“Unbundling” is the Magic Word

Trade Magazine bauhandwerk 1-2.2018

“Unbundling” is the magic word.

Leasing protects liquidity – they say. But even with this financing model you can pay too much. Hidden positions in small print and transparent full-service rates often prove to be cost drivers. The trend is towards open and fair invoicing at market conditions.

A van leased for 240,000 kilometers over four years, including maintenance, repairs, tyre changes and insurance: The monthly rate is 800 euros. That’s a total of 38,400 euros in 48 months. This is what the fleet manager believes at the start of the contract. In the end, it is not uncommon for there to be a lot more. Because demand and capacity utilization change, around 3 % of all leasing contracts are adapted to changed terms and performance; in the construction industry, which is particularly dependent on economic cycles, this happens much more frequently. Leasing companies charge fees for such descriptions. The fleet management company ARI Feet Germany GmbH has calculated the additional cost burden on the lessee in relation to the total cost of ownership (TCO) of a vehicle. For example, an average of 2.1% for premature termination of the contract and 2.3% for new excess or shortfall kilometers is applied. If use is continued beyond the end of the contract and the previous monthly installment is simply paid on, although the loss in value to be compensated is now significantly lower, the customer pays an overpayment of around 2.2%. After return, the leasing company sells the vehicle with an average margin of 3.7 % compared to the imputed residual value at the start of the contract. Last but not least, there are the obligatory return damages – a nuisance with almost every commercial leasing contract. This increases the TCO by a further 2.7 %. ARI Managing Director Majk Strika: “This means that the mileage contract is by no means what marketing promises: a secure bank for the customer, which only charges or remunerates him for an increase or decrease in use and otherwise largely assigns the risks to the lessor.

Transparent full-service leasing

Full-service leasing based on this model makes the whole thing even more complicated and unduly more expensive. This variant includes additional services such as maintenance, repairs, tires or insurance. This results in a simple but unsolvable problem for the cost manager. Even when the contract is signed, the cost manager cannot see what the rate is, whether the services are being overpriced or whether the residual value on which the calculation is based is too low. The supplier loyalty of fleet managers results above all from the fact that the established leasing models do not permit competitive comparisons and that the service descriptions, contract forms and add-ons of the individual providers differ in many details. “The BME Bundesverband Materialwirtschaft, Einkauf und Logistik e. V. (Federal Association of Materials Management, Purchasing and Logistics) says that “knowledge of the market and prices for the individual service modules is lost”.

Open-end instead of closed-end

In addition to potential savings on services, which fleet experts put at between 5% and 10%, it is also possible to conclude much more favourable leasing contracts. The market now offers alternatives to the still dominant, expensive kilometers contract model – also referred to in specialist jargon as a “closed-ended” leasing contract. This means that right from the start the – actually imaginary – residual value and the contract are fixed for a certain term and mileage. In the case of so-called “open-end” models, the final settlement is based on real market conditions. With the so-called “FlexLease” recently introduced by ARI, the lessee can flexibly adapt the financing period to his needs and return the vehicle at any time after a one-year term – two years in the case of trucks – without having to make special payments or receive hefty invoices for even the smallest scratches. Majk Strika: “At the end of the contract, the difference between the remaining book value and the remarketing proceeds is paid out to the lessee. The offer is a novelty for the European market. In North America, the model – called “open-end finance lease” in the trade – has been used successfully for over 40 years. The expert emphasis that transparent models are virtually unsaleable in the home country of leasing.

Separate financing and service

In the case of supplementary vehicle management, cooperation with a fleet management service provider that is independent of specific brands or suppliers is an obvious option. Provided a corresponding contract model is in place, the service provider passes on all savings effects to its customers and only charges a management fee. The use of modern software allows, for example, the market-wide recording of up-to-date and competitive conditions of suppliers and service providers (“multi-supply”), but also the identification of optimisation possibilities in fleet processes. Majk Strika: “According to benchmark analyses, a combination of open-end leasing and a qualified fleet management system can achieve a total TCO of up to 20 percent less than full-service leasing,” says Strika. Companies that prepare their financial statements in accordance with International Accounting Standards (IFRS) are even obliged to strictly separate vehicle financing and services. As of 2019, they must show all leasing liabilities as liabilities in the balance sheet. So that service costs can continue to be reported in the income statement, they will be purchased separately in future. It is only binding for IFRS accountants. But nowhere is it written that the vast majority of companies that prepare their financial statements in accordance with the provisions of the German Commercial Code (HGB) must remain in their old ways.