A significant increase in passenger car leasing has contributed to healthy overall growth among German lease companies in 2019, despite a downturn in demand for machinery. Paul Golden takes a closer look.
The European Automobile Manufacturer’s Association (ACEA) notes that for the first nine months of 2019, demand for new commercial vehicles across the continent remained positive, despite a decline in September. Germany has been the most dynamic market this year, with an increase of 10.9%.
Horst Fittler, managing director at the Bundesverband Deutscher Leasing-Unternehmen (BDL), confirms that developments in the automotive and mechanical engineering industries have had the greatest impact on new business in 2019.
“The leasing industry felt the effects of the WLTP audit standard in the final quarter of 2018,” he explains. “Car manufacturers did not manage to convert to the international standard for emissions measurement for all models as of 1 September 2018, and as a result, their production and deliveries in the third quarter were cut back sharply. This had an impact on the entire leasing business, as vehicles dominate the lease market.”
In the first half of this year, the leasing industry recorded 10% growth in overall new business, driven by a 13% increase in vehicle leasing.
Developments in mechanical engineering are also reflected in the leasing sector, adds Fittler. “Machinery leasing, the second-largest leasing segment, boomed last year and rose by 9%.
“However, in recent months the consequences of trade disputes and uncertainties around Brexit have become increasingly noticeable as companies are postponing their investment plans. Production and incoming orders in export-oriented mechanical engineering are declining, and machinery leasing recorded a decline of 6% in the first half of the year.”
According to the BDL, the German government needs to create improved conditions for investment. It believes bureaucracy must be reduced and an appropriate tax framework created to ensure the country remains internationally competitive.
“German small and medium-sized enterprises must be relieved and strengthened,” he says. “We welcome the SME strategy of the Federal Minister of Economics and Technology, which provides tax incentives for private investment, growth and employment to strengthen Germany as a business location. The challenge now is to implement these measures.”
Fittler says German companies increasingly realise their investments through leasing in uncertain times. “However, if companies generally postpone their investment plans, this will also be felt by the leasing industry,” he adds. “We anticipate moderate growth in new business over the next 12 months, at least at the level of investment in equipment.”
When asked whether the government could do more to improve the environment for equipment leasing in Germany, Dominic Möhrmann, vice-president sales, Germany at Grenke, notes that it already supports leasing initiatives in various forms.
“In addition, our customers can profit from vouchers of development banks,” he adds. “We recently expanded our co-operation with KfW Development Bank in the context of another global loan agreement in the amount of €200m for lease financing, which is an important element in the financing of small and medium-sized enterprises in Germany – particularly during difficult economic phases.”
Möhrmann says the company has recorded above-average growth in Germany during the first three quarters of 2019, with new business totalling nearly €2.1bn compared to almost €1.72bn in the same period last year.
“After exceeding our growth expectations in the first three quarters of 2019, we are raising our forecast for new business growth in leasing from 16-19% to 18-21%, remaining firmly on track for 2019,” he adds.
Claus Henneberger, head of sales at GEFA Bank, refers to a mixed strategy among the major market players as some leasing companies try to compensate for increasing price competition and decreasing margins with more business volumes to hold their interest income, while others try to increase margins against stable volumes.
“Overall the leasing market – and also the loan and hire purchase markets – have developed positively with still limited reversed debits or unpaid rentals despite the lower economic dynamic,” he says.
“Another significant development is the ongoing digitalisation of the leasing industry in terms of digital products and services or – still with limited volumes – the establishing of platform businesses in the industry.”
One of the most common indicators of business confidence in Germany is the Ifo business climate indicator. This index has fallen over the last 12 months, but increased slightly during September.
“The two main external elements which influence the German market and cause uncertainty in business expectations and investments are fears about ongoing protectionism in global trade, and concerns about an unregulated Brexit,” adds Henneberger.
He suggests that rather than being more proactive, the German government could help the lease sector by doing less. “One of the elements that touch our industry directly is new and stricter regulations for the banking industry. These include stricter equity requirements, new and extended regulations for KYC and compliance procedures, and increased reporting and control requirements for local and European authorities.”
While acknowledging that most of these regulations have been drafted to better control and monitor the universal banking system, Henneberger says they require huge investments and more manpower in smaller leasing companies that are mainly servicing SME clients in a local market.
“For our partner industry – the manufacturing industry for investment goods – there is a recognised risk of over-regulation for the introduction and development of new products, especially for the European market,” he continues.
Henneberger also sounds a cautious note on the prospects for growth in the German lease market over the next 12 months, observing that although the economy is still in good shape and economic analysts forecast growth of approximately 1% for next year, the leasing industry mainly depends on the manufacturing industry for investment goods – the biggest one being the truck and car industry.
“The order intake in these markets is currently declining, or has been declining since the beginning of the year in some important markets such as trucks, trailers and forklifts, but also tool machinery,” he says.
“The leasing industry will see the same reduction but postponed, as delivery times are currently still long. For example, we will still see lease production in 2020 for tool machineries that were ordered at the beginning of 2019.”
How large the market decrease will be depends on how fast the order intake goes up again, adds Henneberger. “I do not see a market environment in which the number of produced investment goods will go above the 2019 market level in terms of delivery,” he says. “Another way to grow for the leasing industry is always to increase the lease penetration and to win more market share from the classical banking industry.”
Adapt and Evolve
The world is changing at a more rapid rate than ever, and the financial services industry therefore has to adapt and evolve with increasing pace.
That is the view of Dirk Bunkenburg, head of relationship management at ABN Amro Lease Germany, who notes that much of what is happening in Germany and in the German lease market is a derivation of broader European and global developments.
“To be more specific on developments in the lease market in 2019, we saw a downward shift in economic conditions, increasingly volatile financial market conditions and a wave of tightening regulations,” he says.
“All this against a backdrop of pressing needs for increased digitisation and automation of both internal and client processes, as well as changing expectations of customers driven by demographic trends, new lifestyles and service needs, creates a more challenging market environment than ever.”
Echoing some of Henneberger’s comments, he refers to a further step-up in financial services regulation as regulators look to strengthen protection for consumers and investors to ensure the long-term stability of the financial system.
“In the recent past, we have seen new proposals on capital requirements,” he says. “There have been new regulations in data protection, as well as stricter rules on KYC and the use of internal risk models and on financial reporting. There is also acceleration towards the circular economy, where energy and raw materials are utilised with greater awareness and more efficiency. With a growing shift towards sustainability, a key focus for ABN Amro Lease is the financing of sustainable assets that will support our clients’ transition towards a greener future.”
Bunkenburg suggests that the auto finance market has been negatively affected by the decision to give city administrations the discretion to ban diesel cars, adding that a patchwork of different local regulations within one highly developed and collaborative economy like Germany feels like a step backwards.
“Consequently, necessary confidence for stable demand in the auto and commercial vehicle markets dwindled,” he continues. “Value curves and residual values lost reliability and could be stabilised by exporting our ‘problem assets’ to third countries. A standard national, or even better, a European approach with regards to air quality control would be desirable.”
According to Bunkenburg, the question of whether the government could do more to improve the environment for equipment leasing in Germany can be answered by referring to the slower domestic pace of governmental action to promote sustainability and climate policy through incentivised schemes compared to the Netherlands.
“The support of such political developments by regulatory easements and financial stimulation – such as corporate and income tax breaks for investments in green equipment – needs to be co-ordinated on a federal, regional and local level and accelerated to restore the confidence of entrepreneurs and capital expenditure in general,” he says. “These factors would substantially benefit the equipment leasing market.”
Bunkenburg reckons factors such as ‘product as a service’, new mobility concepts and shifts towards sustainability can be expected to outpace the effect of lower or almost zero growth rates in Germany over the next 12 months.
“As always, the overall leasing market in Germany is driven by developments in the motor and transport sector,” he adds. “Demand will continue to remain strong as technological advances including e-mobility, autonomous driving and the tightening of emission standards for all vehicles powered by combustion engines meet changing consumer behaviour, replacing the formerly widespread status symbol of car ownership with flexible mobility solutions.”
The autumn forecast issued by the German Institute for Economic Research in Berlin predicts that investments in machinery and equipment will rise by just 0.7% in 2019 and by only 0.5% in 2020.
However, Siemens Finance and Leasing CEO Kai-Otto Landwehr notes that overall market growth is not solely dependent on vehicle leasing. He explains that developments in the IT leasing sector have also been positive, with new IT leasing business in the first six months of 2019 increasing by 12%.
“In contrast with the market segments mentioned above, demand for leased machinery fell by 6% in the first half of the year, reflecting the current state of the mechanical engineering industry in Germany,” he says.
“According to the industry’s trade association [VDMA], there was a 9% drop in the value of orders placed in the first five months of the year.”
However, the VDMA has said it expects to see growth of 3-4% in new business for the entire year, on the basis of the latest forecasts for investments in machinery and equipment, which would represent above average growth and a continued rise in the leasing share, adds Landwehr.
“Most leading indicators of the major economic institutes in Germany are lower,” he says. “The business climate index for the leasing industry issued by the Institute for Economic Research [Ifo Institute] has been on the decline since November 2018, mainly as a result of less optimistic expectations. Analyses of the current situation have also grown more pessimistic in recent months.”
However, Landwehr also observes that new opportunities are emerging in the area of digitalisation.
“A study commissioned by the KfW Development Bank shows that leasing is the second most frequently used option for digitalisation projects, behind cash flow,” he concludes. “Investments that will require financing will also be necessary in the area of e-mobility and charging columns for electric vehicles.”