Having exceeded expectations last year, figures for the first quarter of 2017 already suggest another record year for lease activity in Germany, with vehicle leasing firmly at the fore. Paul Golden speaks to key industry figures to find out what is driving the growth, and what challenges are on the horizon
In the first three months of 2017, new leasing business in Germany was up by 10% compared to the same period in 2016.
Vehicle leasing was the main growth factor – new passenger car leasing business rose by 12% compared to the first quarter of 2016 and the leasing of commercial vehicles increased by 10%. Leasing of machinery increased by around 5% last year.n the first three months of 2017, new leasing business in Germany was up by 10% compared to the same period in 2016.
New vehicle registrations in Germany were up by 7% between January and March, and leasing has profited disproportionately from this increase explains Horst Fittler, secretary general of German Leasing Association (BDL).
Companies tend to view service fleet and leasing as indivisible concepts, he says. “The add-on service packages offered by leasing companies are often what persuade firms to opt for leasing when it comes to financing new vehicles. New business models are prompting new financing models, such as pay per use.”
German lease customers – more than 85% of which belong to the small business community or mittelstand – value supplementary services such as maintenance, inspection, repair, insurance and damage management, and expect reliability, good advice for the entire asset life cycle, market expertise and flexibility from their leasing company.
Societe Generale Equipment Finance (SGEF) country head for Germany and deputy chief executive officer, Jochen Jehmlich, who took up the post of chief executive officer on 1 July, notes that the equipment leasing penetration rate has risen from around 20% in 2010 to a historic high of 24%, with equipment leasing realising investments of €58.6bn last year, up 9% on the figure for 2015.
“In addition to the continuous trend towards vehicle leasing, another important sector is machine and plant engineering where leasing is again performing better than the overall market,” he says.
“The reason for this might be that the inclusion of services such as maintenance and repair in the leasing offer is gaining increasing significance. Office equipment and IT systems constitute the third-largest group of leasable assets, although this sector suffered from stagnation and even a decline in 2016 due to the fact that hardware has become more efficient and less expensive. Asset-management solutions for a better controlled and improved administration of IT equipment are also increasingly sought after.”
LeasePlan observes that the operational leasing market for large fleets is very mature, while the SME market is at a much earlier stage of development, with around 37% of SMEs leasing their business cars. The private lease market is also becoming more attractive for leasing companies, as leasing penetration is even lower than for SMEs.
The company refers to a number of significant recent developments in the German lease market, including the trend for recognising the synergy between a co-ordinated fleet and more efficient travel management, although it also acknowledges that putting this into practice will be a challenge for companies and organisations, as fleet and travel management are usually handled by different departments.
Key service elements for German full-service leasing customers include maintenance, fuel cards, tyres and insurance, explains a LeasePlan Germany spokesperson.
“There is also strong and steady customer demand for flexible contract handling. However, this demand cannot always be met by leasing companies due to legal constraints such as the leasingerlass, a decree which defines the minimum duration of a
The German fleet leasing market is split into captive and non-captive leasing. All relevant OEMs offer leasing products via their own leasing companies or even their own independent provider companies.
LeasePlan Germany’s spokesperson says there has been some action taken to incentivise the buying or leasing of electric vehicles, the most important of which has been the umweltbonus, an environmental subsidy for which individuals and businesses can apply through a two-stage process. Pure electric vehicles can receive a total subsidy of €4,000, while plug-in hybrids are subsidised to the level of €3,000. Half of this is given by the vehicle manufacturer in the form of a special discount, while the remaining 50% is requested from the Federal Office for Economic Affairs and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle).
Jehmlich expresses less-positive sentiments towards the government, suggesting that many changes to the law have not taken into account the impacts on the leasing industry.
“The leasing association is constantly undertaking political lobbying in order to draw attention to the importance of the leasing industry for small and medium companies and the wider economy in Germany,” he says. “Though there are some positive responses, stronger backing by the government and the Federal Ministry of Finance would be desirable.”
In this context, it is little surprise that Jehmlich references ever-growing regulatory requirements as the biggest challenge facing the German leasing market in the short term. “These regulations use up resources in terms of manpower and costs, and in many cases are counterproductive for our mission to add value to the industry and to our stakeholders. Additionally, the persistent low-interest-rate environment is affecting the income and cost situation of leasing companies.”
Recent research commissioned by Siemens Financial Services found that businesses are reporting a strong need to upgrade or acquire new equipment in order to fully benefit from the developments around Industry 4.0, notes Kai-Otto Landwehr, chief executive officer and chair of Siemens Finance
Alongside continued growth in pay-to-use finance models over the last few years, there has been significant development in the availability of, and interest in, the idea of paying for business outcomes, rather than paying to use the technology that the acquirer believes will produce beneficial outcomes, he says.
“By integrating technology and finance, these models enable organisations to confidently invest in technology,” adds Landwehr. “The reliability of financial planning is transformed because not only are costs more transparent, the risk of technology obsolescence and capital commitment are
He observes that financial services are becoming increasingly important as a differentiator for the company. In addition to the technical feasibility of assets, customers are placing an increasingly strong focus on financial support for their investments.
“We help Siemens to tap into new business opportunities, support the acquisition of new customers and strengthen existing business relationships with financial decision makers,” explains Landwehr.
“Building on the strength of our balance sheet, we provide financial solutions for Siemens’ projects and products, opening the way for new business ideas such as asset finance and public-private partnerships, and signalling confidence to the markets through long-term risk participation. Third-party customers also benefit from our experience and knowledge. To expand our portfolio and to optimally position our products and services in our markets, we serve customers outside Siemens as well.”
According to LeasePlan Germany, SMEs tend to find their way to local dealers and their captives, whereas international and large fleets look for multi-brand, non-captive solutions. Digitalisation of fleet solutions is an important factor in the large fleet operational leasing market, he continues.
“In addition to improving the service level for fleet managers, we have introduced a special app for LeasePlan drivers which they can use for booking maintenance appointments online,” he adds.
In the SME sector the company works with various partners to offer customised leasing solutions. One example is the offer of customised equipment packages that can be preconfigured for vans and integrated into the operational leasing contract.
Asked to assess the most significant challenges facing the German leasing market over the next 12-18 months, the LeasePlan Germany spokesperson refers to uncertainties around the future of the diesel car.
“In Germany, roughly 45m passenger cars are on the road,” he explains. “For the overall market the largest share is petrol vehicles, which account for two in three of all passenger cars. However, in the business car and leasing market, diesel cars dominate because they offer better total cost of ownership, which is why the large fleet market comprises as much as 95% diesel cars. So if communities and cities start to impose diesel bans, all German leasing companies will face a serious challenge.”
In March an appeal court in Germany upheld a decision which could lead to a diesel ban in Munich by the beginning of next year, in a case brought by Deutsche Umwelthilfe, a non-profit environmental and consumer protection association.
Aside from the political rejection of the industry’s demand for the reintroduction of declining-balance depreciation, Fittler says the biggest challenge facing the German leasing market over the remainder of 2017 and next year is the investment climate, which he describes as unsatisfactory.
“We remain convinced that the introduction for an unlimited period of the decreasing-balance method of depreciating assets would be the best way to kick start investment activity,” he continues.
“What is more, this method of writing off an asset provides a more accurate reflection of that asset’s value at any given time during its useful life. As the leasing industry in Germany is characterised by small and medium-sized companies, it needs an appropriate regulatory system.”
The new accounting standard, IFRS16, published in January 2016 by the International Accounting Standards Board (IASB), requires companies to include leasing commitments from operating leases in their balance sheets from 2019 onwards.
Landwehr refers to warnings from investors that the new standards could affect some organisations’ banking covenants and debt-based agreements with lenders, but that they would also make it easier to compare companies that use leases with those that prefer to borrow and buy.
Asked how IFRS16 will affect leasing in Germany, Fittler notes that only around 1,000 companies will be affected by the new rules, with a share in new leasing business estimated to be less than 15%.
“Market research has shown for years that ‘off balance’ is no longer a decisive motivation for leasing,” he adds.
“Rather, the most attractive benefits are flexibility and tailor-made solutions. Other important advantages are cost predictability and the fact that the equipment can be kept up to date with technology. In addition, leasing provides leasing customers with supplementary services. All these advantages are retained under the new IFRS requirements.”
Eric Gandemer, chief executive officer of Germany, Austria and Switzerland at BNP Paribas Leasing Solutions, says preserving liquidity and maintaining bank credit lines have become increasingly important to German lease customers in recent years, especially SMEs which have less financial flexibility and fewer financing alternatives.
He refers to digitisation as a major source of growth over the next few years, as companies invest in product development and engineering and automated manufacturing.
“The focus will be on technologies such as sensors and connectivity devices, as well software and applications such as robotics,” says Gandemer.
“We also see high business growth in traditional markets such as agriculture where digital technologies to be funded include GPS or data analysis, high-tech tractors and automated feeding of livestock systems.”
He says that compared to other western European countries, the German leasing market for medical equipment has considerable potential for growth, as larger companies with higher investment volumes increasingly use leasing.
Gandemer suggests that although almost 50% of leasing clients are already using additional services, there is scope for expansion of full-service offerings and contracts across a wide range of sectors.
“As is the case for the general market, SMEs are at the core of our German business. However, we also offer leasing solutions for self employed professionals – farmers, doctors, lawyers – as well as mid-cap and large clients of the BNP Paribas bank network.”
While only 15% of new equipment leasing business is expected to be affected by IFRS16, BNP Paribas Leasing Solutions is providing advisory expertise to bank customers, OEM partners and their larger customers, and setting them up with new schemes compatible with these new accounting standard and the evolution of asset-management models