INDUSTRY INTERVIEW: Jon Walden, managing director of Lex
31 July 2008
Jon Walden, managing director at the UK's biggest leasing company, Lex, chats to Paul Barker about a diverse range of topics from recession to acquisition
Recession? It's imminent, it's happening and we'll see it when the figures catch up with reality.
I've been in this game a long time and seen it all before. Every recession has a different dynamic: the previous one in 2000 was over car pricing; in 1991, it was high inflation and high interest rates. So this is different in terms of how it will hit the market.
The volume of business has not been affected at all yet. In companies that are less well managed, recession shows up weaknesses straight away.
The slowing economic growth will have an effect on car fleets - people slow down replacement cycles and extend contracts, the less prosperous lay people off and even the well-off will look to cut costs.
How will the 160g/km divide affect lease rates, given the capital allowance changes? The object of the exercise is to incentivise manufacturers to produce more low-emission cars, so we're taking a look at how it will impact over a three- or five-year cycle. I think some rates will go up because of the difference between the two systems.
It will hit margins, but I remember when CO2 tax was brought out, everyone said that was the end of the expensive car, and it wasn't.
There are two competing forces: on the one hand, there are meddling politicians and hidden socialists who don't want people to have company cars, but recognise they are an important part of the economy; and, on the other, you've got fleet users and individuals who want a better car. As they get more prosperous and want a more expensive and more comfy car with better features, they trade up. Our annual chart of the average capital cost of a car never goes down, and in my view, it never will.
The car industry has always been pushing itself to lower emissions, not because it's environmentally friendly, but because of competition. Ten years ago, the cars in our car park would have been less environmentally friendly and smaller.
The economic slowdown is impacting on the price of second-hand cars - we've seen it already in 2008. Normally, the strongest period for the market is the first quarter, but we've not seen that this year because consumers are not buying houses and some are not buying used cars. It's not as bad as the last recession, but the market will get softer still. Inflation is low, but for anyone who runs a car or shops at a supermarket, their bills are going up much quicker than inflation. Buying a car can be postponed, it's a discretionary purchase.
Will it be as bad as the last downward cycle? No, but it will be uncomfortable for 2008 and most of 2009. I'm planning for the worst rather than hoping it will all go away.
I do think the market will soften further through 2008, and 2009 will be tough. Does that mean price drops of 10% like in 2000? I bloody hope not, but we won't see more of the used car price inflation like we saw in 2006 and early 2007.
...Consolidation and acquisitions
I've said for a long time that the leasing industry will consolidate, and it is, but not quickly. Bigger companies are getting bigger, but there's still a long way to go.
Lex has 15% of the car and LCV market. The next biggest, we believe, has around 8%, so larger companies have still got the opportunity to grow their market share. But our primary interest is quality not quantity - we want to be the best, and if we're the biggest, then that's good. But, we want profitable growth focussed on the quality of what we do.
We've won big outsourcing contracts like Ford and HSBC, but the last time Lex made an acquisition was before my time in 1988 in a deal for 3000 cars. We like to grow organically. It's the best sort of growth - controlled and chosen by us. If you buy another company, you're buying its strengths, but also its weaknesses, and we've never demonstrated to ourselves that it's the best way of growing. We look - like everyone - but we're never convinced it's the right track to choose.
The overall market is growing at about 2-3% per year, so we're not going to be into double-digit growth. If we want to grow faster than that, we've got to win market share, and the way to do that is with great service.
From initial contact and integrating a client's business with your own, to doing what we've promised as well as adapting to a client's changing business - that's always been the Lex way, but customer needs are becoming wider. Ultimately, that will be more important than any acquisition deal. Acquisition is like taking steroids - there's a short-term boost, but it can also do longer-term damage.
Lex itself has gone through harder times and better times, and I'm never satisfied. I always think there are ways of doing things better, and sitting here with 15% of the market, I damn well know there's things we can do because we've not got 85% of the market.
We're not seeing any impact from 120g/km legislation. There has been a move to diesel, but that's stopped, and I don't see it going any further.
We've seen a growth in smaller cars with more spec and in larger cars with spec, but with the middle ground squeezed out - the growth of lower medium and supermini at the expense of upper medium.
We've started doing home working for a small number of people - eight or nine in Manchester - and it's working very well. Productivity has gone up and we want to expand it. In some roles - ones that require interaction with people - it's inappropriate, but if the cost of fuel keeps going up, it will be interesting to follow.