The report, Global Automotive Finance and Leasing: The Role of Product Diversification and Emerging Markets in Future Growth provides a unique and comprehensive comparison of the business environment, market potential, business characteristics and prospects between the US, Western Europe, China, India and Russia, finds that while the risk potential is higher in the emerging markets, strong prospects exist through the offering of traditional finance services as well as the further expansion of lease and additional services business.
Facing lower projected car sales in Europe and increasing overcapacity and competitive pressures in the emerging markets, the finance and lease businesses of automotive original equipment manufacturers (OEMs) would stand to benefit by adjusting their operating models to meet the changing global conditions, finds a KPMG International report.
“Auto leasing and financing companies will need to start executing on a number of different fronts if they plan to remain relevant to the customer and – in the case of ‘captive’ organizations – to their owners, the auto manufacturers,” said Mathieu Meyer, KPMG’s Global Head of Automotive and a partner in the German firm. “Those that take a wait-and-see approach in the hope that their traditional markets will rebound will quickly find themselves commanding a shrinking share of the market while competitors active in growth areas rapidly surpass them.”
“The real story here is about the massive potential that China, India and Russia offer to leasing and finance organizations,” noted Mr. Meyer. “Not only are these markets experiencing tremendous development and increasing affluence indicating high growth potential for auto sales overall, but customers in these markets are also starting to become much more accepting of leasing and financing arrangements. Ultimately, we expect that the emerging markets will deliver tremendous growth to the leasing and finance business of the OEM captives.”
At the same time, new services such as mobility-as-a-service programs, battery leasing, green fleets, and additional banking products offer new ways to generate profit, not only over the long-term horizon in the emerging markets, but also in the more established, yet mostly saturated finance and lease markets of Western Europe and the US.
The report also finds that while the introduction of alternative propulsion systems (such as hybrids and pure electric cars) is a key growth agenda item for auto manufacturers, the vehicles create significant opportunities for their captives as well.
“Auto leasers and financers will need to develop new concepts to align their services to technological improvements,” added Mr. Meyer. “For example, the leasing of batteries may well prove to be a sustainable and rewarding venture for auto leasers and financers to expand into, particularly given the high cost of batteries. Indeed, by separating the lease of the battery from the car itself, auto leasers and financers can both reduce their risk and generate additional revenues simultaneously.”
However, given that the value of an electric car is highly dependent on the expected lifetime of the battery (which can vary widely) and the technology, leasers and financers will find that their residual value formulas become increasingly complex. Moreover, the introduction of new technologies may well devalue the resale potential of a vehicle at the end of the lease.
According to the report, shifting customer preferences and the rise of hybrid and electric vehicles will force captive leasing and financing companies to develop and promote their own mobility services like car-sharing or multi-mode transportation models.
The delivery of new services, such as credit cards and deposit banking, will also help shore up revenues in the more mature markets of the US and Europe. At the same time, the ongoing credit crisis is pushing many organizations towards creating their own banking services in order to reduce their reliance on banks for refinancing.
There are opportunities in Russia as the economy rebounds, car sales rise and consumers income and acceptance of financing improves. Finance and leasing companies can prosper by expanding their financing offerings, introducing basic banking products and improving the service networks and fleet services.
Strong market potential
- Positive outlook for automotive finance and leasing due to high increasing car sales and public recognition of finance and lease products
- Consumer market clearly dominated by state owned banks due to their huge customer base, comprehensive infrastructure and the extensive insights about market intelligence
- Independent leasing companies dominate the Russian company fleet market since banks do not offer fleet management solutions
Business characteristics of Russian finance and leasing market
- Not well established business due to high investment effort
- Customer acceptance not very strong - Russians still prefer to pay cash
- Twenty-five to Fifty percent of private customer sales are financed, leasing is not provided
- Six percent of company cars are leased, with a prospering business outlook
Global automotive finance and leasing: The role of product diversification and emerging markets in future growth is based on desk research and in-depth interviews with senior executives representing key leasing and financing participants including banks, captive and independent auto leasing and financing organizations from China, France, Germany, India, Japan, Russia and the UK.