The independent business analyst expects EU emission norms and government regulations to be the main driving force behind this growth in fuel-efficient, low-carbon-emission vehicles.

According to Datamonitor estimates, business fleet vehicles account for around 10% of all cars on EU roads. As a result of the financial crisis, the green consumer mindset and increasing governmental pressure, lessors are looking to incorporate more fuel-efficient vehicles into their fleets – a trend which is set to increase in the next few years.

Tarun Bisht, senior automotive analyst at Datamonitor, said: “As a result of a growing awareness among consumers and companies, the penetration of environmentally friendly cars in the European fleet sector has increased over the past few years.

“A ‘carrot and stick’ approach by governments through legislative incentives such as tax breaks, congestion charges and greater tax on polluting vehicles has led fleet lessors and leasing companies to rethink their ‘green’ car strategies. As a result, demand for cars that emit less than 120g of carbon dioxide per kilometer grew at a compound annual growth rate of around 40% between 2000 and 2009 in Europe.

“By ensuring that low-carbon-emission cars dominate their fleet parc, lessors are ensuring that the company and user fuel bills are reduced. The greater availability of fuel-efficient cars on the market has also contributed to the uptake in green car penetration among company fleets.

“Meanwhile, leasing companies see the ‘green’ tag as a positive driver for their (and their clients’) brand image.”

The independent market analyst believes businesses that put off updating their company car fleet during the recession will choose to invest in 2010 as the economic recovery takes root.

Datamonitor expects the share of company car purchases in total new car sales to rebound to 30% in 2010 from 25% in 2009.

Tarun Bisht, senior automotive analyst at Datamonitor, said manufacturers contending with declining demand from private buyers will show renewed interest in the fleet sector.

He added: “Car producers such as Peugeot, which aims to have an 8% market share in the fleet sector in 2010, have already initiated new strategies aimed at stimulating sales to businesses.

“Manufacturers such as Nissan, Renault and Kia have forged alliances with leading international lessors to increase their sales in this sector.

“Furthermore, car manufacturers are also making efforts to create centralized pan-European sales teams so that they can serve and co-ordinate with fleet customers more effectively and efficiently.”

Datamonitor believes manufacturers with cars that are fuel-efficient or equipped with other green technologies are most likely to benefit, as most fleet clients will be looking for more environmentally friendly cars.

“The global slowdown in the automotive industry has influenced the attitude of fleet buyers towards fuel efficiency and green technologies”, said Mr Bisht.

“Many corporate and fleet customers are adopting environmental measures to offset CO2 emissions, as they are well aware of green issues and climate change. Owning a green fleet enhances a firm’s brand image and is positively perceived by many stakeholders.”

Automarket: leading the fall…

Figures from the European vehicle manufacturer’s association, the ACEA, show Europe’s new car registrations extended their fall of 7.3% in July to an unprecedented 15.6% dip in August. With consumers’ monthly expenses soaring due to rising inflation, many are already cutting back on discretionary spending, particularly big-ticket purchases. Consumers are avoiding automotive purchases in particular, due to the fear that the US economic crisis will continue to spread, combined with a sharp increase in fuel prices, says Datamonitor automotive analyst Mudit Gupta. “Many consumers have resorted to deferring new car purchases, delaying their car servicing and avoiding unnecessary driving.

“Furthermore, with financial markets tightening, those consumers wishing to purchase cars on finance schemes are likely to find such purchase options less attractive,” he says.

While a lack of cheap finance options will make buying problematic, higher fuel costs are making driving tough, especially for consumers with multi-purpose vehicles (MPVs) and sports utility vehicles (SUVs). Having grown consistently over the past decade, 4×4 vehicles’ share of new car registrations fell in the first half of 2008. Furthermore, there was a noticeable reduction in average engine size of the vehicles sold in the six-month period. Sales have been hardest hit at the top end of the market and the defined switch towards smaller cars has also had a negative impact on vehicle manufacturers’ profitability, as larger cars tend to carry higher margins.

The greatest declines are being felt in the mature and developed western European markets, Mr. Gupta says. “This is likely to prompt a sort of balancing act whereby manufacturers will try to offset these decreases with continued growth in the emerging eastern European and Russian markets. However, even these markets have slowed of late,” he says.

Aftermarket: adding insult to injury

The aftermarket automotive parts industry will not escape the effects of the downturn either. With high fuel costs and tight household budgets, Datamonitor expects a decline in average car mileage in 2008 and 2009, thereby reducing the aftermarket product replacement rates and hence decreasing the overall aftermarket volumes. Furthermore, motorists are forecast to increase service intervals and delay vehicle repairs in order to reduce expenditure. “While it is difficult for motorists to put off the replacement of ‘distress’ products – parts such as batteries, tires, exhausts, which tend only to be replaced when they fail – motorists can delay the replacement of many other parts and accessories,” Mr. Gupta says.

Fleet market: saving grace

However, not all appears bleak in the industry. The fleet leasing market is continuing to show signs of sustained growth in nearly all of the European markets, with growth largely coming from small and medium-sized companies. To defend against the rising total cost of ownership and maintenance, corporate customers are still turning to operational leasing with maintenance management. This, in turn, is fueling the continued growth of company cars. In fact fleet sales will act as a growth engine for many vehicle manufacturers, especially in an otherwise dull new car market. However, even the operational leasing market will not be immune from difficulties in the financial markets, with potential supply-side issues as many larger lessors are controlled by the major banks.

Grim outlook? Not necessarily

In Datamonitor’s view, in the short to medium term the market will continue its downturn, with lower car sales. However, in the medium term Datamonitor expects the market to bounce back. In the meantime, the market will see a wave of consolidation favoring the dominance of global players and badly affecting the smaller domestic players, Mr. Gupta says.

“The outlook for the European fleet leasing market remains optimistic, while nearly all markets will see an increased penetration of operational leasing and overall company car parc.

“For the European automotive aftermarket the outlook is one of cautious optimism – where the aftermarket value, cushioned by crash-repair products, will continue to show mild growth,” he says.

Strong Growth In Face of Teething Problems

Major international leasing and fleet management companies in Russia have rated insufficient quality and reliability of suppliers as the single most serious obstacle to business growth in Russia. Aside from the issues with car repairs, fuel management and fuel cards, which in Russia have considerably lower penetration compared to corporate car markets in western Europe, have also been identified as another weak area, attracting an average rating of 1.2, whereas satisfaction of leasing companies with tyre specialists averaged 1.5. The least criticism was heard about dealership garages for routine technical management of leased company cars, but this failed to earn them an average satisfaction rating higher than ‘2′, Mr. Stojanov says. “In the period between 2000 and 2006, the number of fleet cars in circulation grew by an unprecedented 32%, but the number of garages available to service those cars has not kept pace. It will take some years before this discrepancy is ironed out.”

The lengthy average lead time across crash repair centres is also a consequence of the high road accident rate in Russia, Mr. Stojanov says. “Datamonitor has estimated that just under 10% of all cars in Russia are involved in an accident each year, which compares to eight percent in Germany, for instance.

“Such a high average is caused by the relatively poor quality of local roads and weak law enforcement,” he says.

Players confident of growing demand by corporate fleets

Despite the teething problems highlighted by operational leasing and fleet management companies in Russia, none of them doubt the substantial growth potential of the market in the coming years. According to Datamonitor, the operational leasing market in Russia is forecast to grow at an average rate of 40% a year until 2012, but Mr. Stojanov says the race is on to beat even these lofty predictions. “With full-service operational leasing first offered only five years ago, the local market has already attracted the presence of Europe’s major brands, such as ALD Automotive and Arval, but more companies are on the way in.”

When certain companies are going to enter the market depends on a few factors, he says. “The size of the market, their forecast of the growth pace, potential demand from their existing international clients for services in Russia, as well as past experiences with market entries.

“The fact that some companies have set up operations in Russia and others have chosen to wait implies different perceptions of the market and the actual demand from their own clients, but it may also mean they are trying to correct mistakes made in the past, when they feel they may have acted too slowly or have entered certain markets too early.”

A number of factors are thought to be fuelling the growing demand by corporate fleets for operational leasing, but the market is currently mainly expanding thanks to local subsidiaries of international companies; those that are already familiar with this funding method. Hence, the pace of growth of foreign direct investments in Russia is one fundamental factor influencing the growth of the operational leasing market in Russia in the short- to medium term, together with the growth of the gross domestic product in the country, Mr. Stojanov says. “Another important factor is the shortage of skilled labour, which is likely to become more acute in the coming years.

“As companies are struggling to recruit skilled workers and managers, as well as contain attrition, the result is upward pressure on wages and employers expanding their compensation packages with non-monetary benefits, such as company cars employees can use pretty much as if they were their own,” he says.

According to Datamonitor, currently less than one percent of all cars used by companies in Russia are funded by operational leasing – a ratio which is expected to increase to at least 1.5%, bearing in mind the growth of the corporate car fleet itself. By comparison, Mr. Stojanov says, “in Europe’s most mature operational leasing markets, such as the Netherlands or the UK, around half of all corporate cars are funded by operational leasing, which also further highlights the potential the Russian market possesses.”