This is possible only in countries with a strong infrastructure and network of public transportation. It is a great scheme, for it not only takes corrective measures against traffic congestion, but it also helps protect the environment by reducing pollution.

Although operational leasing has many benefits for a company over other options of handling its fleet needs, it is crucial that we understand leasing in its broader context, as practice that is part of a changing world. The future of the industry is evolving in such fast speed that over the next five years it is expected to see changes we haven’t seen in the last twenty years. Some of the practices already in place which are emerging from this changing world and all of which involve smart mobility solutions include various forms of car-sharing practices and pay-per-drive schemes. These are already being piloted in some European region.

Traditionally a B2B exchange, leasing is also being used in B2C cases. Rather than conventionally hiring a car, something which doesn’t make much sense for an individual consumer in the long-term, it is possible to only partly own a car, with another party owning a share, and paying to this party a reduced, fixed monthly payment, which covers also maintenance and repair costs. Such deals are for a fixed period of time, usually 36 months, after which the customer decides whether to keep or return the car to the dealer to replace it with another new car. In this way, consumers are offered the chance to acquire a new car every three years and so enjoy not just the excitement of driving a new car but also benefiting from the latest technological and safety advancements and developments. This approach perfectly suits the retail sector of Cyprus, where public transportation is not very developed and consumers are always keen to drive new cars. Leasing companies can take advantage of the gap in the market and, provided they have the mindset and capability to apply such an approach, they would enjoy a differential advantage over the rest of the dealers if they started offering this service in Cyprus.

Because the future is about urban mobility, leasing companies need to understand and make the transition from a product to a service-offering model. They will find it useful to set up some experimental platforms which might not deliver the expected returns in the short term but which can make them key players in the market. Innovation, we must remember, costs time and money, but it has the potential to lead to market share.

For example, consumers should be able to use a service depending on their needs rather than a fixed vehicle. They should be able, for instance, to use a small EV (electric vehicle) for their daily commutes and a larger HEV (hybrid electric vehicle) for long journeys or their family holidays.

The mobility industry is being shaken up by new start-ups, a trend that will continue, but at the same time infrastructure and size will matter as having scale is necessary to turn new initiatives into more developed and profitable solutions. Moreover, sourcing will further change the rules of the game and some players will eventually be squeezed out of market. And of course, in all these trends, legislation will have a considerable impact. Take, for example, the introduction of GDPR in May this year – something discussed by George Korellis in this issue of the Business Bulletin. This will make things look more complex and it will put added emphasis (and resources) on creating and maintaining a protected consumer data and safer trading environments.

Traditional Leasing business will have to shift from being asset-centric to user-centric organisations, an evolution which will bring about a change in focus from contract to subscription, the later offering further flexibility. Finally, traditional Leasing companies need to consider that Google, Facebook, Apple and Amazon are joining in the business one way or another. A strong preparation and transformation is required for the challenges that the next few years will bring in the industry, while, each organization will need to re-position themselves in the new eco-system.

Although it might all look a little confusing at this moment, the future could be exciting and the Leasing business should be considered as a huge potential. Those organisations that will better understand its prospects and potential may well come to shape up the future of mobility.

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