Armund Schoen Looks At Leasing

Like highly seasoned gourmet food, leasing is great for some people . . . but may be ill-advised for others.

The decision to lease should be made only after careful study of your company's over-all plans, operation and cash requirements. And the lease should be tailor-made to your specific needs.

Today, leasing accounts for about 10 per cent of new car sales, or are about: 850,000 ears annually. That would be more ears than the total population of New Hampshire. It figures out to about two billion, five hundred fifty million dollar investment in new cars.

The average leased car travels approximately 18 months.

A recent industry survey shows that 75 per cent of the companies which lease cars have been leasing 10 years or less. First choice of leased fleet cars is the Chevrolet, Ford is second, Plymouth third and Buick is first choice for executive cars.

Here's a scorecard on leased car equipment:

• 88 percent have automatic transmissions
• 85 percent are 8 cylinders
• 91 percent have radios
• 81 percent have power steering
• 4l percent have tinted glass
• 21percent have whitewall tires

Air-conditioning is becoming a major factor. A '68 survey for the leasing industry projected that 52 per cent of leased cars would be air-conditioned. Our company, Wheels, Inc., this year expects a total of more than 70 per cent of our cars will include air-conditioning.

Leasing owes its historical start to the railways, who initiated the railroad equipment trust many years ago. However, auto leasing didn't start until 1938, when Zollie Frank and I established Four Wheels, Inc. This was the beginning of the auto leasing business on a national scale.

Hertz didn't start putting people in the driver's seat of leased cars until something like 16 years later. In 1939, it was pretty tough to sell the idea of auto leasing . . . or any kind of leasing.

Let's face it. America is a materialistic society. We've all been brought up to believe in seeking ownership. The accumulation of property, capital assets plus the pride of ownership, The idea of buying only the use of cars, and not the cars themselves, seemed to go against the grain of American tradition. It not only sounded strange and unfamiliar but it sounded downright un-American.

Another selling obstacle in '39 was the fact that a salesman was often hired on the basis of whether or not: he owned a car. Simple. No car, no job. jobs were bard to come by then, so all the applicants who lined up generally owned cars. In effect, they loaned them to the company in return for the job, and a mileage allowance . . . and sometimes, without a mileage allowance.

Leasing had a lot of things going for it. We knew this and were counting on it. First, we could prove-on paper-that leasing costs a lot less than most mileage allowances or sonic company's ownership. The cost-per-mile comparison chart which we developed was an important selling tool for us.

Next, many companies found themselves getting involved with the salesman's financing of his car . . . pitching in on payments . . . guaranteeing loans, and so forth. The companies really wanted no part of this. It's fine to take a personal interest in your employees, but there are limits. Leasing offered a way to avoid this over-involvement. Another reason: in those less affluent days, a salesman's personal car was often not a sight for sore eyes. Imagine the clear-eyed, enthusiastic-but not affluent young salesman driving up to a new account in a car four or five years old . . . with a slightly broken headlight; a slightly rusted running-board; and a frame with a slight list to starboard-and then announcing, he represents a modern dynamic, forward-thinking company.

Leasing put salesmen in bright, spanking-new cars, fresh from the factory . . . and gave the company a high standard of representation on the road. In other words, a "good image."

The phrase "company image' hadn't been invented yet, but businessmen in 1939 knew its importance just the same. For these and similar reasons, companies came to the conclusion that cars should properly be the responsibility of the company . . . and that a salesman shouldn't be required to "loan" his car to the company that employed him. So, leasing started to assume some measure of importance.

In the 40's the leasing business was far from being all ups, ups, ups. There was a down or two. During the war years, production of commercial and pleasure autos came to a screeching whoa. All of our leased cars were pre-war . . . with mileage readings above and beyond the call of duty.

Those were the days when a full maintenance lease was a top priority contract . . . the kind you kept locked in a vault.

With the end of the war, car manufacturers returned to civilian production: leasing started getting lively again. People had been waiting years to replace their aging autos and returning servicemen were anxious to get behind the wheel of something other than a jeep, a 2 1/2 ton truck, a Sherman tank, or a P-47 Thunderbolt. But Detroit was hard pressed to meet the demand. Companies forced into long waiting periods turned to leasing for a solution to their fleet problems.

Most of the lease contracts then were full maintenance leases. This type of lease was popular with both large and small fleet operators, who preferred not to get involved with developing maintenance facilities. At about this time, a new and intriguing form of lease was introduced-the finance lease. But at this particular time, companies weren't that much interested in a finance lease. They regarded leasing more on the basis of a complete service, rather than a financing tool.

As leasing continued to pick up steam, our company continued to grow and increase its share of market. In the middle '50's we added our track engineering department and entered the truck leasing business. However, in the early 50's, American business was faced with a new problem. The problem of finding good men. And, many of the good ones were in Korea.

So, to attract and hold on to the best talent, companies began offering excellent fringe benefits, including leased cars. This proved to be an attractive and effective judgement.

Another reason for the upsurge in leasing was suburban living. The wife needed the family car for shopping, errands, taking the kids to the school and for driving back into the city to visit mother. The husband's leased car solved the problem of who would get to use the family car. The wife would, and rightly so, she needed it.

Another factor: A trend to the elimination of jobbing, in favor of more direct wholesale selling by the manufacturer. There were more salesmen and executives on the road, traveling further to sell directly to their customers . . . and to chase down new business opportunities in an expanding market. More markets, more salesmen, more cars.

Up until this time-the late 50's -auto manufacturers hadn't paid much attention to the potential of leasing. Their attitude was to let the leasing companies themselves develop this new business. But a change took place when a rejuvenated Chrysler Corp. took a forward look, liked what it saw, and entered the field on a direct basis. Late in the 50's, Ford Motor Co. saw leased Fords in its future, and set up the Ford auto leasing system, which was restricted to Ford franchised dealers and leasing firms with Ford affiliation. For the most part, this was Ford's effort to encourage and educate its dealership operations as a means of getting a larger share of market.

General Motors didn't get into leasing then, and still hasn't. GM's efforts have been aimed strictly at educating its dealers on the facts and values of the leasing business . . . and encouraging dealers to go into leasing as an additional marketing tool.

In the middle 60's, the business world entered into a new era. The tight money days. The profit squeeze was on. Working capital was hard to come by . . . and cost an arm and a leg if you wanted to come by it. Then, as today, companies were forced to undergo a constant reappraisal of operating expenses ... to look high and low for the working capital so desperately needed to grow on.

Controllers, treasurers and financial officers got into the act and found that fleet was an efficient modern means of company financing. Leasing provided cars without any capital investment. It unfroze assets-in order to yield the right return on investment. It took thousands of dollars ordinarily spent to buy cars and trucks, and put it back where it belonged-in the company . . . for expansion, promotion, product development, research, and diversification.

Companies decided it made sense to pay only for the use of cars . . . not the cars themselves. And that sometimes it made sense . . . and dollars . . . not to own things, but just to use them. It's been a long time since 1938.

This, then, was when the idea of leasing really caught on . . . when companies started looking at leasing not merely in terms of cost-per-mile comparison charts, but in terms of its over-all cash-flow effect, and its ability to reveal vast sums of money that would otherwise be tied up in the outright purchase cars.

Today, financial officers look to leasing as a financial tool, and not only in terms of automobiles and trucks. The Bank of America has leases on file for everything from super jets to sugar cane equipment, computers to ice cream makers . . . a Chinese fortune-cookie machine . . . .kelp boats, offshore oil rigs, fire engines . . . you name it, you can lease it.

What's ahead for auto leasing? By 1972, 1,000,000 leased cars annually. That's a pretty impressive figure for an industry that's only 31 years old.

How about the cost of leasing? Back in 1939, a Plymouth King cost about $500 and leasing cost per month was $45, with full maintenance. Luxury model Chryslers leased for $57 per month with full maintenance.

Today, a car comparable to the Road King would cost about $2,300 almost five times the 1940 maintenance model price. But the cost of leasing has increased only 2 1/2 times. You'll have to admit it's quite a bargain.