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As car leasing companies embed telematics to improve cost efficiencies and markets remain healthy, the future for the industry looks positive. But is all as it seems? Martin Morris reports.

On the face of it, Technavio’s report earlier this year - ‘Global Car Leasing Market 2019-2023’ – forecasting growth for the industry of close to 14% over the period - paints a rosy picture.

Underpinned by key drivers such as car leasing companies using telematics to improve cost efficiencies, coupled with healthy key markets, nothing could possibly go wrong. Or could it?

Given strengthening economic headwinds (both macro and micro) the jury is still out and the margins that companies have historically enjoyed could yet come under pressure.

Outright global recession may not be a racing certainty yet, but some portents aren’t good.

Research carried out by Rodney Ramcharan and Ralf Meisenzahl of the US Fed last year identified the sudden freeze in credit markets last time round (2007) as one of the contributory factors to a slump in US car sales from 16 million annually to just 10 million three years later.

Moreover, the then increasingly sclerotic credit market, as US banks started hoarding their cash, gave auto manufacturers less room to provide financing loans and leases to customers through their dealers, even if customers still wanted to buy or lease cars.

Against this backdrop, the auto leasing segment has been undergoing profound technological change in the interim.

Frost & Sullivan notes that electric vehicle (EV) leasing and private vehicle leasing with OEMs is set to have a significant impact.

Demand for private vehicle leasing, particularly full-service operational leasing, is set to grow strongly, while EVs are going to have a major presence in the passenger car leasing segment.

But the technological innovation these developments bring is already having a knock-on effect, with fleet management companies increasingly taking an interest in fixed cost insurance - largely due to insurance premiums being driven up by sophisticated new vehicle technology, such as ADAS.

In short, increased complexity invariably means higher repair costs - not least in the field of EV batteries where costly repairs can be incurred even in the case of minor accidents.

One potential solution would be for companies to underwrite risk by setting up their own in-house insurers – thereby taking control of the insurance and repair process, with cover paid for within monthly lease payments.

Also likely to be disruptive - in the short term, at least - is the emergence of new technologies, such as artificial intelligence, augmented reality and voice recognition.

There is a challenge to traditional players as new disruptors move into their commercial territory, which will require time and investment to defend.

Meanwhile, with the lessened need for human interaction, any system being built needs to be sufficiently robust to ensure decision-making is consistent and not subject to periodic errors.

And last, but by no means least, looming large for the industry is the issue of climate change.

In March last year, members of the European parliament agreed on a new, tougher emissions reduction targets for new cars (37.5%) by 2030, compared to 30% previously planned.

The legislation also set a CO2 reduction target for new vans (31%) by 2030 - all of this part of the EU’s longer term objective of reducing greenhouse gas emissions by 80-95% (compared to 1990 levels) by 2050.

A knock-on effect of this and other national and local initiatives is that companies are finding it increasingly difficult to attract sufficient customers for used diesel-engined cars when their lease contracts expire – threatening their residual values.

At the same time, leasing companies must fund a growing number of EVs without the certainty of historic residual value data on which to base their calculations.

Despite these profound changes, there is scope for opportunity. Those companies prepared to ring the changes - even if it means short-term financial pain before operational efficiencies kick-in - will be best placed to exploit opportunities in the longer term.

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