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Market Trends

State of the Fleet Market Outside North America

December 22, 2009, by Mike Antich - Also by this author

The Global Fleet Services (GFS) alliance held its second conference last September in Barcelona, Spain. The conference focused on the pace of global change in the fleet management industry and examined global market trends on a region-by-region basis.

Founded in 1994, GFS is an alliance of fleet leasing companies serving specific regional markets. Companies that comprise GFS are:
● ARI (North America).
● ORIX (Asia and Australia).
● Renting Columbia (South America).
● Eqstra Fleet Management (Africa).
● Total Fleet (South America).
● Johnson & Perrott Fleet (Ireland).

The GFS alliance is represented in 70 countries and manages a combined total of more than 1.5 million vehicles worldwide. The alliance was developed to combine member strengths in serving international companies with global fleet needs for centralized reporting for vehicles domiciled across the globe, global consulting, and global service-level agreements.

The global fleet market was highly turbulent in 2008 and 2009. The following is a report on the state of the fleet market by global region based on GFS Conference presentations.

Outlook for the Fleet Management Market in Africa

GFS alliance member Eqstra Holdings Limited, an integrated capital equipment and leasing provider with operations in South Africa and the UK, discussed the fleet management market in Africa. Eqstra is headquartered in Johannesburg, South Africa. Presenting the report for Eqstra Holdings Limited was Walter Hill, the company CEO.

"A common misconception is that Africa is a homogeneous market, which it is not," said Hill. "The gateway to Africa is the country of South Africa, which has a population of 48 million people."

The global financial crisis did not affect South Africa until December 2008. "In January 2009, the lights went out," said Hill. There were widespread layoffs, especially in the mining industry, the largest employment sector in South Africa.

Banks became excessively selective in lending. The availability of funds became very scarce and there has been an increase in the cost of funding.

"Growth in credit has reached its lowest level in five years. This is due to the increased cost of funds, decreased liquidity, rise in bad debts, and limited available capital," said Hill.

A key reason for the limited liquidity in South Africa is because government borrowing is tapping the local bank market because funding is tight in the global market. The South African government is borrowing to make investments in services and infrastructure. The South African government has committed to spend $100 billion in infrastructure projects, but is now forced to get its funding from the local market, which is crowding out corporations also trying to get funding.

The South African fleet market is highly competitive and a price-sensitive market environment. The South African fleet management industry was heavily impacted by the global financial crisis.

Traditional installment sales and leasing declined due to falling demand for new cars caused by high debt levels and limited credit facilities. In the first eight months of 2009, aggregate industry new-vehicle sales declined 31.6 percent to 258,542 (both retail and fleet) compared to the 378,103 vehicles sold during the first eight months of 2008.

The total South African vehicle population is approximately 7.7 million vehicles (including all categories of vehicles), of which, 8 percent are leased. In the past, annual new-vehicle sales averaged 500,000 units. The total number of vehicles sold in South Africa is typically equal to the total sold in Sub-Saharan Africa. Every brand of vehicle, including Chinese-brand vehicles, is sold in Africa.

Ownership is a very strong preference in Africa. "However, the global crisis suddenly changed this preference," said Hill. "More companies are now receptive to cost reduction and risk transfer by paying for use as an operating expense."

South African Economy

The global collapse of commodity prices resulted in a contraction of the mining and construction sectors, causing ripple effects throughout the economy. In addition, the South African currency, the Rand, gained strength, but since the country is an export economy, a stronger Rand has had a negative effect on the nation's economy by making exports more expensive.

The Chinese are investing significantly in the South African economy. In return, the Chinese are negotiating 20- to 30-year contracts to guarantee future access to raw materials.

The global credit crunch led to substantial reduction in capital flows to South Africa, along with other African countries. There was a significant decline in consumer spending on durable goods. Weakness in consumer spending has caused businesses to reduce capital expenditures.
Black empowerment policies are also a factor influencing fleet management. The South African government measures companies for compliance. The government will not do business with companies if they do not comply with black empowerment requirements.

Fleet Maintenance & Outsourcing in South Africa

Vehicle maintenance presents a key fleet challenge in South Africa because the service infrastructure is insufficient and fraud is rampant in the vehicle maintenance industry. One reason for the high level of fraud is employees are underpaid and fraud is used to supplement incomes. "The country of Lesotho increased wages by 300 percent, and this type of theft stopped almost immediately," said Hill.

Another contributing factor to high maintenance costs is the wear-and-tear caused by poor road conditions.

Driver management is another challenge facing African fleets; in particular, the lack of care of corporate assets. "Employees will use the company vehicle as family transportation. They will load sheep into the car. They do not have the same culture in looking out for the asset as is found in more developed countries," said Hill. "We have seen it all."

Outsourcing is a growing trend in South African fleet management. "Outsourcing of fleet services is still in its infancy compared with global leasing markets," said Hill. "But there has been a significant increase in outsourcing awareness among fleets in Africa. This is as a result of credit pressure and increased cost of funds. Plus, there is a shortage of liquidity and companies are reluctant to tie up working capital in non-core assets."
The fleet market in sub-Saharan Africa faces many similar challenges, such as insufficient availability of capital, but also a limited skills employment base and risks due to political instability.

"The biggest challenge in sub-Saharan Africa is funding. Local governments insist fleet management companies use local banks, but these banks often don't have the capacity to provide sufficient funding," said Hill.

Accident Management in Africa

South Africa experiences approximately 800,000 accidents/incidents on its roads annually. This results in an average of 22 people killed or disabled per day. South Africa is rated the third-worst in the world in per capita accident rates. Accidents cost more than 47 billion Rands per year.
Driver behavior is the single biggest cause of accidents on South African roads. However, Hill says South African fleets are becoming proactive, adopting the latest international offerings in accident management to change driver behavior. In addition, there is renewed emphasis to ensure fleet policy compliance by drivers. "These efforts are starting to pay off with accident reductions of up to 30 percent with some fleets," said Hill.

Vehicle Remarketing in Africa

South African fleets employ a multifaceted approach to remarketing, which includes retail and wholesale outlets, auctions, Internet sales, dealerships, and drivers sales.

Africa is the "dumping ground" for used vehicles exported from Asia and Europe. These areas export their undesirable used vehicles to Africa, which is depressing residual values in Africa. Tunisia and Morocco are big markets for European used vehicles. Tunisia recently shut its market to European used vehicles due to overcapacity.

"CO2 control is an illusion because the dirty vehicles being removed from Europe and Asia are being sent to Africa. You've simply shifted these vehicles from one continent to another. On average, vehicles in Africa are in service for 20-30 years," said Hill.

The Fleet Markets in Australia and New Zealand

George Georgiou, general manager, fleet for ORIX Australia, made the presentation on the fleet leasing markets in Australia and New Zealand.
A key component of the Australian fleet market is tool-of-trade vehicles, known elsewhere in the world as utility vehicles. Fleets in Australia are downsizing from V-8 engines to six-cylinder engines, and many are migrating to four-cylinder engines.

"Six-cylinder cars are disappearing in Australia," said Georgiou. "As a result, there is the ongoing demand to balance costs and driver satisfaction."

Another fleet trend in Australia is fleet standardization, determining whether to sole-source or use multiple suppliers. The recent economic crisis has also prompted many Australian companies to right-size their fleets.

Auto manufacturers operating in Australia are seeking to stimulate fleet sales by offering incentives to large fleet customers. "The Korean auto manufacturers are very aggressive with fleet incentives and are making inroads in the fleet market," said Georgiou.

The primary fleet lease in Australia is an operating lease with services, known in the U.S. as a closed-end lease.

Another type of lease in Australia is the novated lease, in which the employee chooses a vehicle and lease option, either an operating lease or finance lease. The employer assumes all lease obligations and pays the lease rentals (and maintenance if included) to the lessor. Monthly lease rentals are deducted from the employee's gross salary, which may lead to lower income tax and higher net salary. If the employee leaves the company, responsibility to make lease rental payments reverts to the employee.

The used-vehicle market in Australia is soft. Key remarketing channels in Australia are auctions, wholesale tender, retail yards, and novated lease remarketing.

New Zealand is a small fleet market due to its terrain and small population. "New Zealand is about 10 years behind Australia in terms of fleet management," said Georgiou.

The Fleet Market in Latin America

Leandro Aliseda, sales director for Total Fleet Brazil, made the presentation on the Latin American fleet leasing market.
With a population of almost 200 million people, Brazil is the largest fleet market in South America. Fleet management companies have well-developed processes to manage fleet operations in Brazil.

The global economic downturn strongly impacted the Brazilian fleet market. In 2009, fleets bought 20-30 percent fewer vehicles. However, retail buyers offset this decrease, mainly due to tax incentives on new-vehicle sales, making 2009 a record year for the automotive industry in Brazil, which accounts for approximately 15 percent of the Brazilian GDP.

Brazilian fleets have little leverage with car manufacturers and limited bargaining power. Three auto companies control 75 percent of the Brazilian market share - VW, GM, and Fiat. "Fleets don't have huge bargaining power," said Aliseda. As in the U.S., volume buyers receive a better discount. However, most Brazilian companies are not volume fleet buyers.

According to Aliseda, several key drivers are contributing to the growth of the outsourced fleet management market in Brazil. In particular, there is increased focus on productivity, asset management efficiency, and use of a company leased car as a fringe benefit.

The fuel management business is still embryonic in Brazil, mainly due to widespread ethanol use, which powers approximately 75 percent of all light-duty vehicles. "The use of ethanol makes fuel costs and the environmental impact much smaller than in other countries that rely heavily on gasoline," said Aliseda.

Resale values in the used-vehicle market are erratic and unpredictable, presenting the potential for significant depreciation risks. Currently, tax incentives are being used to stimulate new-vehicle sales, causing a decline in used-vehicle values.

The Brazilian economy differs significantly from north to south, with the southern part of the country the most prosperous. As a result, there are wide disparities in the country's infrastructure. "The roads in northern Brazil are terrible," said Aliseda.

In addition, the vehicle maintenance/service-provider network in some parts of the country is not reliable and there are widespread shortages in parts availability. Total Fleet Brazil has two employees dedicated to locating parts to minimize fleet downtime.

Most economists are optimistic about the future of the Brazilian economy. In 2010, a 4-percent increase in gross domestic product (GDP) is projected.

In South America, there is still a widespread cultural preference to own vehicles. One reason is based on past experience during inflationary times, which caused used-vehicle values to increase. In addition, it is difficult to get credit in Latin America, and when credit is available, interest rates are very high.

"All South American countries had problems with liquidity due to the international financial crisis," said Aliseda. "Leasing is low in Latin America, which is good news because there is strong potential for growth." In Brazil, only 3 percent of the population leases vehicles.

Below is a summary of several South American fleet markets by country:

Colombia: The fleet management market is growing in Colombia. The company car is used as leverage to retain employees.

Chile will be classified a developed country in 2010, surpassing Portugal, which is at the bottom of the list of developed countries. In 1993-1995, as with most countries in South America, Chile had an extremely high inflation rate. Since then, inflation has come under control.

Cash constraints limit new-vehicle purchases. Aliseda reported one innovative approach adopted in Ecuador is buying vehicles through consortiums. Groups of people get together to buy a car and raffle it to someone in the group. "They do this because people can't get credit," said Aliseda.

Argentina was one of the South American countries more harshly affected by the international financial crisis. There was a strong economic recession in 2009 and sales of new vehicles dropped sharply.

The Asian Fleet Market

John Carter, managing director for ORIX Australia & New Zealand, presented a review of the fleet leasing market in Asia.

A variety of market challenges affect fleets in Asia. First, there is conservative lending and economic uncertainty. There are increased concerns about CO2 emissions and the possibility of governmental mandates to control these emissions.

"An economic recovery is underway in Asia," said Carter. "Asia will have a good Christmas, but a dip will occur in February because the amount of cargo containers shipping out of Asia is down by 50 percent."

Carter predicted there will be a carbon tax in Asia sometime in the next several years. He predicted there will be a drive to do so after the United Nations climate conference in Copenhagen, which concluded last December.

The following are country-by-country takeaways presented at the GFS Conference:

Japan: The typical fleet has an average size of 200 units. Delivery fleets represent the largest segment of the Japanese commercial fleet market. According to Carter, the Japanese government will go electric and legislate the use of one battery for electric vehicles. "It is clear the Japanese are going electric," said Carter.

India: The average fleet size in India is about 100 units. Tata, the largest auto company in India, dominates the Indian automobile market. Despite its nearly 1 billion population, India sells just 1.5 million cars per year.

China: "China is growing at a larger rate than what they are telling the world," said Carter. "You need to add 5 percent to China's reported GDP number because this is the unreported (underground) part of the economy."

Despite the growth in the Chinese economy, all fleet leasing companies operating in China still have very small leased-vehicle portfolios.

Operating leases are not available in China. The market is highly competitive with all auto manufacturers doing business in China. From January-November 2009, total new-vehicle sales in China surpassed total new-vehicle sales in the U.S. for the first time.

Indonesia: Some fleets in Indonesia are very large, with 3,000- to 4,000-vehicle fleets, operated by international tobacco companies with huge growing operations in the country. Altogether, there are 100 million cars in Indonesia, with an average age of 20 years.

Philippines & Malaysia: Average sized fleets are under 50 units.

Thailand: Average fleet sizes range from 50-1,000 vehicles.

State of the European Fleet Market

The European fleet market suffered the same economic upheaval as the rest of the world in 2009. This market turmoil was manifested by tighter credit, sharp declines in residual values, fleet supplier consolidation, decreased vehicle ordering resulting from corporate layoffs, and widespread lease extensions.

In late 2008 and early 2009, some European lessors temporarily stopped funding new leases due to restricted capital availability. This was especially the case with smaller European lessors constrained by the tightening of liquidity.

Most European companies continued to place fleet orders where company vehicle contracts are tied to employment contracts. However, widespread layoffs and significant amounts of contract extensions on existing leases drove down new-order placements in the European countries. The impact was different by European economy,  but a good representative example of the harder hit economies would by the UK, where in 2008 new-vehicle registrations for fleet were 2.1 million; in 2009, the expectation is that new registrations for fleet will end up at 1.7 million.

"Residuals got hammered in Europe," said Rob Hill, manager, global sales and consultation for ARI. "Many leasing companies were upside down on their residuals."

Most leases in Europe are an operating lease (known in the U.S. as a closed-end lease), with the lessor assuming the residual risk. Residual values declined, on average, 20 percent or more in Europe, varying by country. Some countries, such as Spain, experienced steeper residual value declines than other European countries, such as The Netherlands. In terms of actual monetary losses, industry sources estimate residual losses averaged between 1,200 and 1,500 Euros. However, the UK market saw dramatic improvements in resale values in the later half of the 2009 calendar-year.

As a consequence to the increased cost of funding and potential resale losses, widespread extensions were given to existing lease contracts. "When companies went out to get a re-quote on their leases, they discovered costs had gone up significantly," said Hill. "With residuals collapsing, it behooved both sides - lessor and lessee - to look at extending existing leases. It was a win-win situation for lessees, since an extension was less expensive than a new lease, and lessors benefitted since a lease extension deferred remarketing until a future strengthening of the resale market occurred."

Despite the economic global down-turn, fleet sustainability initiatives continue strong throughout Europe, with many countries adopting the UK model of taxing CO2 emissions as a means to modify driver behavior.
Another trend in European market is increased taxation of fleets in the form of a value-added tax, vehicle excise duty tax, CO2 tax, and other country-specific taxes. 

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Author Bio

Mike Antich

Editor and Associate Publisher

Mike has covered fleet management and remarketing for more than 20 years and entered the Fleet Hall of Fame in 2010.

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