China may be closing the gap on US car sales, but the US is forecast to remain the largest light vehicle market in the world in 2013. Data from the Scotiabank global auto report forecasts that in 2013, light vehicle sales in the US will grow by around 7.6% from 14.4 million in 2012 to 15.5m, compared with some 15.15m in China.

Of the 2012 14.4 million total, around 15% are business cars according to Michael Kasuba, vice president of research for North America, JATO Dynamics; with cars accounting for around 2,044,222 sales in the business sector. The total depends on how you define the sector and Bill Robinson, International vice president at Wheels Inc, reckons the commercial fleet sector is only 5-7% of the overall market. Either way, in percentage terms this is considerably less than the leading fleet markets in Europe.

American business car operators tend to be loyal buyers of their home products. According to JATO’s Kasuba, Chevrolet took 21% of the business car sector in 2012 with 439,508 vehicles and of these, the Impala was responsible for 6% of sales. Ford was close behind with a 20% share, representing some 420,576 vehicles of which the Escape took 3% of sales. The make-up of the business sector sees sedans as the preferred business vehicle with 49% of the market and SUVs accounting for 23%, according to JATO.

Bill Robinson at Wheels Inc, ALD Automotive’s partner in the US, has a slightly different take on which manufacturer dominates the business sector, but as we have said, it depends on how the sector is defined.

‘One of the things that we have seen in the last year is that Ford in the United States has taken a commanding lead in the commercial fleet market,’ he says. ‘It’s not like Ford is edging out GM and Chrysler, Ford is far and away leading the market.

‘It comes down to the fact that in the United States, vehicles are awarded based on business need. It is not a "user chooser" market. The way that the vehicles are selected is whoever has responsibility for the fleet at the corporation determines which vehicles will be acceptable for each class of driver, and then those drivers are allowed to pick – sometimes the only thing they’re allowed to do is pick the colour, or maybe some options. In particular the Ford Fusion (Ford Mondeo in Europe) has become the vehicle of choice in the US market.

‘We order about 60,000 vehicles a year at Wheels and we serve primarily the large corporate fleets and Ford’s share of those orders in the current model year is overwhelming. It’s over 40%.’

Bill Robinson has observed another trend too: ‘When I started in this industry 15 years ago, well over 90% of our vehicle orders were from what we call the "Big Three", the US domestic manufacturers, Ford, GM and Chrysler. In the last five years, since the financial crisis, foreign makes have made significant inroads into the fleet business. The foreign makes are not 25% of the market, but they are 10-15% and they used to be much less than that. The companies that have done well include Subaru, Toyota was doing well until they had some of their quality problems, Nissan is making inroads and Volkswagen has invested in the United States. The company has just put a big plant in Tennessee and they are making the Passat here. Volkswagen – and to a certain extent Audi – are beginning to make some inroads in the US market.’

Cost control has had an effect on the kind of vehicles that are being chosen for business use, as Bill Robinson indicates, ‘We’re seeing a renewed effort around finding vehicles that are the appropriate fit for the business use. The laser like focus on reducing cost has finally made US companies begin to look at smaller vehicles.

‘I know Europeans did this many, many years ago but we’re seeing vehicles go from eight-cylinder engines down to six and from six-cylinders down to four, all as part of efforts to improve fuel economy and reduce emissions. It has been a win-win because not only do they save on fuel costs, but those vehicles are generally less expensive than the vehicles they were using before.

‘I would argue that that will continue as long as our prices stay high relative to what they have been in the past.’

Business vehicle taxation does not really differ from retail sale vehicle taxes in the US. ‘There is no real difference between taxes purchased by the individual as opposed to a business. There is no federal tax, but local state sales tax differs state to state,’ says JATO Dynamics’ Michael Kasuba.

‘Part of the reason why our model is so different from the European model is there is very little difference from a tax basis. There is no favourable taxation of vehicles as opposed to compensation. They are all taxed at the same level,’ says Bill Robinson of Wheels.

‘If you are awarded a company car, you have to pay tax on the personal use of that vehicle, but that is determined by your income.’

The most popular financing method, at least for larger fleets is through leasing, says Bill Robinson: ‘Companies almost always use the leasing structure and get the financing from the fleet management company.

‘One of the trends that is beginning to happen, or that companies are beginning to consider, is coming from US companies in particular that are sitting on a tremendous amount of cash. They have no place to put it. So some of our customers have begun to work out situations where they are either purchasing the vehicles themselves and utilising their own capital rather than paying a financing rate, or they still lease the vehicles from us but they provide the funding to us to purchase the vehicles. It is not common at all for people to do finance leases. The North American model is for what we call an open end or TRAC lease, where TRAC stands for Terminal Rent Adjustment Clause.’ This is a form of operating lease.

Bill Robinson explains: ‘Both the US and Canada are incredibly transparent. You pay for things as you use them, so when you have a lease, there is no time limit, or mileage limit. You can drive it as long as you want and as far as you want. It’s just like making a mortgage payment on a house. If we buy a vehicle for $20,000, part of their payment is a depreciation reserve payment each month and we apply that to the vehicle and then when they sell the vehicle, if the book value on it is say $5,000 and we take it and sell it for the client and we get $5,000, then everything’s great. If we get $7,000 for the vehicle, the client gets all the benefit, the extra $2,000. On the other side, if we sell it for $4,000 and the book value is $5,000, then our final bill to them is for an additional $1,000.

‘Our margins in the open-end market are much lower than they are in the European market, but that is appropriate because in Europe, the fleet management companies are taking all of that risk and we have very low risk. We have a maintenance service, but it’s a very small fee that we charge on a monthly basis to manage that maintenance and if a client has a transmission service and it costs $105, we bill them $105, so they pay the actual cost of maintenance, so we’re not taking any risk on maintenance, we don’t take risk on residual value, we don’t even take risk on financing because most of our clients choose a floating interest rate, so that interest will float month to month depending on market indices.’

Could that model be introduced in other parts of the world? Bill Robinson thinks so, under the right circumstances.

‘If the sourcing people who are based in the United States end up becoming responsible for global fleet, we think that they will drive that model to other markets. We argue that it’s not a particularly good way to manage fleet in a market where the primary benefit that fleet vehicles provide is compensation. So we don’t think it’s a particularly good model for the European market, but we see US companies doing that, in particular the pharmaceutical companies.’

Looking ahead, Michael Kasuba at JATO thinks that business sector cars in the US will stay at a similar level. He points out that over the past five years, the sector has taken around 13% of the total car market.

‘Prior to the great recession, some OEMs were overly reliant on fleet sales to stimulate revenue and ensure production efficiencies at the expense of profitability. This was particularly true with models that weren’t selling quickly. The result was lower overall profit margins for OEMs, which contributed to overall financial issues.

‘Today, fleet sales are an important lever in a carmaker’s overall strategy to sell vehicles. Fleet sales provide a consistent revenue stream and help car companies achieve steady production levels. With pent up vehicle demand pushing new vehicle sales higher, fleet orders, particularly with government or business buyers, help strengthen revenue gains without sacrificing profitability as they once did.

‘In the next five years, I expect business vehicle sales in the US to grow in line with new vehicle sales as pent-up demand stimulates growth both with consumers as well as with commercial buyers who must contend with ageing fleets.’

‘We’re seeing evidence that we’re beginning to see our clients grow again,’ says Bill Robinson at Wheels. ‘So we’re seeing some growth in the fleet that way.’

‘In the US, frankly, our clients costs for vehicles have not gone up for 10 years,’ he says. ‘Even with the cost of fuel going up as dramatically as it has, funding has come down so much – financing is so inexpensive now and that has made up for the increase in the cost of fuel. Vehicles are better made in the US than they used to be, so the cost of maintenance has actually gone down, even though individual maintenance items have gone up. The frequency for maintenance has gone down pretty dramatically. Customers are keeping their vehicles for longer; they used to turn their vehicles between two and three years, now it’s much closer to four and for some of our clients beyond four years. All those things working together have kept costs stable over the last 10 years. We now think that costs are going to go up.’