The tremendous growth of the renting and leasing industry has the auto industry in a dilemma. On the one hand, automakers are happy with the continued growth of renting and leasing companies because be means increased sales. To this end, many auto companies are actively promoting and encouraging leasing and renting. On the other hand, many auto industry executives are concerned about the mushrooming leasing and rental business because they see it as a potential threat to the auto distribution system.
The concern in the auto industry revolves around the growth the finance leasing. Under the finance lease, the lessee is responsible for depreciation, maintenance and insurance. The leasing company does little more than buy and sell the vehicles plus offer specialized administrative services. The lessee generally is billed on the basis on a reserve for depreciation which usually runs 2 or 2½ per cent per month plus a yearned charge. When the cars are sold there is a final accounting whereby the lessee is either credited or debited the difference in sale price versus the remaining book value.
Because of the initial attractiveness of non-maintenance, finance leasing is growing by leaps and bounds. Some of the larger maintenance-type leasing companies are expanding in the area of finance leasing and one auto company, possibly as a portent of what is to come, is testing a finance lease program on the West Coast.
On the surface it would appear that finance leasing is just part of the natural evolution of the leasing business. Certainly, the number of vehicles under a finance lease today is not too significant. However, if the growth continues in the years ahead as it has in the past few years, the number of cars out on finance lease would represent an important percentage of industry sales and would create special problems for auto dealers.
For example, let us say that finance leasing becomes so popular that it can be sold by a man with a telephone, a table and a chair - no showroom, on service facilities and no real customer service. The finance lease salesman would just call professional men and the public in general and offer a new car every year for what is a ridiculously low monthly payment in comparison to a full two year maintenance type lease. The auto dealer would then be burdened with the services and complaints on a increased number of cars which he did not have a chance to sell in the first place.
It stands to reason that a continued increase in the number of cars distributed to the public through outlets other than dealers would have an adverse affect on the dealer network structure. The typical auto dealer would see his volume and profit remaining stable, if not declining, while demand for service would remain constant with the total car registrations. And, while it need not be so, most auto dealers lose money on their service operations.
Leasing companies, mindful of depreciation, constantly pressure auto companies for earl model year delivery. An automaker's first responsibility at new car time is to fill dealer pipelines, But as the leasing company grow bigger than the average dealer, the pressure by the lasing company possibly might influence the auto company in regard to its responsibility.