The future of the business sector and leasing

The news in the last few days that the French leasing business ALD is in discussion with the private equity owners of Leaseplan about possibly quitting the business caught my attention for a number of reasons, because I have been discussing both the future of the business car market and the potential evolution of leasing with a few different parties in the last couple weeks.  The businesses are of a similar size, and the combined entity would be managing a fleet of around 3.5 million vehicles across more than 40 countries.  That’s about the same size as the total passenger car parc in Finland or Hungary, not far behind that of Switzerland.

Leaseplan is currently owned by a consortium of two pension funds, two sovereign wealth funds and a private equity fund, having previously been 50% owned by Volkswagen from 2004.  By sounding out opportunities to dispose of the business after five years’ ownership, they presumably feel that either the coming years are going to be tough, or that they have had such a great ride over the last five years that it is time to cash in their stakes.  ALD on the other hand, a subsidiary of French bank SocGen, is looking to grow, with the ambition to be a “fully integrated sustainable mobility provider and the global leader in our industry” according to their ‘Move25’ strategy.  In any sector, investors will have different perspectives on the same market and company, but it is worth looking at what the pressures and opportunities are in car leasing today, and think about where you would put your money if you were an investor.

Leasing has traditionally been tied mainly into the business market for cars and commercial vehicles.  Whilst the latter will probably continue to grow due to e-commerce growth and the related need for distribution services, the business car market is less certain.  In a post-Covid world where we have all discovered that we can do more online than we realised, our company-provided cars have often been sat outside.  Even in a return to some sort of new normality, my feeling is that the volume of business travel will reduce, and therefore the business need for company cars will reduce.  As individual employees lucky enough to enjoy the benefits of a company car, we also get the joy of paying additional tax in some way on the benefit, and that benefit is now parked more often that it was in the past.  When you then combine this new usage pattern with generally higher tax on these benefits and growing corporate ambitions to achieve net zero carbon and other social responsibility goals, then it may well be that we are going to see a decline in the size of the business car market, with them being restricted to those who genuinely and frequently need to be on the road.

We saw this play out in the Dutch market when tax changes a few years ago made the provision of company cars less attractive, and combined with social and environmental pressures there was a shift from offering company cars to a broader mobility allowance, from which individuals could make their own decision about how best to meet their needs.  In some cases this was a multi-modal subscription scheme, in others a shift to a personal rather than business lease.  For leasing businesses, this is clearly a double-edged sword – they lose business in big B2B accounts, but there are new opportunities in the B2C market, and in new mobility models.

A further relevant trend is the extension of leasing into older cars – rather than sell a car when it comes to the end of its first lease, why not keep it on the books, and offer it at a lower price point to a second user, probably to private consumers?  This is a model that has been tried by Leaseplan (with NextCar) and others, but does not seem to have been pushed as hard as it could have been, partly because of supply being restricted to the cars that are coming off lease, so typically three to four years old, all at similar price points.  With ALD already offering defleeted cars both B2B and B2C in some markets, and their parent having acquired the Reezocar used car aggregator business last year, might ALD see opportunities to extend their business into older cars, say up to 6 years old, rather than focus solely on new cars?  This would then compete with the car manufacturers themselves who are looking at extending lease offers into used cars, particularly for battery electric vehicles in order to maximise the value they can derive from each car, and minimise the risks around a forced disposal of a three year old car.

Linked to both of these trends is that the demand for lease financing and fleet management services will increase.  Some manufacturers and dealer groups already have such skills or will build them internally, but others may decide that they have enough challenges to deal with already and look for partners to whom they can outsource these services on a white label basis.  Surely multinational players who can offer a turnkey service in multiple markets will be welcomed, moving cars off the manufacturer balance sheets, but on the basis that the manufacturer customer contact is maintained and the cars continue to be fitted with OE parts in franchised workshops.  Meantime, in the spirit of co-opetition that we have mentioned in other ICDP research, these same lease companies compete with their own offers under their own leasing, subscription or mobility brands.

For sure, the car leasing business faces multiple challenges, but my money is on more leasing, deeper into the life cycle, more focused on B2C rather than B2B, and therefore with greater value for the players who adapt.