Published on the Bangkok Post on 2nd September 2011
Krungthai Car Rent & Lease Plc (KCAR) for two decades has provided vehicles for rent to consumers and organisations such as public agencies, state enterprises and private companies. It currently has a fleet of more than 3,000 rental vehicles and its own network of service centres throughout the country. Director Pichit Chantarasereekul discusses the company’s strategy and outlook.
What is KCAR’s business model?
KCAR currently operates three main businesses: vehicle operating lease contracts for individuals and companies on both long- (more than one year) and short-term (less than one year) leases; vehicle repair garages to support our lease business; and a used-car dealership under the Toyota Sure brand name.
For the used-car business, we sell all brands and vehicle types, even though this is under the Toyota Sure branding, and currently sell about 1,800 units a year, making us the largest used-car dealer.
What portion of vehicles are short-term rentals versus long-term leases?
Currently we have a fleet size of around 6,200 vehicles and we derive about 95% of our income from long-term operating leases, meaning leases from one to five years. In the past, these clients used to be multinational companies, but we have seen an increasing trend in Thai SMEs using operating leases for their operations as well. To differentiate ourselves in the market, we also provide our clients with more options in terms of lease duration, even for new-car models.
What percentage of revenue and net profit do second-hand car sales represent?
In terms of revenue, used-car sales represent a little more than 50% of our total revenue, as these are booked as one-time revenue when the vehicle is sold. It is of interest to highlight that in the past, our used-car dealership subsidiary booked only the commissions when they sold a vehicle from KCAR’s own fleet. However, starting this year, the subsidiary will need to book all sales revenue in its profit-and-loss statement, due to a change in accounting standards. Hence, we will see the revenue contribution slowly increase in the future. But the net profit contribution from used-car sales is only 14-16% of our total profit.
How does KCAR deal with the increasing interest rate trend? Does it affect the financing of the car fleet?
We are quite conservative in our operating philosophy. First of all, we usually fix the interest rate for the vehicle loan to match the tenure to the lease period for the same vehicle. In addition, we monitor the interest rates very closely and adjust our operating lease contracts every month when we send proposals to our customers. We also encourage customers to avoid operating leases beyond three years as the costs tend to increase, especially in terms of unscheduled replacements when the cars break down, so this allows us to manage our risk better.
With the new government, does KCAR expect an increase in industry growth?
Yes, we think so, due to the improved sentiment and mood among our customers. With political stability comes confidence, which enables not just companies but also individuals to spend and invest in new cars.
In addition, we also benefit from the increasing trend for companies to outsource and use operating leases to improve their capital efficiency by not locking up their capital.
What differentiates KCAR from its competitors?
First of all, most of our customers view this as a financing business, whereas we consider it a service business, as finance is just one part of the entire value chain.
The other area where we differentiate is our business model, in the sense that we do not need to rely on a third-party used-car dealer. Furthermore, we have very close relationships with new-car dealers, enabling us to get better rates when we purchase our new-car fleet.
I think, above all, we view and treat all our suppliers as our business partners. This approach encourages them to go the extra mile for our customers. As I mentioned earlier, our philosophy is that we’re a service business, not a financing business.
What are the biggest risks facing your business today?
Our biggest risk lies in our ability to correctly anticipate customer preferences, as we will only know if the lease contract is profitable or not at the point when we resell the used car. Hence, we need to be able to control this risk by operating our own used-car dealership on a significant scale. Even if the used car is well maintained, if it cannot be resold at a meaningful price it will affect the profitability of our operating business.
Where do you see KCAR five years from now?
As we continue to expand our operating lease and used-car dealership business, we see a lot of opportunities to grow into related and associated businesses to support our existing ones. But if we do, we need to ensure that it is of a significant scale for us to participate and benefit in a meaningful manner. Otherwise, it’s better for us to continue working with our existing partners and suppliers to build and improve the “ecosystem” to support our business.