Raising the Bar: Shifting Global Leasing Markets Point to Places for Expansion

by The Alta Group

The Alta Group is the leading global consultancy dedicated exclusively to the business of equipment leasing and asset finance. Since 1992, Alta has represented equipment leasing and finance companies, financial institutions, manufacturers and service providers, offering management consulting and expertise in global market entry, vendor and captive finance, professional development, legal services, asset management, mergers and acquisitions, and digital business transformations.

Global economic and political changes are affecting equipment leasing and finance markets in diverse geographies. In our interconnected economy, it pays to understand what is happening globally and to look at emerging opportunities.

The Alta Group tapped four of its consultants working with organizations in regions outside the U.S. to offer insights. There are interesting developments underway in global markets, including specific sectors and geographies, that offer potential expansion targets.

In the regions you cover, what changes are having the greatest impact on equipment leasing? 

Rafael Castillo-Triana (Latin America): There is a pendular movement between the extremes of globalization, which we lived through in the 1990s and early 2000s. A domestic introspection that started with the 2008 financial crisis and has been reinforced by the trade wars that the Trump administration is fueling.

As a result, U.S. leasing companies have lost their leadership role in Latin America and other emerging markets to players from Europe and Asia, in particular Japan, and to the indigenous Latin American groups that have become multinationals. In the equipment vendor space, former U.S. leaders are being displaced by Chinese, Japanese, German and Korean competitors. The same is happening in the global IT market. Clearly in the automotive industry, the “Big Three” are no longer leaders from a global perspective.

The upshot may be when the pendulum in the U.S. moves back into globalization, and perhaps more mature globalization, U.S. banks, captives and independents that don’t enter Latin American markets soon may notice that they cannot recover the fields they abandoned.

Rafael Castillo-Triana  CEO, Latin America, The Alta Group
Rafael Castillo-Triana, CEO, Latin America, The Alta Group
Richard Ryan  Partner, Invigors EMEA
Richard Ryan, Partner, Invigors EMEA

Richard Ryan (Europe): Populist policies being enacted within Europe and on a more global scale are having a negative impact on trade and business and consumer confidence. While not directly involved in the trade war between the U.S. and China, Europe is experiencing some collateral damage that is dampening demand for exports. This is of particular concern to high exporting economies, such as Germany.

At a local level, Brexit is having a negative effect, not just on the UK but also on the major Western European economies that trade with the UK the most. The political paralysis within the government and the prospect of leaving the EU without a deal has hammered the pound sterling and business confidence. Growth in business investment in the UK was already negative and has been so for the past three quarters.

The key takeaway is that political turmoil will continue for the foreseeable future, which will negatively affect the UK and European business environment.

Hugh Swandel (Canada): Canada is facing multiple domestic and international influences that have and will continue to affect the commercial equipment finance community. Global trade actions by the U.S. have caused uncertainty among Canadian and U.S. businesses, and this is leading to a slowing in the economy.

Global oil and gas pricing fluctuations continue to stall the Canadian industry’s recovery. Low prices have reduced exploration and drilling investment, which has reduced the significant historic contribution of the oil and gas sector to the Canadian GDP.

Canada is also facing a federal election which has the potential to change the political leadership of the nation. The pending election is an additional driver of spending hesitation among the Canadian business community.

In the U.S., we are expecting slower growth and a possible recession in a year or two. How are economic conditions affecting the demand for leasing in your regions?

Castillo-Triana: The U.S. continues as the world’s largest economy and certainly a recession would have an impact across the rest of the world. However, areas such as Latin America are better prepared today because they managed to diversify their economies, and China is becoming the largest trading partner of most Latin American as well as African countries.

Latin America’s leasing industry is growing five times the rate of the overall economy, based on the most recent figures available. Standouts include Mexico, which held 32% of the leasing market share in the region and grew 42% from the previous year, and Colombia, with 24% of regional market share and 16% annual growth. The industry has also been expanding in Chile and is coming back in Brazil. Argentina has been experiencing some growth and strong leadership but also faces macroeconomic headwinds.

Ryan: Despite sluggish growth in GDP and investment, the European market for vehicle and equipment finance has been much more buoyant. Growth in new business volumes has been around 10% per annum since 2014, though this appears to have dipped to 7.5% last year. The outlook is for growth to continue at 5% to 5.5% this year and 6% to 7% for 2020 and 2021.

Growth in new business volumes has been fueled by a surfeit of liquidity. Despite the ECB and national central banks reining in their quantitative easing programs, there is no shortage of “cheap money,” with interest rates remaining at historic lows. Consequently, there is intense competition for new business, which is reflected in low rates, pressure on margins and some indications of increases in credit risk and bad debt.

Growth varies significantly in different countries. Some mature markets, including Germany, Denmark and Norway, are growing at less than 5% per annum, while most Eastern Europe markets have shown growth of 10% to20% or even more than 20% in Poland and Bulgaria. Poland is the largest leasing market in Eastern Europe and likely to continue growing.

Swandel: The CFLA/PayNet Canadian Equipment Lending Index has seen consistent year-over-year declines for 20 months but with recent month-over-month increase in demand. There is slow but stable economic growth.

What opportunities do you see in the geographies you cover for U.S. businesses?

Castillo-Triana: The U.S. is still the global leader in technology, and that encompasses information and telecommunications technology and all the foundations of digital transformation. Traditional industries that were manufacturing-only, such as agricultural, construction equipment and auto manufacturing, could seize large opportunities if they shift (as some are doing) into digital-based value propositions. Some examples are the initiatives led by GM in ride-sharing applications, electric and autonomous vehicles. If well deployed, and with a leasing strategy, these initiatives could offer great opportunities.

Another opportunity could be for Apple. In our Alta LAR 100 database, we identified smart phones as being among the three most imported assets into Latin American markets. The iPhone has been the leader, but there is no smart phone lease financing, and this gap is being filled by other players that are gaining market share at the expense of Apple.

In the Middle East and Africa, there are also many opportunities. If you look at the map of the IMF’s World Economic Outlook, the outliers in economic growth are mainly located in Africa. The Middle East also has great resources and, although it is currently in the middle of a conflict zone, it needs to migrate into leasing to fuel economic development. One example is the Saudi Arabia 2030 vision, and there are many other areas of interest.

From the Latin American side, multilateral institutions have called on us to transfer the knowledge gained in emerging equipment financing markets here that have more maturity than those prevailing in the Middle East and Africa. In the last six years, we have participated in gatherings where we have shared our expertise with key players.

Hans Geusen  Senior Consultant, Invigors EMEA
Hans Geusen, Senior Consultant, Invigors EMEA
Hugh Swandel  Senior Managing Director, Canada, The Alta Group
Hugh Swandel, Senior Managing Director, Canada, The Alta Group

Hans Geijsen (Middle East and Africa): The Middle East and Africa have a lease potential of more than $100 billion, according to an analysis by the World Bank Group. However, many countries still lack a sufficient knowledge of leasing to realize its benefits and do not have adequate regulations and laws in place to make banks and other financial institutions sufficiently comfortable to offer leasing. Typically, more traditional forms of finance, like loans, are preferred.

Because of this, Alta’s Invigors EMEA and Latin American regions have organized the Lease Conference Istanbul 2019 for Central and Eastern Europe, the Middle East and Africa in Istanbul in November. Our goal is to raise the profile of leasing and make banks, financial institutions, manufacturers and suppliers aware of its benefits, current trends and developments.

Ryan: Many fast-growing markets, such as Poland and others in Eastern Europe, are relatively immature with opportunities for further penetration. Whether through vendor programs or direct lending, a strong local partner is key to success.

At a sector level, equipment finance is now the prime driver of growth in the European leasing market. Vehicle leasing is no longer the fastest growing sector mainly due to the impact of new emissions standards, which came into effect in 2018. Manufacturers and consumers are taking time to adjust to these.

IT equipment leasing has been particularly buoyant in Europe, which is interesting given the general move to the cloud and “everything-as-a-service.” One would expect this to suppress demand for asset finance. This has not been the case, with several players active in the market. Independent specialist finance providers that offer full-lifecycle IT management solutions have been particularly successful.

Swandel: U.S. investment into Canada has been hurt by the tariffs previously imposed on Canadian steel and on other goods. The U.S.-Mexico-Canada trade agreement is expected to improve opportunities for the U.S. in Canada.

Rafael, you are involved in leasing initiatives in developing countries worldwide, most recently in Afghanistan. Do you see opportunities there? 

Castillo-Triana: The answer is yes, but a reality check forces me to acknowledge that international expansion does not seem to be on the list of strategic priorities of most U.S. lessors nowadays. One of the areas where I love to work is in post-conflict countries. I did it for the U.S. government in the former Republic of Georgia between 2011 and 2014, and, in part, thanks to my small contribution, the leasing industry grew six times to what it is today.

Afghanistan has a more troubled history, but it has a young population that wants to achieve the dream of entrepreneurship with access to capital equipment. I would love for some U.S. businesses to share that vision. But right now, I see more action and interest in Europe and Asia. •

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