What Automobile Leasing Is Not

I would like to describe briefly what automobile leasing is not. I've read a great deal of propaganda, advertising, speeches by experts and other professional data which tells me what leasing is. Perhaps that leaves a lot of room for my telling you what, in my opinion, leasing is not.

Leasing is not a panacea. Leasing is not a cure-all. Leasing is not the best answer for all cases of supplying cars to salesmen or other employees.

Leasing is not, in my opinion, a great tax advantage. It may have some tax implications, but the concept of leasing cars as a tax shelter or refuge has never been apparent to me. (I have checked with some of my friends who are experts in the tax business and it isn't apparent to them either.) For some lessees there may be an advantage in not having vehicles registered in various towns, cities, counties or states if this would place them on the tax rolls. For other companies however, (who are already registered to do business in these various jurisdictions), this might be a fringe benefit, but nothing really that could be held as a tax advantage.

Leasing is also not always the only way of divesting yourself of capital investment. The automobile by its very nature is rather readily available as a commodity against which to borrow money. It may be useful and convenient for some companies to take an investment in automobiles off their balance sheet. But by and large, automobiles can be borrowed against without too much trouble. These are some of the things leasing is not.

Let us now look for a minute at what leasing is or can be. Every once in a while a prospective customer says to me "I don't want to lease automobiles," and I am frequently tempted to say, "Well, who does?" I can't imagine anyone who has a burning desire to lease cars. It's going to be expensive, restrictive, somewhat troublesome (although I hope, to a minor degree) and will represent a large portion of the sales budget.

Therefore, when a prospective customer says to me, "I don't want to lease cars," I say to him, "Well, I don't blame you, who does? However, let me ask you a question. Do you need cars in your business fleet? Let's get over this hurdle first. If your answer is 'yes,' then as far as I know there are only three ways of providing them: you can own them yourself; you can lease them from your salesmen on a mileage reimbursement or similar basis; or you can lease them from a leasing company. If there is any other way of handling this necessary evil, I don't know it. So let's look at the three possibilities.

First of all, given a large enough fleet, there is certainly no problem in buying and selling and owning and maintaining your own salesmen's cars. You can either have somebody handle it as a side duty, or, if the fleet is big enough, you can hire a fleet administrator and his staff and have them handle it. The fleet administrator, given some competence, can usually buy cars on about the same basis as that which any large buyer is offered. It will take time and attention and money to provide twenty or fifty or a hundred cities. But it can be done.

It can, in all probability, be done without spending much (if any) more money than a leasing company would spend to buy the same vehicles.

Now you own the cars. You have to maintain them, insure them, repair them, replace them, sell the used cars and this too can be done. To be done properly and economically, your fleet administrator should be expert in all of these fields. He should know wholesale and retail parts costs; labor costs in various areas; local practice; availability of service facilities and other charges reflecting directly on automobile maintenance. He should furthermore know used car markets and be in constant touch with local changing conditions in these markets.

The biggest problem is in the sale of the used car. If the salesman driving your company-owned car is charged with the responsibility of getting the top dollar for the used car, he is going to shop the car from one dealer to another, get three bids, submit them to your fleet administrator, and, if he is lucky, wind up with the best deal.

Your records will not show the loss of sales time that a man costing you ten, twenty or thirty dollars an hour expends in this endeavor, but it is there, nevertheless.

Or, you can make arrangements to sell the cars through your fleet administrator and not involve the salesman. But unless the fleet administrator is an expert in used car sales, he will be dealing in an area fraught with dangers. He will be charged with properly appraising the value of a vehicle he has never seen in a market he has never visited. In other words, he will be an amateur among experts and that is seldom a comfortable position.

Nevertheless, it can be done. Many large fleets, and I will suggest Proctor and Gamble as one, have used company-ownership successfully for many years, and, I assume, profitably. I must make this assumption, because after many years of calling on Proctor and Gamble, no one has been able to convert them to a lease program as far as I know. So let us say for the sake of argument that there are many fleets which are company-owned and which employ a competent fleet administrator. Let us also say the fleet costs are year after year not only within their budget, but perhaps below what a leasing company could offer. This should not surprise any of us, because a fleet the size of which I have mentioned is larger than most leasing company fleets. Since there isn't any magic or secret about operating a fleet, I would have to assume that a large company-owned fleet could operate as profitably, at least, as a leasing company fleet. And, assuming that the leasing company has to make a profit, could by-pass this "middle man." Thus, once again, in the situation that I have described above, leasing is not a panacea or even perhaps an answer to the problem of running a particular fleet of cars.

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Next comes the proposition of salesman reimbursement, or as I prefer to call it, leasing your automobiles from your salesmen. This has a lot of disadvantages, although it has the advantage of being an easy accounting method. In other words, if you pay your salesman ten cents a mile or whatever you want to pay him, he simply reports his mileage on his expense account and you multiply it by ten cents a mile and send him a check.

This method looks simple, and in many cases it is. However, it breeds many inequities. For example, two salesmen working out of the same office, one driving twenty-five thousand miles a year and one driving fifty thousand are going to draw highly different proportionate car allowances in the example given. And, I would have to say (and I hope you will agree) that either one is being underpaid or the other is being over-paid. It can't be that they are both being fairly paid.

Frequently, when I call on a prospective customer and ask him what he is paying his salesmen on a mileage reimbursement allowance, he tells me ten, twelve, fifteen cents per mile, or whatever his mileage figure is. Then I say to him, "Are the salesmen happy?" This is kind of a loaded question, because being a salesman myself, I know that salesmen are never happy.

Salesman reimbursement causes some other problems as well. Men seldom take the mileage reimbursement they are paid each week or each month and put it in a separate account. It goes in with the grocery money or the mortgage money. And when a year or two years or three years are up, and they haven't got the cash to replace a worn our car, then the company or the salesman or both have a problem. The salesman may come to the company and say that the needs a five-hundred dollar down payment. Or, he may be a little more discreet and keep nursing and overage car long past its useful life simply because he lacks the down payment/

There is another disadvantage to salesman reimbursement, and I am sure those of you engaged to any extent in the recruiting of young salesmen will realize this. That is, the ability to offer a car to a young man who, otherwise qualified, hasn't got a car and whom you would like to hire. In my own experience, young men - many of whom were my son's college classmates - have come to me and told me of the wooing that takes place among many of the big corporations in order to sign them up for jobs. In many of these cases a car is offered and where one of the job requirements is to own or otherwise provide a serviceable automobile, this will knock out many of the recruits. These young men will say something like, "I have been offered so much a year plus a car from this man, and $500 or $1,000 more with no car from the other. Which should I take?" My forty years as a salesman pushes me toward suggesting to the young man that he take the job with a car.

Several years ago an issue of AUTOMOTIVE FLEET showed the estimated total annual costs for a business car at almost $2,000 ($1,899 to be exact), and I think this was a fair estimate at that time. Today it is higher. This, therefore, is a pretty potent recruiting tool. If recruiting is a problem, then I suggest that the ability to provide a brand new automobile to your men might be something worth considering.

In addition, if salesmen provide their own cars, you are likely to wind up with a highly diversified fleet, comprising everything from Volkswagens to Cadillacs. This may or may not be a disadvantage. Finally, and this is always a delicate subject, there is a area of potential disagreement between the miles a salesman runs and the miles a sales manager wants to pay. We have had many concrete examples of salesman owned fleets where salesmen were leasing their cars to their employers, which then became company-owned or leased. Here the sales manager subsequently found the mileage covered by his men dropped dramatically. This is understandable, since we are all human beings. I am sure you see the point.

Finally, having examined very briefly the advantages and disadvantages of company-ownership, and of leasing your fleet of cars from your salesmen, we come to the third possibility - lasing from an automobile leasing company. And this, I submit, is the method of providing cars to your salesmen with a minimum of effort, investment, trouble and detailed supervision. It has proven valuable over the last thirty-five years to many, many firms. I could name a couple hundred of them, many listed in FORTUNE's Top 500.

In leasing your fleet from an established lessor, you are able to be provided with exactly the car you want. The people you lease from have to know enough about your business and your company to be able to recommend the right cars. More important, they have to know enough about their own business to be able to deliver the cars they recommend. A new car is no good to you if it is in the factory or stuck on a railroad siding. And promises don't mean much to a salesman who is sitting at home losing commissions. Since leasing plans come in all prices, it's up to you and the leasing company to discover the plan that covers your needs at the price you can handle. Then again, if you're looking for a way to dispose of a present company-owned fleet, your leasing company ought to be able to help you obtain a good price for the replaced cars. A company with a nationwide used car set-up can sell your cars wherever they'll bring the highest return.

One of the advantages of dealing with large established lessors is that in the whole complex of leasing plans, they offer the most variations. Starting with a plan where the lessor simply buys and sells the cars for a customer's account with the titles in the customer's name, you can move to a form of lease where the lessor actually buys and sells the cars for the customer's account, but titles them in the lessor's name and uses the customer's money. And then on further, to one where the lessor buys and sells the cars and retains the titles. Then, on to a closed-end lease where the customer is not responsible for either profit or loss on the sale of the cars, but where he pays a fixed monthly rent without maintenance of insurance. Then finally, to the so called full maintenance plan where the lessee is supplied everything excepting the gas, oil, taxes and incidentals such as insurance, parking tolls and washes. This form of lease, of course, offers what might be called a guarantee as to the eventual cost, since the major operating costs under this contract are fixed in advance.

So, there is almost no form of lease or purchase which is not offered. In fact, if there were one which some customer could devise or suggest, I am sure it would be favorably considered by the leasing industry.

To summarize, may I make the following points:

1. Salesmen's cars are a necessary evil which everyone, excepting those in the automobile business, would like to be able to avoid.
2. Assuming that salesmen's cars are necessary, there are three plans in general by which an employer can supply his employees with automobiles - company ownership, leasing from his own salesmen and leasing from a reputable leasing company.

All of these plans have advantages and disadvantages, and what is right for one need not be right for the next. If I were the president of a company and had to supply automobiles for my salesmen, I might choose any one of the three. I would first base my decision on how many cars are involved. Next, how much of my executive's time is going to be taken handling this problem. And third, does leasing offer me a relief from capital investment. Then I would consider the ease in handling my salesmen's problems. Having a "veil" so to speak between me and my salesmen, I can refer complaints to the leasing company rather than fielding them myself. Also, there might be a possible tax advantage if the fleet is registered in the name of the lessor rather than my own company in the many villages, towns, cities, counties, states who might want to tax me. There may even be a dozen or more other factors to consider also.

Certainly, if popularity and growth of leasing is any measurement of its value, we should take a serious look a this too. An industry authority has stated that about half the cars in major business fleets have already come under some type of long-term lease, and that if the trend continues at its present growth rate, he expects by 1975 more than 75-percent of cars in business fleets will be leased. These estimates do not include short-term car rentals, which are another big story. There does exist in the business community a definite place for long term leasing. It doesn't answer everyone's problems. It isn't for everybody. But it is for many. And to that extent, it surely invites your investigation.