VW and LeasePlan
It's always interesting when I read a business story that is buried in the back of the business section that probably made front page business news in Germany or England. The LA Times' Global Report, which comes from the Financial Times in London, ran an article on 21 June 2004 entitled VW Chief Tries Risky Maneuver for Revenue. The spin of the article was that VW's chairman, Dr. Bernd Pischetsreider, will waste its money to acquire LeasePlan and transform VW into more of a transportation service company. The article disapproved of the move and was very skeptical of the business strategy. The author even compared Dr. Pischetsreider to Jaques Nasser, fired CEO of Ford, who liked to spend lots of money but whose purchases such as Volvo and Land Rover are the few bright spots in Ford's portfolio these days.
What is LeasePlan? LeasePlan is a large auto leasing company that is part of the huge Dutch bank, ING. In the US, ING was largely unknown until just a couple years ago when ING introduced its Orange savings online accounts. ING chose to enter the US market without the traditional branch structure. There are a handful bricks & mortar locations, complete with coffee bar and internet access, but those are more for show than transactions. The purchase of LeasePlan would make VW the 2nd largest fleet manager, with GM taking first place.
The concept is simple. Lease a car to you for 3 years. During the entire period of the lease, one monthly payment includes insurance, maintenance and road tax. I think it's a great idea for either the refrigerator buyer or the car enthusiast. We haven't heard about it here in the US because our social and tax structure are still in the dark ages when it comes to medical and car insurance. It has a great chance of working well in the first world countries that are members of the European Union.
Most EU members have socialized medical care. It's considered a right of every citizen to have access to medical care and prescription drugs. That concept seems to have escaped our lawmakers here and it certainly wouldn't be in the interest of the insurance companies or doctors.
The US, unfortunately, has more attorneys (as a ratio to the total population) than any other country. Our tort and liability law is hopelessly mired in the "sue everyone" attitude. Even in the UK, where our system of tort law finds its roots, they laugh at all the stupid law suits filed here and they show distain for our culture of ambulance-chasing attorneys.
When someone has an accident in, say, Paris, people are calm and exchange insurance information. Oh yeah, that is something that doesn't happen here in LA because there are so many uninsured drivers. In the EU, everyone who drives has insurance. It's not a choice or something that you can just cancel the day after you register your car. If the accident causes personal injury, it's not a problem since the socialized medical system takes care of everyone, no questions asked. It's the same for passengers or pedestrians or anyone else injured. If someone is disabled, they still have lifetime medical coverage and they will receive a government pension if they are no longer able to work. Everyone pays into the government-sponsored social insurance systems with payroll taxes. Essentially the concept of personal injury is taken out of the car insurance equation. I've even seen discussions of "special assessments" that companies make to social programs and how proud they are to be able to support their country! That certainly is not something you'll never see in an annual report from an American company.
The only element of car insurance in Europe is personal property damage. The cost of fixing or replacing a car is easily estimated because all cars are registered and all drivers are insured. Any insurance company actuary can tell you that when you have this much information (including the driving records), it's relatively easy to come up with a projected claim rate. Accordingly, premiums are much lower than in the US and much more realistically tied to a person's driving record and the value of the car. Here in LA, the insurance companies still use your zip code as the primary method of jacking up your rates. It's also very hard to predict whether the person who hits you will have insurance or not.
Ford Chairman and CEO, Bill Ford, has been an advocate of going to a nationalized healthcare in the US. And many in the automotive industry agree with him. It's a simple argument. We live in a global economy. Ford, GM and Chrysler all have to compete on a global level. The main competitors are located in EU countries or Japan, and all of the EU countries and Japan have nationalized healthcare. The US is the only first world country to not have national healthcare. When CEOs decide about where to locate a new plant or whether to hire new executives, everyone should be playing on a level field with respect to employee costs. It's been well documented that GM sells and finances cars merely to fund its pension plan and maintain healthcare coverage for its current and retired employees. Corporate America is slashing retirement healthcare benefits almost yearly. This national crisis can only be solved through federal legislation with leadership from someone in the White House and a willing Congress. I sure hope that that time is soon because the US is losing jobs at an alarming rate to other countries with lower cost structures.
The US also desperately needs tort reform; however, when almost every member of Congress is an attorney and most state legislators are attorneys, it seems that the "special interests" of insurance companies and attorneys are in business to fight each other at the expense of the American people. It will also take a few generations to create a society in which every slip and fall isn't seen as "hitting the jackpot".
In concept, LeasePlan is a great idea. Most consumers can't afford to pay cash for a car. Whether you buy or lease, it's likely that your dealer will arrange financing either through the manufacturer's captive finance company of from any number of prime and sub-prime lenders looking for the business. Wouldn't it be great if you could pay your registration, not have to deal with smog checks or any normal maintenance and pay for insurance with one payment? It would certainly make budgeting much easier.
In the EU, Australia, Japan and other more civilized countries, LeasePlan could work today. If VW gets EU approval to purchase LeasePlan from ING, I would be interested to see how VW rolls out the service. Dr. Pischetsrieder doesn't think it can be done through VW's dealer network or its own finance arm. His plans are bigger, as LeasePlan would include competitor's vehicles and the service element would need to be bigger than existing dealerships. Perhaps VW would certify independent repair shops to be maintenance providers for anyone using LeasePlan.
The back end information VW could get from LeasePlan is very interesting. It will be able to track the actual maintenance cost of its competitors, learn more about the defects in its own cars, learn more about individual driver usage and even perform preventative maintenance that would help avoid accidents like checking brakes or replacing worn tires. So many people let their car go without proper maintenance and that leads to accidents.
VW could also get a bigger piece of the Certified Pre-Owned (CPO) sales and financing business. As prices of new cars get ever higher, so do the prices of pre-owned cars. Anyone who has tried to sell a used car in Los Angeles knows that very few people have $20,000 cash to buy your used Toyota Camry. So the cash customer will simply offer much less until the seller gives up and takes the offer from the first person with a fist-full of cash. Dealers have a much better chance of really getting $20,000 for that 2-year old Camry. And there are tons of suckers out there who will pay $20,000 for the CPO Camry rather than shell out $26,000 for that brand new Camry. The main reason is that the customer needs financing and no one likes the hassle of looking at lots of used car ads on the internet. In many cases, there is much more profit for a dealer selling a CPO car than there is for a new model. The dealer does relatively little work to get their mechanic to do the manufacturer CPO checklist. Once passed, the manufacturer extends a limited factory warranty to the car. In many cases, this small amount of extra cost commands a 25%-30% premium for the dealer selling car versus the individual selling the same car. When applied to the EU market, LeasePlan could be the finance company of choice.
Since LeasePlan is much larger than VW's own finance business, it's likely that the combined units would be able to get better rates on bonds used to finance the lending operations. Of course, this would mean a higher profit margin.
I'm tired of hearing the automotive press predicting doom for something before it's even happened. Hey, those jaded "insiders" are still predicting doom for BMW with its latest styling trends and themes. BMW is selling everything it can make and send to the US. I guess that BMW's customers didn't get that memo. Those same journalists have dire predictions of brand erosion when BMW announced its new 1-Series. The most recent reports in the British press rave about an excellently-executed car with best-in-class handling and interior. That's high praise given that the new Golf, the traditional class leader, is the target for BMW's poison arrow.
I plan to keep an open mind with respect to VW's LeasePlan deal and will be interested on how it's implemented in Germany and beyond.
