Detroit Auto Makers' Share Of Fleet Business At Risk

The U.S. fleet market is starting to stabilize, but domestic auto makers makers risk losing ground to overseas rivals in sales to rental companies and big corporate and government users.

The loss of retail market share to foreign-based auto makers over the past 30 years is well documented, but the decline in a fleet market that will account for 1 million vehicle sales this year is only now emerging.

General Motors Co., Ford Motor Co. (F) - which sold rental titan Hertz in 2005 - and Chrysler LLC have for years been pruning their exposure to what has traditionally been a lower margin business than retail sales.

But now fleet buyers are looking to reduce their exposure to Detroit companies at a time when those sales provide critical business to the auto makers in tough economic times.

GM and Ford executives, in recent conference calls to announce September sales, said they are looking forward to increased fleet business as the market picks up.

The fleet business, particularly to daily rental companies stung by a depressed travel industry, has fallen off in 2009. Rental companies are on track to buy around 1 million vehicles this year, down from 1.5 million in 2008 and 2 million traditionally, Manheim Auctions Chief Economist Tom Webb said.

As with retail sales, it remains unclear to what level sales will return when the market recovers. A full recovery appears unlikely, since many rental and fleet buyers - in what started as a money-saving move - have made a permanent shift toward keeping vehicles in service longer, resulting in less turnover.

Cars and trucks made by Japanese and Korean car companies such as Toyota Motor Corp. (7203.TO, TM) and Hyundai Motor Co. (005380.SE, HYMLY), already are comprising a larger share of the nation's vehicle fleets.

About 56% of vehicles in daily rental fleets are made by domestic auto makers, down from more than 80% in recent years, according to Manheim. Domestic sales are down as well to corporate and government fleets, which comprised 75% of those sales sales in 2008, down from 84% in 2006, according to National Association of Fleet Administrators.

The decline is caused in part by deep cuts this year by the three domestic manufacturers that forced fleet buyers to find vehicles elsewhere. Toyota Motor Corp. and Honda Motor Co. (7267.TO, HMC) also cut production. However, others, such as Hyundai, made smaller reductions while increasing sales to rental companies.

At the same time, rental car companies and, to a lesser extent, buyers of corporate and government fleet vehicles, are making a concerted effort to move away from domestic brand vehicles because of favorable financing terms and residual values boasted by some of Detroit's rivals.

Executives at Hertz Corp. (HRZ), the world's largest car rental firm, told investors last week the company wants to purchase more vehicles from Toyota and Nissan Motor Co. (7201.TO, NSANY) in 2010. The company expects to buy more import-brand luxury models as well, including cars from Toyota's Lexus and German manufacturers.

In part that's because rental car companies are able to get better financing rates when dealing with with investment grade companies, such as Toyota, Nissan and Honda, Hertz Chief Executive Mark Frissora said at an analysts' conference Oct. 1.

"Having a really good position with those people is very helpful in terms of fleet financing," he said.

Residual values, long a strength of Asian auto makers, have become a larger issue as well. As the retail auto industry has moved away from leasing, rental companies as well have begun to buy rather than lease vehicles. This means they, rather than manufacturers, must find buyers for the vehicles once they're out of service.

Image problems, overproduction and a tradition of deep discounting has driven down resale values of many Detroit-made nameplates over many years. While domestic companies have moved to reverse this trend, the companies still lag relative to Toyota, Honda and others.

The risk of lost sales comes just as Detroit's auto makers succeeded in making the fleet business a more profitable one, rather than just a dumping ground for unpopular or overproduced vehicles.

GM, notorious for excessive reliance on fleet sales, has reduced that dependence in recent years. The sales price of a car sold to a rental agency is now just $200 less than one sold to a retail customer, GM spokesman John McDonald said.

"Clearly, we are interested to hanging on to the daily rental business that we have," he said.

-By Sharon Terlep; 248-204-5532; [e-mail].