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Customer LoginsFleet business can be rewarding, but there are risks
New vehicle fleet business, including sales to commercial, government and daily rental enterprises, can bring high volumes and revenues to OEMs. The fleet business can also be more efficient than retail business, as a sale of five thousand units to Hertz, for example, can require fewer resources than those needed to sell the same volume one by one-to-retail consumers. On the other hand, manufacturers can - and do - use fleet business, and in particular daily rental business, as an outlet for excess production over and above that needed to meet retail demand. This "abuse" of fleet business has occurred for decades, and it has tended to be more pronounced among the domestic OEMs than their overseas-based rivals. The domestics have tended to over-produce and then incentivize, versus the imports which have tried to limit production to more nearly match retail demand.
One drawback to the use of fleet business as an outlet for excess production is that this excess supply of vehicles, frequently concentrated in one make or model, reduces the residual value of this make or model, which also reduces lease rates. With this in mind, the domestics recently have been working toward reducing their use of the daily rental business with the hope of strengthening residual values. There is evidence that Ford has actually been going down this path for several years, and now its daily rental mix of total fleet business is substantially below what it was a few years ago. Chrysler and GM still rely on daily rental business to a similar degree as a few years ago, but with their upcoming new products they plan to move away from this practice. As the domestics more nearly match production to actual retail and non-daily rental fleet business, the residual values of their products will become more competitive with Asian and European residuals, something the domestics need to effectively compete in the long run.
Posted by Tom Libby, PolkInsight Advisor, Polk (02.03.2011)