GM, Ford cut back on rental sales; Asians pick up the slack

DETROIT -- For decades, the rental-car market served as a security blanket for the Detroit 3. Weak sales month? Just dump some cars onto Enterprise or Avis lots to prop up the totals.

But over the past few years, General Motors and Ford Motor Co. have become less reliant on that profit-eroding habit, according to a review of industrywide rental sales data by Automotive News. Picking up the slack has been a mix of Asian automakers -- most notably Hyundai-Kia, and to a lesser extent Nissan and Toyota. American Honda's fleet business is negligible.

The chaos of often-sporadic bulk sales to rental companies distinguishes the rental market from the more predictable and profitable commercial and government segments of the fleet business.

For both GM and Ford, rentals account for a significantly smaller percentage of their overall U.S. sales volume than a few years ago -- 13.6 percent for GM through November this year vs. 18.6 percent for all of 2012, according to data from Bobit Business Media, publisher of the trade magazine Automotive Fleet. While still the top rental provider by volume, GM is the only automaker among the top seven to reduce its rental sales this year -- down 11 percent through November -- and company executives vow more of the same for 2016.

Ford's rental business likewise is downsized from years past, despite a 23 percent jump this year through November. Rentals accounted for 11 percent of Ford's sales through November vs. 15.4 percent for all of 2012.

For both companies, the shift reflects revitalized car lineups that are better able to compete with Asian rivals for retail customers. It also shows their reluctance simply to keep their factories running regardless of demand and a stronger emphasis on resale values and brand health, analysts say.

Hyundai-Kia's surge in rental business, meanwhile, coincides with a tough market for car sales. As consumer demand shifts to pickups, SUVs and crossovers amid lower gasoline prices, the market shares of the car-heavy Korean brands are under pressure, says Jessica Caldwell, an analyst for Edmunds.com.

Combined rental sales for Hyundai and Kia have risen each year since 2011, more than doubling over that period to about 237,000 vehicles through November this year, according to Bobit data. For Hyundai alone, rentals through November equaled 22.4 percent of overall sales vs. just 9.9 percent for all of 2012.

Hyundai and Kia "were on a roll following the financial crisis but have lost some momentum" as the Detroit 3 regained their footing, Caldwell says. "Anytime an automaker is under pressure to protect market share, it's tempting to count on the daily rental business to dial up more volume."

FCA US, the No. 2 rental provider in volume behind GM, has not throttled back as much as GM and Ford, the Bobit data show. Rentals accounted for 16.7 percent of overall FCA US sales through November this year, down from 21 percent for all of 2012. But unlike GM and Ford, FCA is on pace to sell more rentals this year than in 2012.

FCA's car lineup is improved with the redesigned Chrysler 200 and other recent entries. But it still lags rivals in an increasingly competitive car market, pressuring FCA to divert more cars to fleets to sustain production and sales volumes, analysts say.

Fiat Chrysler Automobiles CFO Richard Palmer acknowledged during a conference call with analysts last spring that FCA US' high rental mix -- about 77 percent of overall fleet sales -- hurts its profitability relative to Ford and GM because margins on rental sales are "significantly lower" than in the other fleet segments, commercial and government.

That's in contrast to Nissan North America. While it has increased rental unit sales in recent years -- up 20 percent between 2012 and this year's projected total -- that has coincided with broader growth across its commercial fleet business since introducing dedicated small and medium commercial vehicles.

For decades, the Detroit 3 dominated commercial and government fleet sales. That's partly because they built larger and heavier-duty types of vehicles suited for those fleet buyers.

Toyota Motor Sales U.S.A.'s rental sales have grown for three straight years and are on pace for close to 200,000 this year, up about a third from 2013. But that's still a relatively small fraction of its overall sales at around 8.2 percent.

GM has been the most explicit about its rationale for dialing back rentals: It's out to improve its brand health through better resale values, which is tough for an automaker to do if tens of thousands of rental cars are flooding the used-vehicle market each month. The approach has contributed to a rough year for GM's car sales, though: They were off 14 percent through November, by far the industry's biggest decliner in cars.

GM execs say they're willing to make the trade-off, though, as stout truck and crossover sales buoy profits.

"This is very deliberate because we want to build these brands," GM North America President Alan Batey said of the rental reduction during an investor conference in October. "We want to build these residual values, and we're really focused on quality of sale."