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Vehicle leasing market in the Middle East
Source: BI-ME; CIP Development , Author: Terry Indge and Ian Godfrey
Posted: Sat February 18, 2006 12:00 am

INTERNATIONAL. Vehicle leasing continues to grow throughout the Middle East particularly in Saudi Arabia, which has not been subject to the decline that has hit the US market.

Evolution in the US leasing market

Leasing in the early 1990s was considered an innovative way for automobile makers to put customers in mainly high-end vehicles with relatively low monthly payments at a time when new-vehicle prices were rising faster than personal incomes. But in the late 1990s, as new-vehicle prices levelled off and consumer income increased, the role of leasing changed from "an affordability fix" to "the preferred method to stimulate sales in an ever-more-aggressive fight for market share."

However vehicle leasing in North America has, in recent years, seen a dramatic descent as more and more players, burned by residual losses in the billions of dollars, curtailed their low cost strategies or left the game altogether as previously loyal customers deserted leasing in favour of buying because of the lure of  manufacturers’ incentives and low interest rates.

Banks and independent leasing companies were first to ditch the market, disinterested in leasing cars for the sake of leasing cars. "Captive" finance companies, with a direct relationship to manufacturers, ended with a larger share of a smaller leasing pie.

Unfortunately to many players applied the strategy of  setting vehicle residuals  unreasonably high to keep monthly lease payments low, this was suicide but was only realised when vehicles came off-lease in the millions, and those high residual forecasts hit the harsh reality of actual market value, usually in the auction, at a time when major vehicle manufacturers where liquidating new vehicle inventory.

Whilst this decline in the lease business in America has significantly reduced off-lease volumes in recent years it has bolstered used-car prices. "A financial institution would need to think long and hard about getting back into leasing after being burned," says one analyst.

On a bright note it is those leasing companies who have embraced Internet technology that have shown growth in sales with an increased customer base.

Whilst there is strong competition between independent leasing companies and the vehicle manufacturers outlets, who have the advantage of retail workshops and preferential warranty policy, those leasing companies with their own workshop facilities are cutting operating costs by improving workshop efficiency and increasing residual values by refurbishment. Furthermore, others are selling units which come off lease directly to retail customers.

Overall, lessors are looking to the future with a cautious but an optimistic eye. They rode out the ups and downs of 2005 and they are ready to take on the challenges of 2006.

The Saudi Arabian market

Saudi Arabia embraced corporate leasing in the mid 1980s. Led by government institutions, they where soon followed by the private sector which capitalised on the fact that title to lease vehicles remained with the lessor, unlike vehicles sold on finance where title had to be transferred to the customer at the time of delivery.

Whilst growth in leasing contracts has been sustained over the years, as is typical of a growth market, in Saudi Arabia the number of players has increased substantially making competition fierce as newcomers often overvalue residuals as used to happen in the US.

To compound the problems for independent lease operations most, if not all, the major distributors of the vehicle manufacturers have set up leasing divisions which gives them the competitive edge as they receive manufacturer support in terms of vehicle subsidies and warranty terms not easily secured by independent leasing operations ( for example, often warranty is rejected on the grounds of abuse).

Key players in this market have accepted the challenge of competitive pressures and, like their counterparts in the US, are adopting best international practice to reduce cost and secure maximum returns on total capital employed.

Key areas being addressed to increase profitability are: 

  • Establishing true cost of operations (fixed)
  • Real estate used in operations, even if wholly owned by the company, should be costed at market rates so that true market rental rates are charged
  • Vehicles purchased for leasing to be specified to give high residual values
  • The following options should be considered to be ‘standard’ on cars: electric adjustable mirrors, central locking, electric front windows (minimum)
  • Commercial vehicles should be specified for the use intended and the user made clearly aware of capacity limits and what is clearly abuse
  • Vehicle warranties should cover vehicles through the length of the lease
  • Residual values must be set at realistic levels
  • No used vehicle blue book is available so lease operations need to closely and continuously monitor used car values in the market place
  • Makes and models that have insignificant penetration in the market should be avoided since parts and service coverage is likely to be limited. Moreover reliability in the local environment is likely to be unknown
  • All operating costs must be charged against each vehicle
  • Workshops must be managed to ensure maximum use of the facility and efficiency of the workforce
  • Excess workshop capacity could sold at retail
  • Software should provide real time cost management
  • Parts purchasing policy should be cost effective
  • Web-based leasing management and marketing software should be adopted for maximum customer satisfaction levels through state of art communications
  • Vehicles coming off lease, where feasible, should be evaluated to determine if they are suitable for used-car leasing, particularly of late-model, high-end vehicles. This has the potential to become an important segment of lease sales
  • Vehicles if suitable for refurbishment sold at retail
  • Vehicles if not suitable for retail to be sold to the used vehicle trade or at auction
  • Used vehicle sales operations can be a profit centre in its own right and major lease operations throughout the world are establishing Used Vehicle mega-stores to move vehicles that come off lease at retail
  • Such under-cover facilities provide customer friendly environments
  • Provide finance
  • Provide extended warranty
  • Offer 24 hour recovery service
  • Often offer seven day exchange programmes

Note: This article was prepared by CIP Development Services, Middle East specialist consultants in all aspects of the motor industry.

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