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Detroit loses its edge in rental car market

Rental car companies, once reliable customers of the Big Three, are buying more imports than domestic models.

July 22, 2009|Ken Bensinger

If you're renting a car this summer, chances are good that it won't be American.

For the first time, U.S. auto rental companies are buying more foreign vehicles than domestic brands.

Through the first six months this year, only 48.8% of the new vehicles going into rental fleets came from General Motors, Ford or Chrysler, compared with two-thirds a year earlier, according to data supplied by trade publication Automotive Fleet.

Just three years ago, more than 8 in 10 vehicles sold to rental fleets such as Hertz, Enterprise and Avis came from the Big Three. Now those lots are filling with models from Hyundai, Kia, Toyota and Nissan.

The dramatic turnabout is a reminder of how much ground domestic automakers have ceded to foreign competitors as the auto industry evolves. It also illustrates how rental companies, under new financial pressures, are getting choosier about what they put on their lots as they cut the overall number of vehicles they carry.

Agencies increasingly want cars their customers prefer rather than the cheapest vehicles available and, as important, ones that will hold their value over time. Meanwhile, manufacturers that scarcely bothered with fleet sales in the past now see them as an important sales channel as the traditional retail auto market flags.

The result is a recent predominance of foreign makes to choose from at rental counters.

"It's amazing how things turn around," said industry consultant Neil Abrams. "It used to be you'd never see foreign cars in fleets, but the companies reexamined their businesses and decided to embrace non-U.S. brands."

Hertz now carries as many Toyotas as Fords. The Nissan Altima has edged out the Chevy Impala as the top-selling car in the rental market. But the real shocker is the Koreans. Combined, automakers Kia and Hyundai grabbed a 9.5% share of the U.S. rental market last year, their highest total ever. They're on pace this year to more than double that.

"The American manufacturers are playing a smaller role," said Mike Kane, owner of Vehicle Replacement Consulting Group, which advises the rental industry on fleet management. "Somebody has to fill the gap."

For years, Detroit used rental fleets as dumping grounds for vehicles it couldn't otherwise sell. The car companies unloaded those vehicles to rental fleets at deep discounts, frequently with a promise to buy them back.

Many of those rental agencies were controlled by the carmakers themselves. Avis was partially owned by a unit of GM and had a marketing agreement to carry its cars. Hertz belonged to Ford. Dollar Thrifty was a unit of Chrysler, and as a result carried fleets almost entirely composed of the corporate parent's cars. All those rental firms were spun off as independent companies. But only in the last few years have they begun diversifying beyond a few vehicle brands.

In 2004, for example, U.S. automakers sold nearly 1.7 million cars -- or 19% of their total -- to rental fleets, with GM alone selling 850,000. The strategy helped the Big Three boost market share, but it was often a money loser. And because the cars were typically stripped-down versions, with crank windows and AM radios, they had the side effect of hurting brand image and reducing resale values as they hit the used-car market.

"For some models, we'd find ourselves selling 50% to 60% of our production into rental," said George Pipas, chief sales analyst at Ford, citing the last generation of the Taurus in particular. "That'll kill you."

Eager to break the habit, domestic automakers began trimming rental-fleet sales in the last few years as they retooled their sputtering operations. Their recent financial woes -- and bankruptcies -- have only increased the pressure to shed unprofitable business lines.

They have radically cut production, cracking the door wider for foreign brands to sell to fleets. Chrysler, for example, said this month that its June sales to all fleets, including rental companies, declined 95% compared with a year earlier. Both GM and Ford said their fleet sales have been below target, and they hope to recapture some of the market share they've lost.

"Automakers are now trying to sell to rental fleets like they do to the overall market," said Chris Brown, editor of Auto Rental News, adding that U.S. automakers have slashed discounts on rental sales.

Yet higher prices have made Detroit's products less attractive to rental companies, which are holding cars longer and placing more emphasis on how much vehicles command on the used market.

That metric -- residual value -- is an area in which imports hold a decisive edge.

Over the last three years, residuals for Hyundai and Kia rose sharply -- up 12% and 8%, respectively. That's more than any other brand, according to Automotive Lease Guide Inc., which sets those values.

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