Leasing... The Chrysler System Way

In 1963 Chrysler Leasing System was set up as a dealer-affiliated network of leasing companies designed to lease to individuals as well as to local and regional fleet accounts.

What advantages are there in belonging to the System? . . . What are the qualifications? . . . What does the future hold for the System?

Automotive Fleet talks with Herb Wood, Manager of the Chrysler Leasing System, and presents to its readers an in-depth look at this unique organization and its activities.

AF: What is the relationship between Chrysler Leasing Corporation and the Chrysler Leasing System?

Wood: Early in 1962, Chrysler Corporation decided that its dealers needed to get much more active the leasing and rental business, particularly in leasing. At that time only a handful of Chrysler-Plymouth and Dodge dealers were involved in leasing. As a result, Chrysler was getting about 4.2 per cent of the identifiable leasing business. Chrysler decided to approach leasing in two ways: the first was by forming Chrysler Leasing Corporation, which initially was designed to lease directly to large national fleet accounts. At the same time that CLC was formed, extremely comprehensive research was initiated to determine the proper way to establish a dealer affiliated leasing system. From the time the decision was made to form such a dealer oriented system, it took a number of months before we were ready to appoint our first Licensee.

AF: Why the delay?

Wood: We had to find out what was really going on in the leasing business, and we had to find the right way to approach the market. What kind of organization? What kind of controls were needed? What kind of financial capability? What kind of insurance program? These questions and many more had to be answered first.

AF: When did Chrysler Leasing System actually get off the ground?

Wood: In May of 1963, our first Licensee was appointed: Ken Brown Leasing Corporation in Detron. The first two markets in which appointments were made were Detroit and Chicago. From that point we approached the other 100 major metropolitan markets, one by one, and carefully evaluated the dealers in these markets to determine their interest in leasing and their capabilities. We did not want to overpopulate any market. If this were done the profit potential would be too small for any Licensee to make money. For this reason, we are still very selective in offering our Licensee agreement, much like the Sales Divisions in the selective, appointment and placement of dealers.

AF: Was there a set pattern of growth established, in the formative years?

Wood: When Chrysler Leasing Corporation was organized in 1962, it started on what was called the "Phase One" operation. In this first step, Chrysler Leasing Corporation concentrated on leasing to large national fleet accounts and to daily rental firms. It was never our intent then, nor is it now, to compete with our dealers. "Phase Two" was the development of a dealer leasing system that would have the capabilities of handling a large part of the leasing business that we, as a corporation, set as a market penetration goal.

AF: How is Chrysler Leasing System set up?

Wood: Chrysler Leasing System is composed of 304 independently owned and operated leasing companies. Each of the companies, or Licensees, has separate capital, separate management, separate credit lines and a separate corporate structure distinct from the dealership. The Licensees buy their cars from their own dealerships or from other dealers in the same city. In their own market, they act just like any other leasing company. They dispose of their own used ears. The basic relationship between a Licensee and Chrysler Leasing Corporation is the license agreement, which is like a dealer franchise in some respects.

AF: How many vehicles are in service throughout the Chrysler Leasing System network?

Wood: As of February, 1969, the total Chrysler Leasing System fleet amounted to 61,238 ears and trucks. Tin's was a 29.2 per cent increase over February, 1968.

AF: Where are your Licensees located?

Wood: Chrysler Leasing System Licensees now operate in 245 cities in 48 states and the District of Columbia. Because of the investment required, they are located primarily in the top 100 markets.

AF: What type of cars are used throughout the System?

Wood: Our System follows the industry in that respect. The "bread and butter" cars for the leasing industry always have been the so-called standard, low-price ears. I guess the reason for this is the historic resale value in the Ford-Chevrolet-Plymouth-Dodge price class. Even though we lease more Plymouths, Dodges and other ears in this class, the percentage relationship is much higher with Chryslers, Dodge Monacos and Imperials than in the retail market. In other words, we have a much richer "mix" in leasing than in retail.

The total Chrysler Leasing System fleet is composed of about 77 per cent Chrysler Corporation makes. Among the Chrysler Corporation products, we are running about 38 per cent Plymouth Fury, and 30 per cent Dodge, while Chrysler is running nearly 14 per cent. Imperial is running about 7 per cent. As for body style, the overwhelming choice is the two and four-door hardtops.

AF: What about equipment on leased cars?

Wood: In leasing, it is not the original price of the car that is important but the dollar amount of depreciation over the period of the lease. If you are going to lease a car in the Ford, Chevrolet, or Plymouth price class, for instance, the Licensee should offer the high-line car and should equip it with automatic transmission, power steering, power brakes, radio and beater, white walls and wheel covers and safety equipment. These items will bring back much of their value on resale.

AF: Does Chrysler Leasing System encourage its dealers to lease makes other than Chrysler products?

Wood: If the leasing company confines itself to leasing only Chrysler products, it is limiting itself theoretically to only 18 or 20 per cent of the market. If a person wants to lease a car and if he insists on a CM or a Ford product the first time around, we encourage the Licensee not to lose the customer. If the lessee is satisfied with the service and the attention that he gets from the leasing company, the next time around the customer is much more amenable to switching into a Chrysler Corporation product.

AF: What is the breakdown between individual leasing and fleet leasing?

Wood: In Chrysler Leasing System about 70 per cent is in individual leasing. By this I mean either one or two vehicles per customer. The remaining 30 per cent of our leasing business is done with either local or regional fleet accounts. These fleets range in size from five or six vehicles to as high as 1100. If I had to select an "average" fleet account for our Licensees, it would be between 30 and 40 vehicles. This would include cars and trucks.

AF: What is the current profit picture for your Licensees?

Wood: Profits for all reporting Licensees averaged 35.8 per cent of operating investment during 1968. Those Licensees who had been in the system at least a year reported earnings equal to 36.7 per cent of investment. During 1967, the comparable group of Licensees had a 32 per cent return on investment. The average operating investment increased about 25% during the past year.

AF: What is your procedure in qualifying a new Licensee?

Wood: It's fairly complicated. First of all, each potential Licensee has to be in a market that we are confident is big enough to support a full-fledged leasing operation. Secondly, the candidate has to be a good dealer. He has to do a good consistent sales job and show us that he runs a profitable retail operation. If you take a poor dealer and add leasing to his operation, you are not helping the dealer, you are hurting him. If he is a good dealer, then leasing is a definite asset to his over-all operation. If a dealer meets all of these qualifications, then we tell him that we would like him to form a separate corporation with separate management and become an operating Licensee.

AF: Are there any stipulations as to who controls such an operation?

Wood: We want the dealership or dealer personally to own a controlling interest in the leasing company. We ask the dealer to invest separate funds, not from the dealership, in an amount commensurate with the size of the market. This money must be invested in capital stock in the leasing corporation. We also ask the Licensee to acquire a separate credit line for leased vehicles through a local bank or finance company or through Chrysler Credit Corporation.

In addition to financial commitments, we also want the Licensee to employ a qualified person to handle the leasing company. Such a man must first be approved by one of our 16 Area Development Managers. If he agrees, we will undertake to train him and the dealer in the leasing business. Once the dealer has met all these criteria, we issue him a license agreement.

AF: Once a Licensee has qualified for the agreement, what does Chrysler Leasing System do for him?

Wood: A lot of things: We have developed all the forms and documents that the Licensee needs in his operation. We provide a complete accounting system for each Licensee. We also provide a program of nation-wide identification such as outdoor signs and window decals. All of our advertising carries the Chrysler Leasing System logo and offers the Licensees excellent tie-in opportunities. Chrysler Leasing System also makes available a nation-wide insurance program through Employers Mutual of Wausau.

AF: What about training?

Wood: In our training activities, we will include any person or persons that the Licensee designates. And we don't care how many persons are involved. It can be lease salesman, an accountant, the leasing manager or the dealership owner. The only thing that we do require is that the first person to receive the training must be the leasing manager. During 1968, we held 17 lease training seminars in 14 different locations, with 348 Licensee personnel in attendance. Individual conferences were provided in many locations where seminars were not feasible.

Each Licensee also is provided with an Operations Guide that we believe is the finest manual on dealer leasing offered in the industry. The guide was 18 months in preparation and was compiled by some of the most knowledgeable men in the industry. Sections in the guide pertain to organizing a leasing operation, the lease market, cost and rate development, financing, insurance, daily rental, management and operation of a leasing business, lease accounting, responsibility to other Licensee members, tax and licensing laws, leasing and rental documents, and a special section on heavy duty truck leasing and rental.

AF: What is the charge to Licensees?

Wood: Any service that Chrysler Leasing System performs for its Licensees is free of charge. The Licensee pays no franchise fee to become a member of the System and he pays no monthly service fee for the guidance that he receives.

AF: You mentioned your field men, your Area Development Managers. What is their function?

Wood: We have 16 Area Development Managers, or ADM's, in the field. Nearly all of these men either owned or managed a leasing company or were Branch Managers of a major leasing company before joining Chrysler. These 16 men have an average experience of 20 years in the automobile business and an average of 16 years in the leasing business.

Judd Brims is our National Development Manager-East, and Bill Privette is our National Development Manager-West. Each man has eight ADM's reporting to him. The ADM lives in his territory and is responsible for its development. It is the ADM's job to recommend potential Licensees, to install them, and then be totally responsible for the Licensee's development.

To the average dealer who has dealt with factory personnel (and I am a former Dodge regional manager), the contact with our ADM is a new experience. The man that we recruited was from the leasing industry had spent little, if any, time with a manufacturer. He probably knows less about factory programs than the dealer does. The typical ADM has just one thing in mind: How are we going to get this leasing operation off the ground and making some money? The involvement that these ADM's achieve with the Licensees in helping them build their business is rather unusual in the automotive business.

These 16 ADM's are distinct individuals. To try to rigidly supervise them from Detroit or press them in any kind of mold would be totally ridiculous. We simply tell them: "Here is your territory and here are the general ground rules. Now you run it." As a result, we have 16 areas which are probably run 16 different ways. Quite frankly, in the final analysis, we don't care, as long as the Licensees are making money and are leasing more Chrysler vehicles.

AF: How do the ADM's do most of their training?

Wood: Basic seminars are held on the ABC's of leasing. Advanced seminars get into subjects such as leasing to daily rental companies, servicing local or regional fleet accounts, and business and finance management.

The great emphasis in training, however, is centered in the regular visits the ADM makes to his Licensees. He may stay a half day or a week. It all depends on how long the ADM feels is necessary for that particular Licensee. We feel that we are unique in this respect: We have professional leasing men living in the field whose sole job it is to develop the Licensees' business. They have no other function. They are not involved in fleet sales in any manner.

AF: What type of reporting does the Licensee make to Chrysler Leasing System?

Wood: We require only two regular reports from our Licensees. One is a monthly sales activity report. This indicates the number of vehicles leased by make and how many are new business and how many are renewals, ft also indicates the size of the Licensee's fleet by make. We use this data in all of our recaps to see how we are doing as a System and to see how each area is doing. We look at this each month to measure our progress against our sales objectives.

The second report that we require is a comprehensive monthly financial statement that is designed for the leasing business and is totally distinct from the dealership statement. We analyze these each month, and we recap them. We issue quarterly composite's showing the averages and the "norms" such as depreciation, interest, maintenance expenses, taxes, selling expense, gross rental profits, etc.

AF: Does Chrysler Leasing System offer its Licensees any type of credit card plan for purchases?

Wood: We have two types of cards that we issue on our Licensees. One is a fleet identification card which is issued to Licensees who then issue them to their lessees. The lessee uses the card when he goes in for service at any Chrysler dealer. This is not a credit card, however. The second is a tire credit card. Some Licensees have agreements with us and we, in turn, have agreements with tire manufacturers. Those tire manufacturers give reduced rates on purchases to our credit card holders.

AF: Do you recommend to your Licensees that they enter into only certain types of leasing contracts?

Wood: We believe very strongly that our Licensees should expose themselves to the total leasing market. They should lie interested in any legitimate leasing proposition that comes along that is profitable. One of the curious things that we have found is how the type of contract varies with the geographical area. In New England and New York, it is almost a 100% closed end, full-maintenance market. On the West Coast, the average person thinks of leasing only on an open end non- maintenance basis. Obviously, there are advantages and disadvantages in each. The point we are trying to make to our Licensees is that they should not close their eyes to any type of leasing. I would say that we are running about 70 per cent open end contracts. The reason is simply because more business is produced in the open end markets. The monthly rates are lower and more attractive to the average customer. Of the other 30 per cent, I would say that at least two-thirds is full-maintenance.

AF: Do you feel there is a special advantage to a dealer owning the leasing operation?

Wood: The relationship between the dealership and the leasing company is a natural marriage in our business. We feel, however, that it should be an arm's length relationship. One of the beneficial things about a dealer owning the leasing company is that he buys most of the cars for the leasing company through his dealership. This is "plus" number one. As a result, the leasing company becomes his largest fleet customer.

Secondly, every lease customer within the Licensee's sphere of business becomes a service and parts customer for the dealership.

Number three, and best of all, when the vehicle comes off lease, here is a car and a customer that the dealership and the leasing company know. The lessee can't sell that vehicle or go to someone else before coming to the leasing company. In this way, the dealership and the leasing company get first chance at the renewal.

AF: Regarding the used unit, how is this handled?

Wood: The dealership normally has the first opportunity to buy the car from the leasing company. The dealer's used car department bids for it at market value. If the leasing manager can get a better bid elsewhere, he takes it. The leasing business is a wholesale business from start to finish. We do not want the Licensee to get into the business of retailing used cars. But a great advantage about being connected with the dealer is the outlet they have for the disposal of off-lease vehicles.

AF: Is there any conflict between Chrysler Leasing System and "fleet minded dealers?"

Wood: We find that they have not conflicted at all. We have dealer/Licensees who are very active in the fleet business. However, they very carefully separate their fleet sales activity, which is part of the dealership, from their leasing company. They are careful not to compete for the same customers.

AF: Do you feel that a manufacturer must pursue the leasing business today in order to compete in the total car market?

Wood: I can't speak for other manufacturers, but it is quite obviously something that Chrysler had to do. This is simply our way of approaching the leasing market: an organized dealer leasing system. We had to come from behind. The Ford people do it their way, with FALS and Ford Rent A Car System. This is their approach, and they have been successful at it. General Motors is the giant of the industry, and does not have to organize its efforts in the same way that we do. For many years CM has had metropolitan dealers that were strong in leasing. So, you see, its situation is different from ours.

AF: What has been the biggest problem that you have encountered in regard to the System?

Wood: One of our biggest problems was in getting the Licensees to understand our lease accounting system and accept our accounting philosophy. It differs considerably from the dealership bookkeeping. The Licensee at first may find it hard to follow a system that is foreign to the one he is using in his dealership.

When we talk to a Licensee candidate, we tell him frankly that he is going to lose money in the leasing business for the first 18 months to two years, that is, if he properly allocates his expenses. If he begins by charging his leasing company office rent, utility expenses, the leasing manager and bookkeeper salaries, when the company has no income, it is obviously going to lose money at first, It is difficult for most dealers, who quite naturally want to make a profit each month, to see this. However, the launching period losses are recouped as the gross rental profits build up. We have a number of Licensees who have been in the business in excess of five years who earned in excess of $50,000 in 1968.

AF: What type of growth do you see for the leasing industry?

Wood: As nearly as I can determine, the leasing and rental business is growing at a rate of about 15 per cent a year. If you look at the total leasing market you can divide it into three segments. One of these is leasing to fleet accounts, the use of leased cars by business firms. About 68% of all fleet cars today are being leased. As the fleet market continues to grow, the market for leasing cars to business firms will continue to grow, in number and probably in percentage. I don't know where this will level oil.

The individual segment of the market is very important, the foundation of our Licensee's business. It is harder to tell how fast it has been growing, because the cars are registered in the name of the leasing company rather than in the name of the lessee. More and more individuals are turning to leasing because of the convenience and the service.

The third part of this business, which will show the most explosive growth, is the daily rental business. This has mushroomed, partly due to the great increase in air travel. When the jumbo jets start flying, I don't know what the future will hold.

AF: Has Chrysler Leasing System become involved in any overseas leasing program?

Wood: Only in an advisory capacity. In Canada, we assisted in formulating a Chrysler Leasing System patterned almost identical to ours. This was our first venture out of the United States. More recently, Chrysler Australia has instituted a dealer leasing system. Judd Bruns, one of our national development managers, went to Australia on that assignment for six weeks. We also have helped to set up leasing programs of one type or another in Venezuela and in South Africa.

AF: What are the immediate goals of Chrysler Leasing System?

Wood: We want to expand the System from 304 Licensees to 350 Licensees, and we want to reach 100,000 vehicles in lease service, it took us five and one-half years to reach our present levels, but we have now established the kind of base and reputation upon which we can build. We believe that we can reach both these goals in about two years.

AF: What do you feel has contributed most to the growth of your System?

Wood: There are really three things: The first is the very sound research that went into the launching of the System. Let me give you an example. Jack Sparkes (now vice president of Chrysler Leasing Corporation) and his staff put together this comprehensive Operations Guide six years ago. In all that time, we have had to change only one sentence in the entire manual. That kind of foundation helps a lot in building a quality System . . .

Secondly, we have strictly adhered to our original philosophy in the selection and appointment of Licensees:

"There must be sufficient market potential to each Licensee in order to justify his commitment of funds, facilities, and managerial capacity to a leasing operation ... at a rate of growth not in excess of Chrysler Leasing System's ability to develop the Licensee's leasing skills."

And the third factor is a simple one, yet a rare commodity in today's market: We have dedicated people . . .