Lease-rental for cars is not a smart option for individuals

Operational leasing for private vehicle owners will start making sense only when manufacturers start reducing prices of their sedans to more sensible levels, relative to two-wheelers and ‘ordinary’ hatchback cars

At the end of the day, unless the math shows otherwise, the operational leasing model in India is something like the famous signboard outside the more famous fish & chips shop. Yes, it works in some specific cases—expats who do not want to get saddled with an asset, people who do not have enough for the smallest of down-payments or magicians who have figured out how to beat both the Income-Tax Act in India as well as VAT (value-added tax) and soon service tax rules.

But for the run-of-the-mill Indian consumer, operational leasing appears to be yet another punch-line based gimmick, while the reality on true costs lies elsewhere.
Add the threat of service tax as well as VAT on lease rentals coming your way soon. And then answer this—will it work for the Indian car-buyer; the self-employed entrepreneur; the salaried class—those looking at earning a livelihood from their wheels? The jury is out on this one, and the fact that less than 1% of Indian cars are sold using the operational lease rental route, as against 50%-70% in other countries, provides a response which means that Indians still prefer the basic loan or even the full-payment route when they go to buy a private car.
There is a simple reason for this—a loan or outright purchase gives you a residual value to work with. And it also helps you do what you want with your asset. Which is bad news for the operational leasing companies—most of whom are in one way or the other offshoots or closely-linked to automobile manufacturers—often directly-related entities. Transfer pricing has its tentacles everywhere, and most of all in this business.
However, the real undercurrent is that luxury cars of the sedan sort are simply not moving in India, the way they did in China, and with global sales showing mixed trends again, it is time to try out yet another option to push your 4-door 3-box Mercedes, BMW and Audi—in a market where “premium” hatchbacks and their related sedans still reign supreme. Oh yes, SUVs (sports utility vehicles), the bigger the better, guzzling subsidised HSD (high-speed diesel) by the gallon—those will move. But the sedans? We have more ads for them, and press conferences, than sales—that what it seems like.
In addition, one of the biggest fears currently striking home with a vast variety of corporates in Europe has to do with the simple thought that if the euro-zone collapses, then the rest of Europe for their specific country will become multiple small markets, with ample trade barriers to bring grief to those corporates who have got used to dealing within most of Europe as one unbroken trade zone, further with attendant increases in costs making their products unviable. As one of the European car manufacturers told me on the sidelines of a meeting recently, it will be back to regional country brands—SEAT in Spain, FIAT in Italy, Mercedes/VW/BMW and similar brands mainly in Germany, FIAT 125P for Poland, the grand revival of Vauxhall and Morris for England, the even grander revival of SAAB in Scandinavia, Yugo in the Balkans and a whole host of other local brands everywhere else. For all we know, Muscovites would be back in Russia, along with the Lada and ZIL.
This, incidentally, is just a very small representation of the vast variety of cars of European brand names which we saw in Europe as recently as the ‘80s. South Korean brands had just about made it into the Persian Gulf market, and Japanese brands were still considered cheaper alternatives in Europe and America. Everywhere else in the emerging world, people used cars and buses made by their outgoing colonial masters. Small little Papua New Guinea, for example, had largely German brands, and Singapore ran on British Morris Oxford taxies. Nigeria worked French cars. So on, and so forth.
The globalisation of automobiles happened only after the Japanese and the South Koreans took over—and when the Europeans consolidated their brands and manufacturing facilities. Globalisation also happened because of hard marketing tactics, the question of whether they were fair or unfair did not arise. Witness the business of royalties from India, for example—what sort of free market concept explains or justifies that, even now, especially in the case of Maruti Suzuki, for example? Are we here in India now subsidising the Japanese automobile customer, for no other reason but unfair pricing policies? And are we in due course expected to do the same for the South Korean and then European automobile customers, by sending royalties there too?
Anecdotal 1—This correspondent was in Hamburg (Germany) in the mid ‘70s when the first Japanese brand taxi (a Toyota Crown) was bought in lieu of a Mercedes-Benz by a local taxi driver, and it made headlines as well as television news—almost making it sound as though the buyer was a traitor. People threw potatoes and sausages at the car (vegetables and fruit were still a luxury in Europe in those days) and the driver said he bought one simply because it was cheap—and the warranty was much longer than for the German brands.
Anecdotal 2—On a voyage to an African port out of Bombay in the early ‘80s with a load of Indian trucks and buses on deck, we heard the most amazing story, the local dealer for a Japanese brand had bought the land on which the route out of the port lay. For weeks after we had discharged the cargo, the Indian trucks and buses could not even leave the harbour, and by the time they left, they had been thoroughly vandalised. And since most of the trucks were meant to be used for harbour to up-country operations, their owners were simply not able to access the port again, unless they bought the Japanese brand.
It is something like that, with those tasked with selling automobiles in India. Despite the reduced output from Maruti Suzuki, despite a strong discount structure in place for most cars, the basic pricing of sedans is still very unfair and skewed in favour of huge margins towards the manufacturers, and through them, to their parent companies at “home”. This, rather than any other marketing jargon based sound & fury about high interest rates, fuel prices and recession, is at the root of slow sales.
When this was put to the head of one of the players in the luxury market, the answer I got went like this—we are able to achieve almost any price we want to even for stripped-down versions of our large SUVs. The price of our sedans, therefore, has to be in relation to this benchmark. So much for fair pricing—or products made for markets. It is like a computer manufacturer trying to position an AZERTY keyboard at a premium price in India, expecting buyers to get fooled into thinking that if it came wrapped in a leather case, it somehow implied luxury, which a QWERTY keyboard did not. (A particular keyboard manufacturer did try it, in India, actually, and obviously failed miserably).
So what’s operational leasing all about, then, and why are the luxury car manufacturers all trying to jump on this new mantra—especially when in some form or the other, it has been around for over a decade now?
1) You can, for whatever reason, “lease-rent” a car without having to make a down payment of any sort.
2) At current market levels, you will pay shade over 3% of that car’s list price as a monthly rental for a minimum lock-in period of 36 months.
3) Usage will be capped at about 15000km per annum, anything over that will cost extra.
4) As of now, this cost includes VAT, but does not include future implications of changes in service tax and income tax or even GST or sales tax.
5) The car will be registered in your name, so all legal liabilities will be yours during the tenure of the lease rental, but you will not get residual value.
6) You may have to agree to get the car geo-locked, with permissions needed to take it out of a particular geographical range.
7) There is a lot of other fine print, some of which goes over the head of most people who only want to drive a car.
8) All costs like maintenance, insurance, registration are included. Consumables like fuel, tyres are not included.
The big problem with operational leasing the way this writer sees it, in India, is that:
1) You can get much better deals and discounts on luxury cars than ever imagined before. Just walk in, looking sufficiently serious as a buyer, and try to work out the discounts available, across brands in sedans. Yes, the dealers will put you off with positions on delays in deliveries, but in reality the manufacturers appear to be holding ample stocks, and with the year-end approaching, a lot of fancy realities are going to bite now that the “festival season” has not lifted numbers moving out of showrooms.
2) The operational leasing companies depend more on their global tie-ups to offer fleet discounts as well as tax-saving benefits, and where the operation of private vehicles is linked to large corporates also operating huge commercial fleets. The individual customer or small corporate is simply not going to be prime focus for them, and that means you have a better chance with the friendly neighbourhood dealer, where different dynamics prevail.
3) Most of all, the issue of residual value and taxation element therein on the same, or lack thereof, are complicated enough to tie a person into knots till well after the car is past and gone. That, along with some fine print on what the next vehicle should be, sometimes locking you in with a particular brand.
All in all, operational leasing for private vehicle owners will start making sense when manufacturers start reducing prices of their sedans to more sensible levels, relative to two-wheelers and ‘ordinary’ hatchback cars. Which, using the operational leasing route for global and fleet customers, they have already started.
Whether they pass these benefits on to Indian customers of the individual sort remains to be seen. But a quick back-of-the-envelope calculation shows that a 3% of list price as lease rental is still about 33% too high—at present rates and residual values accruing back to the manufacturer, the effective rate would be closer to 2.2% or so. And that’s the number they will have to reach for, all these new lease-rental companies, if they want the steel and rubber to move off the dealer’s floor, and if they want to offer good competition to the basic plain vanilla loan segment.
Otherwise, it remains: ‘Today's special—Pay for two, get one, and get the second one free.”

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