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Why are rental cars American cars?
Our new hire at GMU, Ilia Rainer, posed this question over lunch yesterday. Why don't rental car companies use the superior Japanese product? Our group came up with a few hypotheses:
1. Rental car drivers consume patriotism by using the American product. Often a third party, such as a corporation, is picking up the bill. Rental car companies don't want a "foreign" image.
2. Rental cars are (and must be) well taken care of by Hertz and others. Japanese cars perform better when maintenance is low, but with plenty of care American cars do just fine.
3. Here is a variant on #2: Rental cars have higher value on the resale market than regular used cars, given that they are well taken care of. This boosts the value of U.S. cars relative to Japanese cars, since Japanese cars will hold up anyway.
4. The fraud problem in the auto repair market is severe. If you can fix your cars yourself, at marginal cost, U.S. autos are a fine buy.
5. U.S. cars are more comfortable for long drives, which makes them better suited for the rental market. They are also better for "nature driving" out west. Japanese cars are better for daily commutes, urban driving, and stop-and-go driving, which are more likely found in your daily life and less likely relevant for the rental market.
But surely you can do better. Your thoughts? Comments are open.
Posted by Tyler Cowen on November 30, 2005 at 07:07 AM in Economics | Permalink
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Comments
the real answer is quite likely to turn on a detail of willingness to provide vendor financing.
Posted by: dsquared at Nov 30, 2005 7:56:06 AM
How 'bout a simple answer? American cars are cheaper. And when you buy several hundred thousand of them every year, having a rental fleet of American cars is less expensive than a comparable Japanese fleet.
For a rental car, the maintenance frequency and cost will be the same whether it's a Japanese or American car. So overall, an American fleet is cheaper.
On top of that, American cars have higher gas consumption. And gee, where do rental companies make most of their money?
Posted by: Noshua Watson at Nov 30, 2005 8:00:36 AM
Don't the Big Three own several car rental companies? Wouldn't they then want to stock the inventory of those companies with their brands, thus increasing revenues, brand presence on the road, and their rank in terms of auto sales?
Posted by: Anne Bielawski at Nov 30, 2005 8:08:00 AM
The premise of the question is false. Depending on the model year, sometimes American cars and sometimes foreign cars make big sales to rental car companies.
A few years ago, when we were buying a used car from a rental company, the man selling us the car said, "Next year, you should come back and we'll sell you a Toyota. Toyota made a big push to be the number one car company in America this year, and they gave our rental company a good deal on the cars."
Rental companies try to negotiate all-or-nothing fleet deals with car companies. They say to car companies, "we're buying X thousand cars this year. We'll buy all of them from you, or else all of them from another manufacturer. What can you do for us?"
So, if rental cars companies have mostly American cars, it's because the American car companies wanted the business more in that particular year.
Posted by: Arnold Kling at Nov 30, 2005 8:28:20 AM
//Rental cars are (and must be) well taken care of by Hertz and others//
I had a summer job back in college with one of the big rental firms. The cars are not well maintained at all. The reason you rarely see a rental car with high mileage is that the rental companies drive them into the ground for the first two years with no preventative maintenance, then dump them on the used car market before the lack of maintenance starts to cost real dollars.
Posted by: COD at Nov 30, 2005 8:29:22 AM
Aren't Japanese cars stolen at a higher rate than American cars?
Although I imagine rental cars are stolen at a higher rate than
personally owned cars. But, when was the last time you rented a
Honda Accord? And I'm always shocked when people buy used rental cars.
As the old joke goes: What's the difference between and SUV and a
rental? There are some places you can't take an SUV.
Posted by: Kevin F. at Nov 30, 2005 8:34:08 AM
I would suggest two reasons. First, for the length of time that rental agencies keep their cars, repair frequencies are low for almost all cars -- reliability differences become much greater over several years. Secondly, I believe U.S. manufacturers are the ones with excess capacity, high fixed costs, and union contracts with no-layoff guarantees, so they've have been much more willing to make fleet sales at or near cost just to keep factories running as close to capacity as possible. Most Japanese companies, on the other hand, do not have excess manufacturing capacity in the U.S. (not only because their vehicles are in greater demand, but also because their factories are more flexible in being able to build multiple vehicles and adjust the mix as necessary).
I believe that U.S. manufacturers have tried to back off on the fleet sales at various times, not so much because of the finances of the fleet sales themselves, but because they're worried about their vehicles being saddled with a 'rental mule' image. GM tried to finesse this recently by keeping an old model (the 'Malibu Classic') in production for a couple of extra years as a fleet vehicle only.
Posted by: Slocum at Nov 30, 2005 8:35:12 AM
The last car I rented in Denver was a Toyota.
Posted by: Barry P. at Nov 30, 2005 8:39:51 AM
Anne Bielawski is on the right track (see http://ils.unc.edu/~viles/172i/users/big/docs/AP881101-0210 - old link, but it'll give a good summary of how interconnected the two industries are.) For the companies in which they do not have an ownership stake, U.S. automakers offer substantial volume discounts to the rental car companies, since they tend to make large, regular fleet purchases.
Another factor influencing the U.S. automakers "motivation" to offer large discounts to the rental car companies are the government-imposed CAFE fuel economy standards for vehicles produced in the U.S. Most of what the rental car companies buy are small cars, which have better fuel economy ratings. These sales increase the auto manufacturers overall average fuel economy for the vehicles they produce and allow them to offset the sales of less fuel efficient vehicles that ordinary consumers have preferred in recent years.
Posted by: Ironman at Nov 30, 2005 8:40:09 AM
Is #3 true? I thought that rental cars were often driven harder, picking up more wear than the mythical "used car that was only driven on sundays by a grandmother going 3 blocks to church." [I ask this out of curiosity, not argument -- maybe I should change my car buying strategies].
If the overall premise here is true, I suspect it is due to car-size tradeoffs. I have frequently rented small Japanese cars when I was looking for ultra-cheap rentals. It is surprising that rental car companies would use Japanese cars for small sizes, and American for SUV's?
Posted by: DK at Nov 30, 2005 8:50:11 AM
What types of cars to rental car companies in Japan, Germany, etc offer?
Posted by: Scott Wood at Nov 30, 2005 8:53:16 AM
Hi -
First: volume discounts and delivery schedules. Sales to rental companies can be set so that you sell the cars at break-even. Then all of your regular sales are pure profit, allowing serious discounting if need be. It's all in the volume. Sell 250,000 cars to cover your costs and every car you make above and beyond that is profit. If you expect to sell 400,000 of a certain model, that is an enormous incentive to price aggressively.
Second: captive markets. Auto makers buy rental companies and then sell to them. There's not gonna be much incentive to buy someone else's cars.
Third: the first point I make here is also true for Europe. VW and Opel and their subsidiaries are very, very big in the rental markets.
John
Posted by: John F. Opie at Nov 30, 2005 9:05:49 AM
American car companies know how to give the best kickbacks baby! That's all you need to
Posted by: Killer at Nov 30, 2005 9:19:37 AM
Ford owns Hertz, last I heard. I suspect the other Automotive companies have interests in rentals. Even if a place only has american cars it's never Ford & GM - always one or the other.
Posted by: eggroid at Nov 30, 2005 9:31:41 AM
All of the above certainly seem plausible. All I know is that every time I rent a car and get a Chrysler Intrepid or a Pontiac Sunfire or some other Detroit built crap-mobile, I just want to scream. American cars just shout out lousy design and engineering from every orifice. As far as renting in other countries goes, I've had an Opel (GM), Renault, Volkswagon and Nissan in Germany, Spain, Ireland and South Africa respectively.
Posted by: ramster at Nov 30, 2005 9:34:57 AM
I think that ann's got it. Rental cars *may* be driven harder than regular cars (personally, I think that this is a dubious premise), but they also get more maintenance than regular cars. My wife and I bought a used Hertz car a few years back (a Mazda, by the way), and it did have a relatively large number of miles for its age (they get retired when they hit 1 year/30,000 miles), but it's been flawless since.
Incidentally, carfax prints a little text when a car shows up as being a rental indicating that rental cars get better than average maintenance.
Posted by: don Hosek at Nov 30, 2005 9:38:45 AM
I rented a Subaru outback in Portland recently.
Posted by: Mr. Econotarian at Nov 30, 2005 9:50:38 AM
I assumed it was juts because the US auto manufacturers owned the big rental agencies. ;-)
Chris
Posted by: Chris Meisenzahl at Nov 30, 2005 10:00:27 AM
Some of your are close but all of you are wrong. Here are the reasons there are more American rental cars than Japanese:
1.) American car companies need to sell more cars to rental car companies because they need to keep their factories producing cars regardless of consumer demand.
2.) Honda, as a company policy, does not sell any cars to the rental fleets, taking away the second largest Japanese manufacturer.
3.) Rental cars actually hurt resale values. First, they create a glut of vehicles at certain times of the year (i.e. the fall). Second, they have traditionally been poorly equipped (i.e. no power windows). The manufacturers have been taking steps to even out the return process and better equip these cars, but challenges remain. Also, though people know rental cars are better maintained, they also believe them to be more abused than other cars.
4.) Fleet sales are based on a percentage of total sales for many manufacturers. Therefore, a company like Kia will sell 10 percent of its cars to rental car companies, but Kia's total volumes are very low, so there are fewer Kias to rent. People overestimate how large the sales volumes are for most foreign manufacturers. Nissan, the third largest Japanese manufacturer, only recently topped 1 million U.S. sales. That may seem like a big number, but it's only 1/17 of the total market.
5.) No manufacturer currently owns a rental car company, with Ford recently spinning off Hertz. However, there are many close ties based on legacies of ownership (Chrysler and Dollar-Thrifty for example).
Posted by: Ted Craig at Nov 30, 2005 10:15:53 AM
Anne is right. It's because U.S. automakers have historically owned the major rental companies.
Posted by: PJ Doland at Nov 30, 2005 10:31:54 AM
The Ford Focus I rented in Virginia a few years back was the *least* comfortable car I have ever driven for *any* distance. In Spain, I rented a turbodiesel Seat from Hertz (I think VW owns Seat), so if the Big 3 own those companies, they aren't doing a very good job protecting themselves in Europe (Ford has a direct presence and GM has a presence through subsidiaries like Opal).
I think Slocum and COD are right about the maintenance - it doesn't make sense to do lots of preventive maintenance when the rental car companies can simply swap out a car for the occasional disgruntled customer. They already have lots of cars, why invest in maintenance?
I think dsquared is right about dealer financing, especially in light of GM's notorious "push" manufacturing practices and the profitability of GMAC. When their predictions about the future market go south, they have to find a sink for the inventory that piles up. Toyota doesn't operate that way, so they rarely or never have to dump cars somewhere. This also underscores Arnold Kling's remark.
Could there be a path dependency problem on the supplier side? How large of a percentage of sales of each of VW, Toyota, and the Big 3* goes to fleet sales, considering GSA, police, other government agencies, rental cars, etc.? I'm guessing that GM and Ford have a larger dependence on those than the Japanese or European companies simply because of the magnitude of the relevant contiguous market, so they have gradually oriented themselves toward fleet customers and away from private individuals. Maybe in the future, Ford will simply make police and rental cars, GM will be a finance company with a fleet manufacturing department, and Toyota and VW will be fending off SAIC for the private market?
* BTW, isn't "Big 3" a dead term now that Toyota is pushing past GM in world market share? Or is the Big 3 now Toyota, GM, and VW?
Posted by: Eric H at Nov 30, 2005 10:43:07 AM
One thing about cars: my wife's ford focus was made in Cologne Germany, while my Toyota Camry was made in Hayward California. There's no patriotism in driving a car made in a different country 8,000 miles away as opposed to a city 20 miles from where you live.
"What types of cars to rental car companies in Japan, Germany, etc offer?"
Have you been to Japan? I lived there for many years and these are people who won't even import rice that costs 1/10 of what the domestic product cost. I've visited Germany, and all the rental cars where at least made there, though one was an Opel (sic?), which is owned by GM.
Posted by: Andrew at Nov 30, 2005 10:49:41 AM
Last few cars i remember renting were a toyota and a hyundai.
I drove them much harder than i would have drove my own car.
Posted by: cube at Nov 30, 2005 10:50:29 AM
Some years ago, I knew some folks who worked at a rental car operation.
Based on their description of how the cars are treated by the *staff* (disregarding the possibility of abuse by customers), I can heartily suggest *never* buying a former rental car.
I found the following idea ridiculous, though it may be true, I don't know: "Rental cars have higher value on the resale market than regular used cars"
Posted by: Kyle Cordes at Nov 30, 2005 10:58:18 AM
"I had a summer job back in college with one of the big rental firms."
Good, thank you, I appreciate your experience. I am troubled by the nonempirical speculation that seems to dominate the thinking of economists, for example this blog entry. Instead of speculating in a vacuum, economists ought to do a little more basic research, like picking up a phone.
Posted by: Constant at Nov 30, 2005 11:00:00 AM
