NVLA LeaseWire
07/05/2020 | Issue 11

President's Message
In a few short days, Baby New Year gets the keys to the kingdom. Here at the NVLA, we are in anticipation of what is in store for 2020. While every industry is affected by what happens in the future, as lessors, we are even more affected. Our bottom-lines hinge on how accurately we forecasted the value of a used automobile, causing us to spend a portion of our time living two to five years ahead. We’re in the present, but we operate in the future, and our success relies on how proficient we are at being a prognosticator.

I find the Great Horse Manure Crisis of 1894 very interesting as it shows us how we have to consider every solution, including the unknown, when looking into the future. The Times newspaper predicted in 1894 that within 50 years, the streets of London would be nine feet under manure if nothing was done about the 35 pounds of manure produced daily by every horse on the city's streets. In 1898, the world’s first international urban planning conference was held in New York. Attendees were desperate to find a solution to this problem for all major cities around the world. The opinion of many was that civilization as they knew it was doomed. Of course, we now know that an unexpected savior would appear: the automobile. Calamity was averted by a pivot that was not even in everyday existence when the crisis first reared its head.

Another necessary pivot was executed by Victorinox, the company that makes the Swiss Army knife. When their famous multipurpose tool was banned in carry-on luggage at airports all over the world after 9/11, the company plunged into crisis: this product accounted for 95% of its sales. Today, we know Victorinox by the many new products they developed in response: briefcases, knapsacks, as well as fragrances and other travel gear. Swiss Army knives now account for only 35% of the company’s revenue.

The credit crunch in 2008-2009 is a good example of most lessors being taken entirely off guard, and many of our sister firms that were not bulletproof became casualties overnight. The surviving leasing companies are those who were nimble enough to pivot, reinvent themselves, and find a way to win while navigating change.

One of the significant changes ahead for us is autonomous vehicles. Our good friend Jim Marlier, industry veteran and former President of GT Leasing in Jacksonville, Florida, took a bit of time off from the golf course this month to write an excellent article about what the future holds in regards to AVs. Definitely an item we need to have on our radar.

I trust that as you celebrate this holiday season with family and friends and cast your gaze through the looking glass into the next few years, you can do so without trepidation. The future is simply an extension of the past, and the past, allowing a few scrapes and bumps along the way, has been very good to those of us in the leasing world.

Now is a good time to take a few minutes to secure your registration for the 2020 Annual Conference in Austin, TX. We are putting the finishing touches on a great program as we prepare to explore "The Wins of Change."

Affordability and EVs Could Lead to a Boon in Leasing
George Augustaitis, Director of Automotive and Economic Analytics for CarGurus
Heading into 2020, the automotive industry faces a major headwind: affordability. While it’s the same issue the industry saw going into 2019, the rising cost of vehicles makes this headwind even stronger for the coming year. When analyzing price trends, both full-size and mid-size pickup trucks, as well as large SUVs, have all increased more than 20% since January 2014.

While the rising price of new vehicles acts as the main driver of the affordability headwind, there are economic factors causing the headwind to have even more impact. These include low wage growth and the rising cost of both discretionary and nondiscretionary goods. The pricing and macroeconomic factors that created the affordability headwind are now pushing consumers to extend the length of their loans for new vehicles to close to an average of six years. However, there is another option for consumers to access affordable vehicles – leasing.

The Automotive Industry Has Been Here Before

Looking back on its history, the automotive industry previously faced the affordability headwind in the 1960s when consumers’ habits began to shift. Similar to our current industry, consumers extended their vehicle loans from two to four years, mostly due to the rising cost of vehicles. However, automotive industry innovator Eustace Wolfington wanted to curb costs and bring the buyers' purchase cycle back to two years. Wolfington’s idea was to have customers finance (what would eventually be called a "lease") their vehicles at half their price for two years. Then, the dealers would take the vehicles back and resell them for the depreciated amounts on their lots.

Originally, leasing served as a way to lower customers' monthly vehicle payments, allowing them to afford vehicles with luxury features, such as air conditioning. Leasing also gave automotive companies and dealers a more predictable customer life cycle. Years later, the luxury segment utilized leasing to boost sales and bring down the cost of luxury vehicles so that more consumers could enter the luxury market.

Growth Potential with EVs

Just like in the 1960s, rising vehicle costs today are keeping consumers out of the market. In addition, we are seeing longer loan terms change the customer buying cycle. In the short term, these same cost-driven problems that impact financing may lead to more consumer leases. However, the growth potential for leasing extends beyond affordability, as the automotive industry continues to undergo a major shift to electric vehicles (EVs).

While EVs clearly have environmental benefits, their high listing prices are also a drawback for consumers who wish to finance one. Range, vehicle size, and features, like all-wheel drive, contribute to the cost in producing EVs. While some costs will come down as the technology scales, it is unlikely that this will occur in either the short-term (1-2 years) or mid-term (3-5 years).

Battery degradation is another drawback to EV ownership. Laptop and smartphone owners witness firsthand how lithium ion batteries degrade overtime when their devices do not hold the same charge. This is because the batteries used in smartphones and laptops have a set lifespan. Even though EV batteries are produced with the goal of battery longevity and minimizing degradation, they still degrade. Case in point, there are mixed stories of 2012 Tesla Model S owners reporting battery degradation: some indicated slow degradation and others indicate that it moves quickly. Nissan Leaf owners note the same degradation, and several mention faster degradation rates if they have a 30 kWh battery compared to a 24 kWh battery.

However, if a consumer leases an EV, they do not face the same drawbacks as owning one. Leasing an electric vehicle allows the consumer to enjoy it without worrying about issues like battery degradation. Consumers who enter a two-to-four-year lease on an EV will likely return their vehicle before major battery degradation occurs. Likewise, leasing lowers the cost of entry and allows more consumers to add an EV to their consideration set.

Will Affordability and EVs Lead to an Increase in Leasing?

It’s likely.

In the short term, leasing may be a more viable option for consumers than an 84-month or 96-month loan. Consumers can only extend loan terms so long before monthly payments increase. Consumers are likely to remain in negative equity for a longer amount of time with longer loans because of interest costs. When combined, both of these negatives should push people from considering longer loan terms to the leasing market.

It may seem contradictory to think that since EVs carry high price tags, they could actually help consumers combat the affordability headwind in the automotive industry. However, lowering the cost of entry for these vehicles through leasing will not only free up consumers from having to consider issues like battery degradation, but could also increase their adoption rate. Looking at both the mid-term and the long-term, leasing an electric vehicle may prove to be a growth area as it solves many of the drawbacks associated with owning one of these vehicles.

George is the Director of Automotive and Economic Analytics at CarGurus. He has worked in the automotive industry for almost 15 years, working with OEMs including Porsche, Nissan, and Lexus. His industry experience has focused on the crossroads of marketing, pricing, strategy, and economics.

Seeing is Believing: The Big Picture for Autonomous Vehicles
Jim Marlier, former president of GT Leasing, Inc.
If you are in the business of transportation, you can’t avoid the drumbeat of autonomous vehicle updates seen everywhere. The industry publications are constantly asking, "Are you ready for the new ride?"

With all of the conflicting opinions and constant "updates," keeping up with the big picture in AV news is like trying to take a sip of water out of a gushing fire hydrant. Industry gurus are telling us that individuals and businesses will no longer need to own their vehicles because the automation will be so pervasive that owning will no longer be cost effective. So, let’s talk a bit about the "new ride" and contemplate how it may change your business.

I was riding in my neighbor's $100,000 Tesla a few weeks ago, which is a "level 3" AV and is about as advanced as you can currently purchase. The vehicle can take over for short periods of time under specific circumstances, but still needs a human driver. Tesla's autopilot even requires that you put your hands back on the wheel periodically or it will drop out of autopilot mode. Tesla and Audi have the only level 3 vehicles on the market, but several other manufacturers are about to introduce them.

The promises from AV manufacturers and industry insiders are alluring, from saving lives and cutting accident costs to saving hours in commute time. All of this got me thinking about what is coming, who is promising what, and the chances of these changes actually coming to fruition.

Ford, Volvo, and Baidu (a Chinese tech Internet and AI company in Beijing) are telling us they will each have a level 4 by the end of 2021. Level 4 requires a human to take over for situations the system is unable to handle. I can imagine some scary situations occurring with a complacent human driver. Tesla has been brashly communicating that it is going for the gold and will have a level 5 and by the end of 2020. It may take a technological and financial miracle for that to happen, though. If you are an Elon Musk believer, you may have no problem believing this miracle is possible. As for me, I'll believe it when I see it.

There is a definite divide in the business view of AV, not that it won’t eventually happen, but when it will happen. Steve Wozniak doesn’t seem to believe much in Tesla or the promise of a level 5 AV any time soon. In fact, the Apple co-founder stated that he has "given up" on self-driving cars in a Mirror article last year. "I don't believe that sort of 'vision intelligence' is going to be like a human...Artificial Intelligence in cars is designed to spot everything that is normal on roads, not something abnormal." Woz goes on to say that autonomous cars will struggle with unforeseen circumstances that are common in a real-world driving scenario, such as temporary road signs or a rule-breaking vehicle.

When you think about a system required to complete all of the real time local data processing in each car, conceptually, it gets overwhelming. The ability to produce an AV with the AI to take into account the speeds of surrounding cars and the precise proximity to initiate actions, like braking or switching lanes in traffic, illustrates Wozniak's point about the problem with reacting to unforeseen or unusual circumstances.

Simultaneously, there are tremendous amounts of processing tasks that must happen remotely in the cloud. Software must be updated for transportation signals, sensors on the ground, and the vehicles themselves. We just don't have anything like this for such a mega scale. A scalable, highly-resilient cloud-based infrastructure is critical for handling this type of data processing.

Rest assured, all of the manufacturers are busily researching, planning, and in many cases, collaborating to deliver automated transportation to the public. AVs are sure to come; however, the engineering and most importantly, the capital needed is simply staggering. The amount of resources that must be brought to these projects is nothing short of overwhelming.

The top innovators in the field of robotics and applications for autonomous vehicles are fairly clear on this. PBS and NOVA aired "Look Who’s Driving" (original airdate: October 23, 2019). The top innovators in AV shared their current state of research and development, and there were some very frank comments by leaders about taking AV into the mainstream.

Daniela Rus, director of MIT's Computer Science and Artificial Intelligence Laboratory said this: "In my opinion, the safe solutions today work at low speeds in low-complexity environments. So, this includes driving on private roads, on campuses, retirement communities, airports, but we do not have solutions that work, in general, at high speeds, in congestion and in really difficult road conditions."

Martial Hebert, a leading researcher in computer vision and robotics and dean of Carnegie Mellon University’s School of Computer Science, which is heavily involved in AI for AV research, shared, "Having a fully autonomous vehicle being able to take you anywhere, anytime is very, very far in the future. In fact, I don’t have even a guess as to how far in the future that would be."

Steven Shadlover, retired research engineer at the UC Berkeley who has been involved in efforts to create autonomous driving for 45 years, also shared his thoughts. "The technology does not exist to do what he (Elon Musk) is claiming. He doesn’t have it and neither does anybody else. It’s not like a mobile phone app where, you know, if the mobile phone app doesn’t work 10 percent of the time, big deal. This has got to work all the time. There’s a pot of gold out there at the end of the rainbow for those who can actually get this to work. Now the challenge is how to get it to work safely.

As for our leasing community, we will not be the innovators in marketing these products and are much more likely to be a trend-following financial supplier. This is good news because it gives us a great deal of maneuverability. We will likely see a fairly sizeable pool of data from the evolution of these vehicles, first from segregated commercial and industrial usage and then across-the-board applications. We appear to be much more likely to see an evolution rather than a revolution, likely preventing an economically and sociologically disruptive scenario for our industry and even society as a whole. The position we have heard about the individual or commercial entities no longer owning vehicles because it will be possible to just dial up a driverless vehicle for all of our daily chores just doesn’t hold water for the foreseeable future.

It is hard to muzzle the unbounded enthusiasm that proponents have for these newest technologies, but they all would be wise to temper their excitement for a bit of reality. It is going to be a process.

Jim Marlier is the former president of GT Leasing, Inc. in Jacksonville, Florida and has spent over 35 years in the leasing industry.

Everyone at NVLA would like to wish you happy holidays! Please note that the office will be closed from December 23 - January 1. Please email with any questions or if you need assistance.

National Vehicle Leasing Association
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Menomonee Falls, Wisconsin 53051
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