“It was the best medicine this industry has ever had because that lack of car supply and inventory did one amazing thing,” Lowden said. “It triggered an incredible position where the supply of vehicles was restricted, and what we saw coming out of the back of that was residual values going up. So suddenly, a car was a very valuable asset to have your hands on. We saw our RPD (revenue per day) go up. We had just won the lottery as an industry. What made us succeed was the limited supply of vehicles.”
With fleet levels and OEM supply reaching more normalized levels by 2024, the rental car industry now faces a different market scene, he said. Price points in rental fleet-heavy locations such as Orlando and Miami, Florida, are returning to pre-pandemic levels.
The resurgent post-pandemic travel demand, but a flatter customer flow last year, has led to too many cars, brokers, and rental brands competing for inventory, he said. That results in a lower level of customer service, underscoring that reduced supply leads to more rental car profitability.
Leveling the Rental Car Market Down
When Chinese OEMs enter the market, it creates the opposite effect and drives down the costs of rental fleet vehicles and rental rates for customers, Lowden said.
“It’s a proven fact that when people rent a vehicle that they’ve not experienced before, it is a free demonstration vehicle for that OEM, and it’s a quick way to get brand recognition wherever that vehicle comes into market,” said Lowden, alluding to the strong motives for Chinese OEMs.
Even tariffs cannot fully deter the Chinese vehicles because they are mostly set at 5% to 15% levels among most importing nations, and still low enough for Chinese OEMs to factor them into the prices of their still-cheaper vehicles, Lowden said.
“Ultimately, the absorbed tariff still leaves the car probably at a 50% lower price point than competitive cars in the marketplace.”
As customers engage with the Chinese vehicles, “they love this product, because what’s not to love about it?” Lowden asked. “They’ve accepted the Korean product. They’ve accepted the Japanese product. Why should they not accept the Chinese product because these cars are high quality in technology?”
Such a scenario, where Chinese vehicles are rapidly moving into automotive markets, can dilute the financial strength of rental car markets. “We must remain vigilant and keep our eyes wide open as this happens. The revenue will start to collapse because we have too many cars in our fleets.”
With few or flat numbers of customers in markets such as Florida, the car rental prices dive down, Lowden said. “Not only do we see a collapse in revenue, but the quality and service follow very quickly. We drag the industry into a bad place where we cannot be trusted.”
Lessons Can Inform New Strategies
One way for rental car operators to navigate this challenge is to learn the lessons of the recent past, Lowden said. The tariff picture will constrain fleet vehicle supply in the short term as various OEMs adjust or reduce export and production levels.
“There is now a short-term vehicle supply crisis for our sector here in the U.S.,” Lowden said. “This is not good unless we manage it correctly. Be aware that for the next few months, maybe longer, that the fleets you’ve got in the U.S. market could be the fleets you run for the foreseeable future. Let’s try and learn from the pandemic and start getting those rates to a level that allows us to operate profitably and deliver great service to our customers.”
Looking ahead, the rental vehicle supply and rental car markets are reshaping how companies operate, Lowden said.
The U.S. is a comparatively isolated marketplace, and if it only depended on domestic-built vehicles, the rental fleet sector would lack enough supply since American OEMs would prefer to sell their cars to retail and corporate buyers first, Lowden said.
“Utopia is not protectionist markets. It doesn’t work. You need market forces to come into place for the industry.”
Lowden advised that Chinese OEMs eventually would find a way to enter the U.S. market, however indirect it may be. They already have built plants in Mexico that produce their vehicles, and depending on future trade outcomes, could eventually open plants in the U.S.
“That’s probably where this will end up, with American jobs and American-built products, but Chinese technology and cost points. The landscape will change, and we have to work our way through it. To adapt, you’ve got to look at residual values, the price point of vehicles coming into the market, and most importantly, see if the Chinese OEMs can become an option for you based on their ability to support your business: Do they have a dealership network? Service centers in place? A parts inventory available to you as a business? Because if they don’t, then you have a serious issue.”
In purchasing any Chinese vehicles, rental car operators will need heavy upfront discounting to manage future residual values at the end of the holding cycle, Lowden said.
“They are an unknown entity at this point. Keep eyes wide open on this. Think about how these vehicles would come into your fleets, how you manage the wider vehicle piece, and make sure you have the right partnerships. Choose the right OEM. Let’s see what they can do.”
A Reality Check for Chinese OEMs
During a follow up Q&A after the keynote, one Brazilian rental car operator Jorge Pontual reported BYD now makes 70% of all electric vehicles in Brazil, but the country lacks enough adequate charging infrastructure to make them appealing to customers. That has boosted the domestic market for hybrid vehicles.
“These Chinese manufacturers are not worried about making money. They are worried about leading the market,” the operator said. “So, when a Chinese company comes to Brazil, and they go to our consultants asking what they think about the market and what are the chances to sell cars, the first thing we ask them is. . .. How much money do you want to lose in this market in the first five years? If they say they want to make money, we tell them they better pack their bags and go back because you won’t make money in the first five years.”
