Q Industry~ Trade Summary Leasing Services USITC Publication 2864 March 1995 OFFICE OF INDUSTRIES U.S. International Trade Commission Washington, DC 20436 UNITED STATES INTERNATIONAL TRADE COMMISSION COMMISSIONERS Peter S. Watson, Chairman Janet A. Nuzum, Vice Chairman David B. Rohr Don E. Newquist Carol T. Crawford Lynn M. Bragg Robert A. Rogowsk.y Director of Operations Vern Simpson Director of Industries This report was prepared principally by James M. Bedore Service Industries Branch Services, Electronics, and Transportation Division Address all communications to Secretary to the Comm~ion United States International Trade Commi~ion Washington, DC 20436 PREFACE In 1991 the United States International Trade Commission initiated its current Industry and Trade Summary series of informational reports on the thousands of products and services imported into and exported from the United States. Each summary addresses a different industry area and contains information on U.S. and foreign producers, trade barriers, and industry trends. Also included is an analysis of the basic factors affecting trends in consump­ tion, production, and international trade. I This report on leasing services covers the period 1989 through 1993 and represents one of approximately 250 to 300 individual reports to be produced in this series during the first half of the 1990s. Listed below are the individual summary reports published to date on services industries. USITC publication Publication number date Title 2456 November 1991 ....... Insurance 2569 October 1992 ......... Advertising 2594 February 1993 ......... Legal Services 2638 June 1993 ............ Commercial Banking 2864 March 1995 ........... Leasing Services 1 The information and analysis provided in this repon are for the purpose of this repon only. Nothing in this repon should be construed to indicate how the Commission would find in an investiga­ tion conducted under statutory authority covering the same or similar subject matter. CONTENTS Page Introduction . 1 Dimensions of the market and the theory of leasing .. .. .. .. .. .. .. .. .. .. .. 1 Categories of leases . • . 2 Importance of residual values . • . 3 Varieties of leasing companies .... ; . • . 5 Other reasons for leasing . • . • . 5 U.S. industry and market profile . • • . 5 Largest U.S. companies . • . 6 End use for leased equipment . 6 Restructuring in aftermath of the Tax Reform Act of 1986 . • . 6 Current state of market . 9 Outlook . 10 European leasing markets . 11 Differing leasing traditions within Europe .. • . • .. .. .. • .. • .. .. .. .. .. .. .. .. .. .. 11 Organization of European leasing markets . 13 European computer leasing . • . 13 Current state of market . • . • . • . 13 Japanese leasing market . • . • . 14 Japan as a source of global leasing capital . • • . 15 Current state of market . • . 15 Other leasing markets . '. 15 Emerging markets and the International Finance Corporation • . 16 The Unidroit Convention . 17 International trade in leasing . • . • . 18 Cross-border trade vs. affiliate transactions . 18 Foreign penetration of U.S. markets and U.S. leasing abroad . 18 Tables 1. Ten largest national leasing markets, ranked by volume, 1992 . .. .. .. .. .. .. .. .. .. .. .. .. 2 2. Leasing: World's 10 largest leasing companies, by annual business volume, FY 1992-93 . 2 3. Summary of major leasing types • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • . 4 4. Ten largest U.S. leasing companies, ranked by annual volume, 1993 . 7 5. U.S. equipment leasing trends, 1988-94 . IO 6. U.S. commercial airline fleet leases, 1990 . 10 Figures 1. Distribution of U.S. annual leasing volume by equipment type, 1992 and 1993 .............. : . 8 2. Growth of equipment leasing in Europe, 1983-93 . 12 3. European leasing, by type of equipment, 1993 . 12 4. Japan's leasing market: Types of equipment, by percentage, 1992 . 16 iii INTRODUCTION Dimensions of the Market and the Theory of Leasing This summary covers leasing services as they relate to the leasing of tangible personal property, The global market for leased equipment was about generally in the form of new or reconditioned $323 billion in 1992. The United States was the largest equipment; this summary does not cover services national market at roughly $120 billion.2 It is estimated associated with the leasing of real property. Leasing that about 32 percent of all new capital equipment put services are provided by a variety of firms, including into service in the U.S. economy is under lease, banks, insurance companies, original equipment including computers, motor vehicles, rail cars, manufacturers, and independent firms that specialize in sophisticated medical equipment (such as body leasing. Because of the significant differences between scanners and electronic resonance machines), aircraft, the players in the industry (e.g., manufacturers vs. and telecommunications satellites. 3 The size of the 10 banks) and wide variations in the level of involvement largest national leasing markets globally is shown in of individual firms in providing such services, there is table 1. Table 2 indicates the 10 largest leasing firms no clearly defined ..leasing services" industry as there globally and their volumes of business. All these firms is in the case of certain other services industries (e.g., are based in the United States, Europe, or Japan. The accounting services and architectural services two largest firms are headquartered in the United industries). Tangible personal property leasing almost States.4 always involves a written contract by which the owner of property (the lessor) grants to another (the lessee) Leasing rests on the distinction between the legal the right to possess, use, and enjoy the property for a ownership and the day-to-day use of an asset This specified period of time in exchange for periodic distinction often permits differing tax and accounting payment of a stipulated price, generally referred to as advantages to accrue to owners and users of equipment renL 1 or property, and is the historical basis of the leasing Leasing may in many instances be more industry. For example, a lessor (owner of equipment) advantageous than an outright sale to both the lessor may desire tax offsets that can be gained from and the lessee. For example, for a manufacturer-lessor, depreciation schedules on equipment it owns. A lessee in the case of a multi-year lease, it may serve as the (user of equipment), conversely, may need to finance equivalent of a sale and lead to "sales" that would not new equipment. Tax laws in many countries permit the have been made but for a lease transaction. As rental payments for leases to be deducted from taxable discussed later, it may also have tax benefits for the income as business expenses. In contrast, interest lessor. For a lessee, leasing may serve as an alternative payments on loans from banks and other traditional to seeking new bank loans (and adding to balance sheet sources may not be deductible expenses.s Similarly, debt) to finance new equipment purchases; and for new money paid by lessees for leasing equipment does not or highly-leveraged firms with high borrowing costs have to be reported in annual financial accounts in the and limited access to capital, it may serve as the least same way as money borrowed from banks. The latter expensive way to acquire equipment. For lessees are considered debts for accounting purposes, while the requiring equipment for only part of its useful life, former are merely regularly incurred rental payments. leasing eliminates the task of having to dispose of the Thus, leasing is often an off-balance-sheet type of equipment as well as the risk that, because of financing. technological developments or changed market 2 World Leasing Yearbook, 1994, Euromoney conditions, the equipment will have a less-than­ Publications, London, U.K., p. 3. U.S. figures refer only anticipated residual value. to equipment leasing, including vehicles. Some global figures, especially for the European market, also include This summary describes in broad form the basic real estate leasing. legal and financial framework of leasing in various 3 Ibid. 4 The leasing arm of the Ford Motor Company, national markets; the adverse effects of economic Detroit, has never made public its leasing volume or asset recession on leasing; current market conditions in the figures on a global basis. The leasing firm called USL U. S., European, and Japanese leasing industries; Capital is one part of Ford Financial Services, the Ford Motor Company's global financial arm, and covers only a international attempts to create more standardized part of Ford's domestic leasing services. USL Capital's leasing contracts; the growing importance of leasing in FY 1993 leasing figure was listed as $2 billion. less developed countries; and the comparative Additionally, Ford Credit Europe PLC (United Kingdom) listed its European leasing business in FY 1993 as $2.5 importance of leasing in international trade. billion. Thus, if the worldwide leasing business of Ford Motor were publicly known, it would likely be among the 1 For a definition of the term "lease," particularly as it five largest companies in the global leasing industry. pertains to the lease of tangible personal property, see 5 Alternatively, interest tax depreciation rate schedules Black's Law Dictionary, 6th ed. (1990), p. 889. may be lower, or slower to take effect, than leasing ones. 1 Table 1 Ten largest national leasing markets,