Opinion: Will Leasing Vehicles Work in India?

Leasing vehicles is at a very nascent stage in India. The practice of leasing has only traditional been carried out in real estate, wherein most consumers have opted to purchase big-ticket items such as vehicles. At the moment, only a mere 5% of vehicles are leased in the Indian market, but the industry is expected to grow at a CAGR of 20% in the coming years.

Traditionally, purchasing a vehicle has always been a sense of pride and achievement for Indian consumers. Their hard work is reflected by owning a big-ticket possession such as a car. On the other hand, leasing vehicles has been a norm for corporate India and not for the general consumer. With a rising millennial population and changing consumer spending habits, will leasing vehicles be a norm for the general Indian consumer as well and not only for corporate India?

What is Vehicle Leasing?

Vehicle leasing is essentially renting a car for a set period of time, rather than purchasing one. It is most appropriate for consumers who want to frequently change vehicles, particularly in the luxury segment, and those who may be not locked into one geographic location for a long period of time. It is interesting to note that the lease rate is determined based on the monthly depreciation value of the vehicle, rather than the full value of the car itself. How much a car is being reduced in value each month due to wear & tear is what consumers pay.

The benefits of leasing cars include low monthly payments, ability to get a new car every few years and attractive safeguards. The benefits are particularly attractive for luxury cars. If one cannot afford a luxury vehicle, they can simply lease it for a few years and then move onto the next car. Consumers do not have to go through the process of reselling, or discarding, owned cars after they stop getting utility from it and can just sign a lease for a new one. Lastly, the warranties, repairs, insurance and tax benefits make it attractive to lease cars. Consumers do not need to worry about paying extra for any of the above, as it is included in their lease payments.

There are also many drawbacks to leasing a vehicle. Firstly, one must have a steady income for the period of the lease so they are able to make the lease payments as per the schedule. Since many consumers may not have a steady income, it may be difficult to adhere to the strict contract. In addition, like when a consumer leases an apartment and landlords have a say in their property, not everyone will qualify for leasing vehicles, and if they do, it will come with certain rules. The most crucial rule is drivers cannot go beyond a certain mileage range, limiting the usage of their vehicle, especially in large, sparse geographies.

The Growth of Vehicle Leasing in the US

The United States is perhaps the best known market for vehicle leasing in the world. The US has a leased-vehicle penetration of 32.5%, meaning almost 33% of new vehicles in used in the US are leased. This is an increase from 2019, wherein the penetration was 31.5%. This growth YoY was seen despite an average increase in the cost to lease a car. According to Edmunds, consumers who are leasing vehicles are paying almost $2,000 more than they did in 2016 and that average monthly payments are up almost $50 since then.

The growth had been fueled by consumers wanting to lease luxury cars, with OEMs such as Mercedes Benz having a lease penetration of around 55%. The leasing option put the "American Dream" closer for many consumers, as it did not require large amounts of cash to purchase a car. Rather, once they are secure in a job or business, they could lease an S-Class for a few years and then upgrade. In fact, compact and sedan luxury car leasing had a 68% market share, compared to a regular SUV market share of 18%.

One of the main drivers for an increase in demand for leased cars in early 2010s was because leasing became cheaper than financing. Since lease payments were making depreciation payments, the lessor will benefit from having a higher valued car when it is returned to them. If the used-car market has high prices, the lessor benefits from giving lower lease payment offers as they can sell the car for more in the used-car market after its "decline" in value. This was the case right after the Great Depression, where a lack of used-cars in the market jacked up the prices, thus made leased-vehicles cheaper. In addition, it is arguable that the US at the time was shifting from a purchasing society, to a renting one. Though the housing-bubble of 2008 was perhaps a great contributor to this shift in consumer preference, a new concept had started to emerge in the early 2010s called collaborative consumerism, access-based consumption, or non-ownership consumption. In this type of consumer behavior, according to academics at the Journal of Consumer Research, consumers "instead of buying and owning things, consumers want access to goods and prefer to pay for the experience of temporarily accessing them".

A cheaper leasing environment and overall shift of consumers towards a more renting society were what caused the recent growth in the leased vehicle market in the US. Can a similar growth trajectory seen in the Indian market?

Leasing Vehicles in India

The car-leasing market in India is currently a $200 million industry, with an expected CAGR of 20% over the next few years. Compared to the overall automotive industry, which is $200 billion, it is a small fraction. The leased vehicle market has an estimated penetration of 5% in India. The question is whether this penetration will increase significantly, or will consumers still opt to majorly purchase vehicles.

The current leasing dynamic consists of two types of leases: Operating and Finance Leases. Operating Leases is the most simple form of leasing. Under this agreement, the lessee signs an agreement to lease a vehicle for a set period of time, wherein the asset ownership is not transferred to the lessee. Lessees are "borrowing" the asset, reducing the administrative burdens on them and a more quick & easy approach. The risk of the asset remains on the lessor, as they expect to get the asset back after the set period of time, though the asset is expected to maintain a certain residual value at the end of the term. Finance Leases are a little more complex. In this, the lessee will enter an agreement to use the asset, but will bear the risks associated of owning the asset. A Finance Lease also includes the option to purchase the asset at the end of the set period via a balloon payment, and thus the agreement period is for the useful life of the asset.

Organized vehicle-leasing companies have had the majority of their focus on corporate clients. Major companies, such as Avis (a Joint Venture between Avis Budget and Oberoi Group), serve corporate clients for their cars to be leased to employees. Leased vehicles have become a strong tool for employee retention at many corporations, major players hope to see a 20% growth in the leasing-segment over the next few years.

Original Equipment Manufacturers (OEMs) have also entered the leasing landscape. Mahindra & Mahindra, the third largest car manufacturer in the country has partnered up with leasing companies to offer a range of leasing options directly to its customers. The lease payments will range anywhere from INR13,000 to INR 34,000 ($180 to $450), depending on the car model. Their aim is to bring in consumers who prefer ease & convenience over the "hassles" of owning their own car. Since leasing agreements include maintenance, repair and insurance services, they are value-added benefits to the lessee. If they had purchased a car, all the burden would be on them. Mahindra & Mahindra's aim is to bring "professionals, small businessmen and millennials" as their main customers.

Is it an Opportunity?

The opportunity lies in a very defined customer profile, one which was very well expressed by V.S. Parthasarathy, group chief financial officer at Mahindra & Mahindra. The ideal customers for leasing vehicles are professionals, corporates, millennials, small businessman and luxury car enthusiasts. India is filled with MNCs, more than 30,000 in the market, which means there is a huge customer base, as each MNC will employ several thousand employees. Corporates and MNCs can retain employees by offering leased-vehicles, rather than purchasing the car and then providing it (adding it to their balance sheet will be an accounting scrutiny), specially since corporate jobs have a fair bit of intra-migration. Employees may opt to lease vehicles themselves as well, rathe than purchase, if they do not expect to live in a particular city for more than a few years. With more of a job culture emerging in India, leasing-vehicles could have strong growth in this customer segment.

In addition, the growth of leased-vehicles is likely going to be the strongest in superstar cities. Metropolitan cities such as Bangalore, Hyderabad, Delhi and Mumbai are big, and public transportation is not the best. These cities have more of a millennial population than other regions in India, as well as customers with a higher purchasing power. As in the US, luxury cars were a strong driver for leased vehicles. I believe India will have a similar story. Luxury cars can be an expensive purchase, costing up to $100,000, and so leasing may work out cheaper. Consumers may want to upgrade their luxury cars after two-three years, wherein lessors will also get a good resale value in this short time frame, rather than deal with the nuisances of owning an expensive car for 9 to 10 years. This will, however, leave out 93% of the Indian population, as most of them live outside of metropolitans and superstar cities, where consumer preferences are still more traditional.

Finance Leases are more predominant in the Indian landscape at the moment. According to Avis, their fleet dedicated to Finance Leases is three times higher than the fleet dedicated for Operating Leases, which stands at approx. 20,000 vehicles. Though Finance Leases are more established, Operating Leases are a bigger opportunity. The majority of the Operating Lease market is controlled by the unorganized sector. In this, small regional owners have a fleet of around 15-20 cars, which they lease out to mainly small businessman, or private taxi drivers. These payments are quite high, almost as high as $500 per month for a very basic sedan costing approx. The organized sector controls a small portion of the market. This presents an opportunity for companies such as Avis to increase their presence in more regional areas, wherein they can offer more attractive operating leases to the customers of the unorganized sector, who are mainly small businessman and private taxi drivers. In fact, there is also a tax benefit of up to 35% as lease payments can be written-off as expenses, a great incentive for small businessman. Avis and other players have already realized this segment of the market as a growing and want to shift focus.

However, I believe the renting society is still one which has not developed on a mass scale. Of the 93% who live outside trendy metropolitan cities, many will still have traditional buying preferences. Many consumers still have a sense of pride and achievement when they are able to purchase an asset or item on their own. Leasing may still be a taboo for many consumers for it to reach a mass-market scale in India. Although there is a rising millennial population, who are preferring to rent, specially real estate, there still remains a large population which do not have the same preferences. The consumer utility is still optimized by having a sense of ownership in India.

Furthermore, ride-sharing apps such as Ola and Uber may have an adverse effect on leasing vehicles. The ride-sharing industry is expected to reach $90 billion by 2030, a significantly larger market-base than leased-cars. In addition, as mentioned, corporate clients are a strong growth driver for leased-vehicles. However, the majority of employees at MNCs will not be far enough in the corporate ladder to obtain a company car, therefore most people will still prefer ride-sharing apps rather than pay a significant amount of their monthly salary to lease a vehicle.

Conclusion

I believe leasing vehicles will work in India. However, it is probable that the opportunity will not be a very large , but a more focused, niche one. Leasing vehicles will be appropriate for professionals, corporates, small businessman, millennials and luxury car enthusiasts. For this category of customers, it may make economical sense to lease vehicles rather than purchase them. In addition to the economic sense, there is also the experience of leasing a vehicle; it is easier, quicker and more hassle-free than purchasing a car.

In the mass market scale, I believe India will not see much growth in leasing vehicles. This is primarily because the renting society has not emerged in India; it is still more emotionally fulfilling for many consumers to purchase a vehicle rather then "borrowing" it. The growth of this business model will likely only succeed in metropolitan and superstar cities, but will perhaps see not much growth in less developed regions as of yet. The increasing demand for ride-sharing apps will also hinder the growth of leasing vehicles to consumers. Nonetheless, once there is a bigger millennial and Gen-Z population, India may shift more towards a renting economy.

In my opinion, leasing vehicles will be a great business on a more B2B model, with some B2C traction in the luxury car segment. Corporate clients will probably remain the largest users of this service, as well as small businessman because it provides financial incentives. Achieving strong growth in the B2C will likely take some time as consumer preference will need to shift towards normalizing the renting culture. As a result, I believe leased vehicles will only be able to obtain an upper limit of around 10% penetration in the near future, up form 5% currently. It will likely remain an industry with a size of less than $1 billion in the near future, given its niche demand.

Hope you enjoy the read. Please let me know if you have any thoughts, questions or feedback. Thank you!

Written By,

Abhishek Khetan

[email protected]

BU 2020 Graduate