Copyright © 2009 by the Equipment Leasing & Finance Foundation • ISSN 0740-008X
VOLUME 27 • NUMBER 2 • SPRING 2009
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BUSINESS PROCESS IMPROVEMENT IN EQUIPMENT FINANCE By Charles R. Gowen III, PhD, and James M. Johnson, PhDCan process improvement methods be used in fi nancial services (leasing) fi rms? This article describes the experiences of fi ve companies that use process improvement methods successfully to increase performance and reduce costs, thereby gaining more effi ciency.
THE OPPORTUNITIES AND CHALLENGES OF EMERGING MARKETS
By Shawn D. Halladay, Jonathan L. Fales, and Rafael Castillo-Triana Equipment leasing in emerging markets potentially is a major business opportunity for international lessors. Although legal and regulatory frameworks continue to evolve in these markets and there is no single, successful business model, study and preparation will pay off for motivated lessors.
KNOCKING DOWN (GREAT) WALLS: AN UPDATE ON THE CHINESE EQUIPMENT FINANCING MARKET
By Jonathan L. Fales and Jason ZhouChinese large-ticket fi nancing and vendor programs both should continue to grow over the next two to three years, even with the current worldwide economic slowdown. This article updates the Great Walls study the Foundation published in 2005.
TRANSPORTATION EQUIPMENT FINANCING: TRACKING THE FORCES SHAPING THE MARKET
By Mark LauritanoA brighter day is coming for those who can adapt to the current environment and take the long view. Rail and marine should lead the way. But the fi rst signs of a turnaround in transportation fi nancing are not likely to appear until the end of 2009.
WINNER ANNOUNCED FOR 2008 ARTICLE OF THE YEAR
Business Process Improvement in
Equipment Finance By Charles R. Gowen III, PhD, and James M. Johnson, PhD
The well-known financial economist Fischer
Black (1975) wrote on the efficiency and
competitiveness of financial institutions over
30 years ago. His general observation was that
in an industry such as banking or equipment leasing,
facing perfect competition, the most ef-
ficient companies will earn competitive
rates of return and less efficient com-
panies will go out of business or be
acquired. Hence, this article discusses
some of the branded methodologies for
improving competitiveness and reports
on our qualitative survey of process
improvement practices of five equip-
ment leasing companies.
The competitive advantage of an
equipment leasing company can be
enhanced by the application of a busi-
ness process improvement (BPI) pro-
gram. Process improvement initiatives
have recently attracted the widespread
attention of transactional companies
due to their potential for enhanced
efficiency. More than 80% of the U.S.
gross domestic product relies on ser-
vice industries, and 30% to 80% of
service firm costs are estimated to be some form of waste
resulting from inefficiency (George, 2003).
In this paper, we discuss the nature of BPI programs,
our study of several leasing firms using BPI, and the find-
ings of our survey. The five equipment financing com-
panies we interviewed used a variety of BPI methods to
tackle various customer and process issues. None of the
firms used a pure branded method, although several of
the executives had been employed previously in finan-
cial services companies that used branded methods.
Our purpose here is not to be an advocate for any
particular business process improvement method but
to acquaint the reader with the core
concepts and deployment strategies of
these structured methods. Toward that
end, we begin by summarizing two of
the current branded methodologies,
that is, Six Sigma (SS) and lean man-
agement.
BUSINESS PROCESS IMPROVEMENT METHODOLOGIES
The purpose of BPI is the redesign of
processes to result in superior pro-
ductivity, speed, quality, and low cost,
which leads to greater cash flow, prof-
itability, customer satisfaction, and
competitive advantage (Womack and
Jones, 2005). Some BPI program driv-
ers and results appear in Table 1 (next
page). BPI can consist of a combination
of branded methods, such as Six Sigma
and lean management, which are mutually reinforcing
when they are implemented simultaneously. Lean im-
proves operations productivity and speed, whereas Six
Sigma ameliorates quality and low cost (Arthur, 2007).
Lean methods can be enhanced by Six Sigma’s fo-
cus on organizational culture, program infrastructure,
customer needs, and reduction of process variation. Six
Can process improvement
methods be used in
fi nancial services (leasing)
fi rms? This article
describes the experiences
of fi ve companies that
use process improvement
methods successfully to
increase performance
and reduce costs, thereby
gaining more effi ciency.
2
BUSINESS PROCESS IMPROVEMENT IN EQUIPMENT FINANCE JOURNAL OF EQUIPMENT LEASE FINANCING • Spring 2009 • VOL. 27/NO. 2
Sigma could benefit from lean’s pursuit of waste identifi-
cation, process speed (or cycle time improvement), and
quick, action-oriented events (George, 2003). Although
lean management and Six Sigma were originated by man-
ufacturing corporations (Schonberger, 2008), the recent
trend of financial service firms adopting BPI is driven by
the enhanced advantages resulting from combining lean
and Six Sigma practices (Hayler and Nichols, 2007).
Six Sigma Initiatives
Six Sigma is a process improvement methodology ex-
ploited by many leading financial service companies. It
is a systematic, data-driven approach
that finds and eliminates errors in
processes by focusing on the results
most critical to customers. The term
SS refers to the statistical measure of a
quality level equivalent to 3.4 or fewer
defects per million opportunities. The
SS infrastructure depends on teams of
employees who are highly trained in
statistically oriented practices for pro-
cess improvement projects (Summers,
2007).
Six Sigma projects are selected
based not only on customer require-
ments but also on their ability to achieve clear financial
returns for the organization. A recent survey reveals that
SS is used by more than 50 financial service firms (Hay-
ler and Nichols, 2007) because it enhances transaction
accuracy and speed while reducing costs such as search,
information technology, bargaining, decision, and moni-
toring costs (Arthur, 2007).
Six Sigma was developed as a quality improvement
program by many firms in the manufacturing sector.
Motorola pioneered SS and won the Malcolm Baldrige
National Quality Award in 1988, largely due to its SS
initiatives. Other companies such as General Electric and
Allied Sigma helped to provide a significant amount of
credibility and media attention to the SS concept. Since
then, SS has become a popular methodology for process
improvement across a range of manufacturing and ser-
vice industries.
The SS roadmap for process improvement of finan-
cial companies begins with examining a firm’s services
from the customers’ viewpoint. Marketing research dic-
tates what impact the “voice of the customer” (VOC)
technique would have for the company (George, 2003).
Then data-driven practices, such as quality function
deployment, demonstrate how the VOC affects the im-
provement of services. At Wachovia Corp., the applica-
tion of VOC within a SS program drove the customer
satisfaction rating up by 20%, customer loyalty up 26%,
and customer attrition rate down from 20% to 12%, with
16% annual earnings growth over five years (Hayler and
Nichols, 2007).
The SS team infrastructure depends on specially
trained participants. The key roles in SS teams typical-
ly include Champions, Master Black
Belts, Black Belts, and Green Belts. The
job of executive Champions involves
working with Black Belts to identify
possible projects. Champions also pro-
vide support and validate the results
at the end of the project. Master Black
Belts are experienced Black Belts who
serve as mentors and trainers for new
Black Belts. During a year of full-time
training, Black Belts are trained in ad-
vanced statistical techniques, team-
building, and project-selection skills
and are committed full time as the
leaders of a SS team.
Green Belts are trained in basic quality tools and are
assigned to SS teams on a part-time basis.
Typically, larger financial services companies, such
as American Express, start with a core group of employ-
ees and expand training programs over a few years to
include all employees (Hayler and Nichols, 2007). For
example, the main purpose of an extensive training pro-
gram at Capital One was a culture transformation, which
has provided dramatic results from 2005 to 2007, such
Table 1.
Key Drivers and Outcomes of BPI
Key drivers Key outcomes
Quality Cash fl ow
Low cost Corporate profi tability
Productivity Customer satisfaction
Speed Competitive advantage
Six Sigma projects are
selected based not only
on customer requirements
but also on their
ability to achieve clear
fi nancial returns for the
organization.
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BUSINESS PROCESS IMPROVEMENT IN EQUIPMENT FINANCE JOURNAL OF EQUIPMENT LEASE FINANCING • Spring 2009 • VOL. 27/NO. 2
as a 39% reduction in the cost of a new account, 54%
lower servicing cost in existing accounts, and custom-
er satisfaction improvement of 10% (Immaneni et al.,
2007).
Problem-solving projects are another integral part of
the SS methodology. The objective for a SS team is to
analyze a problem and develop a permanent solution.
The problem-solving methodology used in SS is DMAIC,
which stands for Define, Measure, Ana-
lyze, Improve, and Control, and incor-
porates a wide variety of statistical tools
and process improvement techniques.
Started in 2001, Bank of America’s SS
program resulted in decreasing errors
by 24% in all customer channels and
by 88% in electronic channels, reduc-
ing transaction cycle times by more
than half, adding $2 billion in profit,
and increasing “customer delight” (de-
fined as a rating of 9 or 10 out of 10)
by 30% (Cox and Bossert, 2005; Hay-
ler and Nichols, 2007).
For the SS program initiated in
2001 at the retail services and consum-
er lending divisions of HSBC, N.A., customer complaint
projects saved $1.6 billion annually; training guideline
improvements reduced turnover by 10% and yielded
$1.9 billion annually; and sales leads priorities projects
produced $9.5 billion annual savings (Gordon, 2006).
Alternatively, many companies have developed varia-
tions of DMAIC, such as FASTER (Flow, Analyze, Solve,
Target, Execute, and Review) at Countrywide. These
methodologies have produced $244 million in produc-
tivity gains and $76 million in operating profits (Hayler
and Nichols, 2007).
Lean Management
Likewise, the importance of lean management has grown
considerably in recent years, and lean
programs have emerged as a major
source of competitiveness. The main
motivation for lean methods has been
relentlessly pursuing waste elimina-
tion, lowering costs, and increasing the
speed of delivery of products and ser-
vices to the customer (Arthur, 2007).
Although the Toyota Production Sys-
tem is credited as the origin (Liker,
2004), lean programs have also proven
highly effective for service companies.
Some differences among SS, lean, and
BPI (by combining SS and lean) initia-
tives are presented in Table 2.
Lean management consists of
three sets of principles: core tenets, waste sources, and
the 5S principle (defined below). The nine core tenets
of lean are:
1. Assess customer value.
2. Convert business processes to customer pull sys-
tems.
Table 2.
Characteristics of Three Process Improvement Methods
Six Sigma Lean BPI
Platform 1–4 month project 1–5 day event Project or event
Main motivation Reduce variation, innovation (DFSS), effectiveness
Variation, innovation, effectiveness
Customer value creation, corporate culture change
Competitive advantage Improve quality, productivity Improve speed, cost, productivity Sustainable competitive advantage
Metrics Defect rate Cycle time Customer value-added
Organization Six Sigma teams Kaizen teams BPI Teams
Techniques DMAIC, Design for Six Sigma Five Tenets, value stream mapping, future state map, 18 building blocks
Combination of methods, such as Six Sigma and lean
Human resource management Train selected employees as Black Belts
Train all employees in basic concepts
Train some employees in BPI concepts
The main motivation for
lean methods has been
relentlessly pursuing waste
elimination, lowering
costs, and increasing
the speed of delivery of
products and services to
the customer
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BUSINESS PROCESS IMPROVEMENT IN EQUIPMENT FINANCE JOURNAL OF EQUIPMENT LEASE FINANCING • Spring 2009 • VOL. 27/NO. 2
3. Switch to one-transaction flow.
4. Level out the work load.
5. Stop and fix problems immediately.
6. Standardize processes.
7. Use visual controls.
8. Use proven technology.
9. Compete against perfection, not competitors.
(Arthur, 2007)
Lean management identifies and reduces seven sources
of waste: overprocessing that does not add customer val-
ue, transportation or unnecessary movement of services,
motion or excess time for employees, excess work-in-
process inventory, waiting time delays, defects or errors,
and overproduction of goods or services (George, 2003).
Finally, the 5S principle includes Sort for necessity, Sim-
plify the workplace, Shine for cleanliness, Standardize
processes, and Sustain standard processes (George et al.,
2005).
The implementation of lean management involves
several distinctive techniques, two of which are “value
stream mapping” and “lean work cell” design. Value
stream mapping visually displays the process flow, dis-
tinguishes between value-added and
non-value- added activities, assists
in pointing out root causes of waste,
identifies problems and opportunities
for improving workflow, and shows
how the future workflow would look
(George et al., 2005). Lean work cell
design assembles all of the necessary
work activities for a process into a cell
layout, such as an emergency room
with an X-ray machine, a CT scanner,
and lab testing equipment to reduce the
patient’s transportation time for faster diagnosis (Arthur,
2007). Lean projects are implemented by a lean team,
often an entire small department with process improve-
ment experts, as a lean or Kaizen event (Arthur).
The workflow process for an area is redesigned in a
five-day Kaizen as follows:
• First day to train team members and define the
problem(s)
• Second day to measure and analyze workflows, cy-
cle times, and value stream maps
• Third day to generate and test improvement alterna-
tives
• Fourth day to simulate and deploy the selected solu-
tion
• Fifth day to evaluate and report out to management
For example, Bank One’s National Enterprise Operation
(NEO) launched lean management based on the Kaizen
event approach in 2002 and fully implemented it by
2004, when it was acquired and became a division of
JPMorgan Chase. The NEO lean system is characterized
by a limited set of Lean techniques, voluntary employee
involvement, and collaborative use of lean experts who
coach Kaizen teams, while avoiding massive employee
training and teams of only experts (George, 2003). The
results include cycle time reductions of 30% to 70%,
improved revenue, and decreased costs of thousands of
dollars per event. The disadvantages concern time-con-
suming events, difficulty in effecting physical workplace
changes, and sustaining lean management as a priority
among other corporate initiatives.
BPI Scope: Organization-wide or Focused?
A fundamental choice for BPI deployment is whether
the scope of implementation should be organization-
wide or on a SWAT team-like basis.
The full Six Sigma model argues for
corporate-wide training of employees
and implementation of projects (Hay-
ler and Nichols, 2007). Alternatively,
other evidence supports a focused
approach—a SWAT team strategy—of
training only limited groups of em-
ployees for resolving the most urgent
problems (Arthur 2007, p. 230). The
contrast between the two approaches
is summarized in Table 3 (next page).
As in the Bank One example above, the lessons
learned from this successful program involve autono-
my for each business unit, tailoring the BPI model for
each organization, deploying at a pace that suits each
unit’s readiness, avoiding mandatory use of BPI, cross-
functional problem-solving, and preference for lean
methods as opposed to Six Sigma, which requires robust
metrics (George, 2003). Similarly at JPMorgan, a SWAT
team approach resulted in more than $1 billion in pre-
tax net benefits in 2002 and 2003. Then the program
was integrated with JPMorgan’s corporate efficiency pro-
grams in 2004 (Hayler and Nichols, 2007).
A fundamental choice
for BPI deployment is
whether the scope of
implementation should be
organization-wide or on a
SWAT team-like basis.
5
BUSINESS PROCESS IMPROVEMENT IN EQUIPMENT FINANCE JOURNAL OF EQUIPMENT LEASE FINANCING • Spring 2009 • VOL. 27/NO. 2
BPI methods are just as applicable to a small busi-
ness, as illustrated by Table 4. By deploying these meth-
ods for a small business, Mesa Products Inc. achieved
above industry and competitor business results, such as
customer and employee satisfaction, productivity, and
return on investment, as well as winning the prestigious
Baldrige Award in 2006 (Daniels, 2007).
STUDY OF LEASING FIRMS
We employed a telephone interview methodology to
collect information about five firms in the U.S. leas-
ing services industry. We contacted executives in an
independent equipment
financing company, two
captive firms, and two
bank-related firms. The
seven resulting interviews
were initiated in August
2008. All firms requested
to remain anonymous.
The structured tele-
phone interview method
was chosen to yield richness of information for certain
key issues, although there is limited quantification of
data. The interviews focused on several questions for
each of the four main issues: descriptive characteristics
of the BPI program, project success stories, program
drivers, and advice to firms considering the adoption of
a BPI program.
In terms of the characteristics of the program, there
were striking differences between the captive and in-
dependent corporations. The captive firms started BPI
initiatives several years before the independents began
theirs. Another disparity was the captive firm’s manda-
tory participation for all
departments, as opposed
to the bank-related and
independent companies’
policy of voluntary de-
partmental participation.
Generally, the captive
firms had implemented an
organization-wide model,
whereas the bank-related
and independent companies deployed the SWAT team
type of BPI program structure.
SURVEY FINDINGS
Our structured interviews revealed several insights about
successful deployment of a BPI program. The descrip-
tive characteristics suggested two distinctly different al-
ternatives for BPI implementation: the organization-wide
model and the SWAT structure, as discussed above. Sec-
ondly, there were a variety of program drivers that led
Table 4.
Deployment of BPI for a Small Business
Steps for designing BPI for a small business:
• Assess the potential readiness of managers and employees for organizational change.
• Build organization-wide commitment by CEO promotion of the BPI program.
• Train managers in BPI principles, then managers train subordinates in BPI tools through a cascading coaching process of knowledge transfer and a simple trial project.
• Be highly selective of initial projects so there are early wins.
• Develop a “pull” training system to provide BPI knowledge and skills as needed, widening the pool of managers and employees who are competent in BPI practices.
• Engage employees, in successively lower levels of the fi rm, as project team leaders by ownership of progressively complex and rewarding projects.
• Recognize employees and managers who adopt the most effective BPI practices.
• Build BPI successes into the corporate culture and reward system.
• Monitor program effectiveness periodically and become increasingly selective of new projects and BPI team leaders.
SOURCE: Arthur, Jay. Lean Six Sigma Demystifi ed. New York: McGraw-Hill Professional, 2007; Byrne, George. “Ensuring optimal success with Six Sigma implementations.” Journal of Organizational Excellence, 22, no. 2 (2003): 43–50; Daniels, Susan E. “From one-man show to Baldrige recipient.” Quality Progress, 40, no. 7 (2007): 50–55.
Table 3.
Implementation Characteristics of Two Approaches to BPI
Organization-wide approach
SWAT team approach
Purpose Culture change Problem-solving
Project choice Deterministic Situational
Participation Mandatory Voluntary
Financing High investment Limited risk
Strategy Maximizing return Optimizing return
Approach Full toolbox Selected tools
Structure Bureaucratic Opportunistic
We employed a telephone interview methodology
to collect information about fi ve fi rms in the U.S.
leasing services industry. We contacted executives
in an independent equipment fi nancing company,
two captive fi rms, and two bank-related fi rms.
6
BUSINESS PROCESS IMPROVEMENT IN EQUIPMENT FINANCE JOURNAL OF EQUIPMENT LEASE FINANCING • Spring 2009 • VOL. 27/NO. 2
to success stories for these BPI initiatives. The advice
our experts had for firms considering the adoption of
a BPI initiative will be discussed toward the end of this
article.
Program Drivers and Successful Projects
One of the equipment financing firms was looking at
ways to improve its cycle time (the response time with
customers that is required to close a transaction) and
employed its BPI methodology to do so in an organized
way. The company believed it could reduce cycle time
but needed to have the expectation that resources invest-
ed in doing so would reap a financial
return. The bank’s borrower and lessee
customers were saying that some of their
competitors “do it better.” The problem
and scope were defined, and then the
bank worked on the problem with a BPI
team. The result was a reduction in cy-
cle time and greater consistency in the
way transactions were processed. The
payoff was a higher conversion rate (the
proportion of business worked on that
resulted in booked business) and more
profitable volume.
A second financing firm was a mul-
tidivision company that was assessing
its varied financial services businesses,
which included small-ticket transactions, vendor pro-
grams, and direct financing business with customers.
For various reasons, individual business units were us-
ing their own process and showed little interest in coop-
erating with one another to streamline their processes.
Customers complained that they had to go to a different
contact person for each type of business they were doing
with the company.
Eventually, this became a mandated project to push
the various units onto one streamlined platform. The
company does not use a major branded process im-
provement methodology, but a number of executives had
previous experience with Six Sigma financial services
companies. Using an unbranded process improvement
tool borrowing some SS tools, the company was able to
map out existing processes to see how they might be in-
tegrated. The result was to combine business groups, one
at a time, and move them onto a new, common platform.
As a result, customers now have a consistent experience
and one point of contact, regardless of what financial ser-
vices mix they are buying from the company.
In contrast, another firm with a successful vendor
program was having difficulties in setting up new deal-
ers efficiently. For various reasons, the firm needed to
rework many dealer applicants to “get it right.” A project
was launched with the goal of greatly reducing rework
with dealers. Much energy went into examining the pro-
cesses to detect the causes of rework—not getting the
complete set of information from a dealer the first time,
not processing information consistently, and so forth.
The company now has implemented a
successful program in which its deal-
ers grade it each year against the best
service they received from the com-
pany’s competitors.
A fourth company suffered from
an inefficient process for collecting
interest on time. This became a proj-
ect for one of the leasing firms, with
the goal of reducing the time spent on
this function. The SS project team dis-
covered that, over time, the company
was using more and more methods to
perform the same function. Years ago,
the leasing firm would send out a re-
minder letter to customers that were
approaching a due date. When faxing technology be-
came prevalent, the company began to mail notifications
to customers and fax notices for the same issue. As email
came online, the company added that method of sending
their customers the same information.
The BPI team found that not only was the company
using redundant methods for collecting interest but also
that customers were becoming frustrated, being bom-
barded with multiple notifications. The team was able
to streamline the notification process, which resulted in
reducing the time spent by approximately 85%, while
realizing virtually the same on-time payment percentage
and improving customer relations.
In responding to customer feedback, the fifth leas-
ing company developed a project around “ease of doing
business.” From customer interviews, the project team
realized that the company received high ratings only
once the customer was on board. The typical complaint
The BPI team found that
not only was the company
using redundant methods
for collecting interest but
also that customers were
becoming frustrated, being
bombarded with multiple
notifi cations.
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was how difficult the company’s processes were for a
prospect looking to become a customer. The team exam-
ined all aspects of how the leasing company originated
business and defined a series of projects to improve cus-
tomer responsiveness.
This leasing company was able
to reduce the number of documents
it required for a transaction and made
significant headway on instituting stan-
dardized templates. The net result was a
significant improvement in streamlining
the customer closing process. Now the
customer need talk with only one point
of contact rather than being referred to
five different people, depending on
what information the customer wanted
and for which product line.
Advice for Starting a BPI Initiative
The executives interviewed generally
agreed on the importance of establish-
ing BPI program goals and project ob-
jectives up front as well as specifying the
“end game.” Several executives emphasized that a key
goal should be to change the culture of the organization
by training and causing employees to think differently
regarding how they go about their work. One executive
indicated the value of viewing this process as a journey,
not a quick fix or an add-on function.
The five leasing firms indicated that getting outside
assistance is important and should take place at the out-
set of the initiative. Consultants and facilitators should
be engaged up front to help the organization get started
in parallel with training of the organization’s personnel.
Interestingly, the executives from organizations that used
brand-name process improvement methodologies did
not recommend that newcomers buy into an off-the-
shelf system but rather that they build to suit their com-
pany’s circumstances.
Because we interviewed very different organizations,
using both customized and branded process improve-
ment methodologies, the advice we gathered for setting
initial expectations differed significantly. Some execu-
tives indicated that no savings should be expected for
more than a year due to the significant up-front invest-
ment in training and organizational change. One said,
“Do not underestimate the commitment front-end.” An-
other executive cautioned, “Be leery of a fast payoff” and
be mindful of third-party promoters telling tales of big
wins early in the process.
At the opposite end of the ex-
pectations spectrum, an executive
recommended starting with some
small projects, suggesting that sim-
pler events yield quick wins and keep
personnel focused. He indicated that
large, long-term projects have unin-
tended negative effects, such as per-
sonnel becoming bored, losing focus,
and struggling with the large project
pieces.
However, there was agreement
that a successful process improve-
ment program should be woven into
the fabric of the organization rather
than as a standalone entity. Three
comments summarize the advice we
received about BPI organizational
change:
1. It should not be viewed as an add-on, but a different
way of working.
2. Process improvement is a way of thinking.
3. It should be ingrained in the organization’s culture
to make it feel natural. Keep it simple. Take the best
of brand-name process improvement methodolo-
gies and develop a process that will feel natural to
the company.
Some of our interviewees came from organization-wide
SS environments and cautioned against allowing the pro-
cess to take over and become its own bureaucracy. The
seven executives with whom we talked recommended
proceeding with less formality than the original SS sys-
tem in which several of them were trained. They indi-
cated that, as their organizations transformed, it did not
appear necessary to be as rigid in implementing BPI. One
executive warned, “Don’t let the process take on a life of
its own. It’s a tool, it’s not the business.”
CONCLUSION: THE IMPORTANCE OF BPI
The literature for the financial service industry and our
study suggest that BPI may be a productive tool for
The seven executives
recommended proceeding
with less formality than
the original Six Sigma
system in which several of
them were trained. They
indicated that, as their
organizations transformed,
it did not appear
necessary to be as rigid in
implementing BPI.
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BUSINESS PROCESS IMPROVEMENT IN EQUIPMENT FINANCE JOURNAL OF EQUIPMENT LEASE FINANCING • Spring 2009 • VOL. 27/NO. 2
achieving, increasing, or sustaining a competitive ad-
vantage. Several success stories of financial service com-
panies demonstrate the benefits of BPI methods, such
as voice of the customer and BPI projects for improving
quality and cost-effectiveness. BPI tools have also been
successfully deployed by financial service corporations
for improving productivity and speed, such as customer
delivery time.
Our study of five leasing firms reveals that each com-
pany found BPI to be beneficial in improving organiza-
tional performance as each defined it. The choice of the
type of program structure is critical. Our study suggests
that the larger captive leasing companies are effective in
adopting an organization-wide program, but the smaller
bank-related and independent firms are successful with
more of a SWAT team approach. BPI programs include
a variety of drivers and successful projects for improved
leasing transaction response cycle time, leasing plat-
forms, dealer application practices, interest collection,
and business origination processes. These projects re-
sulted in reduced customer response cost, greater leasing
transaction productivity, better transaction consistency,
lower application cost, higher collection rate, and in-
creased customer satisfaction.
Our study’s sources had the following advice on
starting a BPI program:
• Establish challenging BPI goals at the start—what
will be the end game?
• Seek initial consultant engagement, and set realistic
program expectations.
• Deploy BPI as an integral part of the organization’s
fabric versus making it an add-on.
• Design the program to be informal and a good fit
with existing organizational culture.
• Don’t expect instantaneous payoffs but plan for
gradually increasing wins.
In summary, our study reveals that a successful BPI pro-
gram can be deployed using some general guidelines,
but it will be most beneficial if it is tailored to the specific
needs of each equipment finance company.
References
*Arthur, Jay. Lean Six Sigma Demystifi ed. New York: McGraw-
Hill Professional, 2007.
Black, Fischer. “Bank funds management in an effi cient
market.” Journal of Financial Economics, 2, no. 4, (1975):
323–39.
Cox, Daniel, and James Bossert. “Driving organic growth
at Bank of America.” Quality Progress, 38, no. 2 (2005):
23–27.
*Daniels, Susan E. “From one-man show to Baldrige recipi-
ent.” Quality Progress, 40, no. 7 (2007): 50–55.
*George, Michael L. Lean Six Sigma for Service: How to Use Lean Speed and Six Sigma Quality to Improve Services and Transactions. New York: McGraw-Hill, 2003.
*George, Michael L., John Maxey, David T. Rowlands, and
Mark Price. The Lean Six Sigma Pocket Toolbook: A Quick Reference Guide to 100 Tools for Improving Quality and Speed. New York: McGraw-Hill, 2005.
Gordon, Jack. “Take that to the bank.” Training, 43, no. 6
(2006): 40–42.
*Hayler, Rowland, and Michael D. Nichols. Six Sigma for Financial Services. New York: McGraw-Hill, 2007.
Immaneni, Aravind, Allen McCombs, Gus Cheatham, and
Ron Andrews. “Capital One banks on Six Sigma for strategy
execution and culture transformation.” Global Business and Organizational Excellence, 26, no. 6 (2007): 43–54.
Liker, Jeffrey K. The Toyota Way. New York: McGraw-Hill,
2004.
Schonberger, Richard J. Best Practices in Lean Six Sigma Process Improvement. Hoboken, NJ: Wiley, 2008.
*Summers, Donna. Six Sigma: Basic Tools and Techniques. Upper Saddle River, NJ: Pearson Education Inc., 2007.
Womack, James P., and Daniel T. Jones. Lean Solutions: How Companies and Customers Can Create Value and Wealth Together. New York: Free Press, 2005.
*These references are most recommended for additional information.
9
BUSINESS PROCESS IMPROVEMENT IN EQUIPMENT FINANCE JOURNAL OF EQUIPMENT LEASE FINANCING • Spring 2009 • VOL. 27/NO. 2
Charles R. Gowen, PhD
Charles R. Gowen III is a professor of
management in the College of Busi-
ness at Northern Illinois University
in DeKalb, arriving there in 1987.
He has worked in operations management at Eastman
Kodak Co. and in commercial credit at Bank One (now
JPMorgan Chase) as well as consulted in quality man-
agement for several Fortune 100 companies. His cur-
rent research interests are in financial services, quality,
healthcare, and strategic management. Dr. Gowen has
published in several leading journals, such as recently in
the International Journal of Production Research, Journal of
Operations Management, Health Care Management Review,
Journal of High Technology Management Research, and Six
Sigma Forum Magazine, and presented papers at numer-
ous national and international conferences. He earned a
BS at The University of Rochester, N.Y., and an MBA and
PhD at The Ohio State University, Columbus.
James M. Johnson, PhD
James M. Johnson has been a pro-
fessor of finance at Northern Illinois
University, DeKalb, since 1987. He
has been a consultant, advisor, and
educator of lessors and lessees alike for more than 25
years. Dr. Johnson serves as an expert witness in leas-
ing disputes and has written extensively on lease finance.
His 2004 book, Power Tools for Small Ticket Leasing, was
coauthored with Richard Galtelli and Barry S. Marks and
was published by LeasingPress. Dr. Johnson’s previous
books, Power Tools for Successful Leasing and Technology
Leasing: Power Tools for Lessees, both co-authored with
Barry Marks, are also published by LeasingPress. He
serves on the board of trustees of the Equipment Leas-
ing and Finance Foundation and this journal’s editorial
advisory board. He received his PhD in finance from The
Ohio State University and a BBA cum laude and MBA
with honors from Western Michigan University, Kalama-
zoo.
Th e Opportunities and Challenges of Emerging
MarketsBy Shawn D. Halladay, Jonathan L. Fales, and Rafael Castillo-Triana
Editor’s note: In the past year, the Equipment Leasing and Finance Foundation added fi ve international studies to its library of research: Brazil: The Carnival of Equipment Financing (July 2008); Hispanic Latin America: Discovering and Conquering Equipment Financing (March 2009); India: How to Navigate the Equipment Finance Marketplace (February 2009); and Mexico: Factors for Success in the Mexican Equipment Finance Market (September 2008). All can be ordered at www.store.leasefoundation.org/department/research_studies_reports/.
It is clear that anyone seeking a lively debate over
whether or not the U.S. leasing and financing mar-
ket is mature is going to be disappointed. All one
has to do is listen in on conversa-
tions at any industry meeting or review
the Equipment Leasing and Finance
Association’s Survey of Industry Activ-
ity data. The competitive landscape is
tight, the product is a commodity, and
growth is slowing. Recent economic
events notwithstanding, the year-on-
year declines in spreads and the static
share of leasing as a percentage of total
financing opportunities serve to rein-
force the notion of a mature market.
Indeed, the only source of growth
in such an environment is increased
levels of equipment acquisition, unless
lessors choose to expand operations
outside the United States. Even then,
opportunities are limited and competi-
tion stiff in all but emerging markets.
Entering emerging leasing and finance
markets, which at first blush appears
a logical decision, comes with its own
unique set of challenges. This article
examines the initial decisions that must
be made in each environment when es-
tablishing operations outside the United States. The dif-
ferent challenges to be faced, particularly in emerging
markets, and how leasing and financing companies can
successfully overcome those challeng-
es, also are discussed.
ENVIRONMENTAL DIFFERENTIATION
A finance company faces constant
challenges even in its own country
—the task becomes even greater in an-
other jurisdiction, especially when it is
compounded by time, distance, and,
in many cases, the nascent legal and
regulatory frameworks of an emerging
market. As an example, the concept of
paying over time, with repeated pay-
ments, is a relatively new concept in
China. Other structural, accounting,
tax, and cultural differences add to the
mix of items that must be addressed
when entering an emerging leasing and
finance market.
Beyond these factors, a U.S. lessor
seeking to establish a presence in an
emerging market also must consider
the developmental stage of the leasing
industry it is entering. Many emerg-
Equipment leasing
in emerging markets
potentially is a major
business opportunity
for international lessors.
Although legal and
regulatory frameworks
continue to evolve in
these markets and there
is no single, successful
business model, study and
preparation will pay off for
motivated lessors.
2
THE OPPORTUNITIES AND CHALLENGES OF EMERGING MARKETS JOURNAL OF EQUIPMENT LEASE FINANCING • Spring 2009 • VOL. 27/NO. 2
ing leasing industries follow similar developmental pat-
terns, starting out small and then growing very rapidly
as multiple lessors enter the market. After a relatively
short period of growth and prosperity, however, there is
an economic adjustment, usually in the
form of a major contraction or even, in
some cases, a collapse.
A combination of government
regulation and more rational business
practices generally results in a subse-
quent period of slow growth, followed
by a stabilization of the industry. It is
at this point that the emerging leasing
industry, strengthened by its trials, is
poised to continue its development.
The Indian, Korean, and Indonesian
leasing industries all followed this pat-
tern. By understanding this pattern, a
U.S. investor can avoid losing hard-
earned traction in that industry.
On a more granular level, U.S. lessors must make
decisions such as whether to act on a cross-border basis,
establish a permanent presence in the emerging market,
or take on a partner. Special attention also must be paid
to languages, technological and physical environment,
social organization, geography, labor issues, country his-
tory, the concept of authority and political organization,
religion, and even the prevailing business and social ap-
proach toward time. The many things that are taken for
granted in the U.S. business environment now become
critical factors for success in an international environ-
ment.
In Latin America, for instance, the emphasis is on
relationships rather than formal contracts. Another dif-
ference from the United States is the inherent instability
of an emerging market’s economic cycle. This potential
instability requires lessors to look even more closely at
the social, cultural, and economic fundamentals of the
country, including the attitude of the government toward
the leasing and finance industry and the role it plays in
the economy.
The number and nature of the regulations and rules
are another dissimilarity between leasing in the United
States and in other countries. Most emerging markets
consider equipment leasing and financing as financial
activities, so they regulate them with the aim of ensur-
ing transparency, professional reliability, and minimum
damage to the public interest. Consequently, regulatory
agencies such as the central bank or ministry of finance,
have oversight of leasing companies. Some markets also
may consider leasing to be a commer-
cial activity subject to regulation by
other government bodies, such as the
Ministry of Commerce in China.
Lastly, the U.S. leasing and finance
company must consider the size of
the emerging market it is consider-
ing entering. The total leased assets
by leasing companies in China as of
December 2003, for example, was ap-
proximately US$2.6 billion. This figure
indicates a leasing penetration rate of
0.44% of capital formation,1 indicating
the tremendous growth potential of
the Chinese leasing industry. Other
leasing markets, by comparison, in-
clude Mexico (with a total portfolio of roughly $5.6 bil-
lion) and India (with a total portfolio of roughly $364
million), all the way down to El Salvador’s portfolio of
$23 million.
ESTABLISHING OPERATIONS
The number of rules and regulations with which finan-
cial companies must comply in emerging markets is, as
a general rule, much higher than in the United States,
including those necessary to establish operations in the
country. In spite of this general rule, however, some
countries, like Argentina, do not have formal barriers to
organizing a leasing company.
Regulation
The regulatory agencies in the vast majority of emerging
market countries allow lessors to establish either of two
types of leasing companies. These are financial leasing
companies (subject to financial company/banking rules)
and operating lease companies (generally not subject
to financial company/banking rules). Financial leasing
companies require a license granted by the authorities,
usually the ministry of finance or central bank. Operat-
ing leasing companies, on the other hand, do not. This
distinction makes it much less burdensome to establish
and run an operating leasing company.
On a more granular
level, U.S. lessors must
make decisions such as
whether to act on a cross-
border basis, establish a
permanent presence in the
emerging market, or take
on a partner.
3
THE OPPORTUNITIES AND CHALLENGES OF EMERGING MARKETS JOURNAL OF EQUIPMENT LEASE FINANCING • Spring 2009 • VOL. 27/NO. 2
Obtaining a license to conduct financial leasing re-
quires a vetting process that includes proving financial
capacity plus a minimum amount of capital. China re-
quires $10 million of capital to establish a leasing com-
pany, while the number is closer to $4 million in Brazil.
There are no minimum capital requirements in Mexico,
although the tax rules regarding thin
capitalization and the consequences
under Basel II of undue leverage must
be taken into account.
There also are differences in the
types of companies foreign lessors may
be allowed, or required, to form. Au-
thorization to establish a foreign leas-
ing company in China, for example,
must be obtained from the ministry of
commerce. The ability to operate as a
branch, representative office, or a per-
manent establishment may be available
only to certain types of companies or
require various levels of authorization.
Brazil prefers that foreign lessors act
as subsidiaries, rather than branches,
since a subsidiary is subject to the
domestic and regulatory framework,
which reduces the number of cross-
border regulatory problems more likely to appear in a
branch scenario.
Partners
Even though the foreign government may give owner-
ship and/or control over the leasing company to the U.S.
investor, the need for local alliances and know-how is
critical for success in any emerging market. Local part-
ners offer the following advantages:
• local market knowledge
• existing business relationships
• staffing
• familiarity with the local legal system
• speed to market
• language
• hierarchical interactions
Most international lessors with operations in China to-
day have Chinese partners, due in part to the fact that a
local partner was required to obtain a leasing license.
FundingFunding options available to lessors in emerging markets
may be tied both to the lessor’s type of leasing license
and the terms of the license itself. Lessors with licenses
to lease only in foreign currency in China, for example,
generally fund offshore. Leasing in China’s local cur-
rency creates regulatory barriers (gen-
erally exchange barriers) along with an
exchange risk factor.
According to the U.S. Embassy’s
China Country Commercial Guide,Foreign-invested firms, like domestic
firms, must register all foreign loans
with the State Administration for For-
eign Exchange (SAFE). Along with the
People’s Bank of China, SAFE regulates
the flow of foreign exchange into and
out of China.2
Because of these factors and other
regulatory barriers most multination-
als tend to self-fund their operations in
China.
Onshore funding options are lim-
ited in some countries, so bank loans
represent the only real funding oppor-
tunity. This is particularly true for op-
erating lease/independent companies
that, although less regulated, also have fewer funding
options as a result of less regulation. It is not unusual
for the commercial paper market to be underdeveloped
in emerging markets as there is little available credit in-
formation on most companies. Some emerging markets
such as Chile have sophisticated funding options, how-
ever.
Funding options in some emerging markets include
domestic bank loans, cross-border loans (subject to for-
eign exchange restrictions), commercial paper, deben-
tures, and securitizations placed in the domestic capital
markets. There are, however, potential obstacles of which
lessors need to be aware. Argentina3 and Colombia,4 for
example, require that a cash reserve be deposited at the
Central Bank together with the filing of cross-border
loans.
Although these requirements make the effective cost
of cross-border loans more expensive than their original
terms, these countries have good domestic capital mar-
ket conditions for funding leasing companies. In Argen-
Funding options in some
emerging markets include
domestic bank loans,
cross-border loans (subject
to foreign exchange
restrictions), commercial
paper, debentures, and
securitizations placed
in the domestic capital
markets.
4
THE OPPORTUNITIES AND CHALLENGES OF EMERGING MARKETS JOURNAL OF EQUIPMENT LEASE FINANCING • Spring 2009 • VOL. 27/NO. 2
tina, securitization is the preferred vehicle for funding
leases. Argentine lessors tend to establish equipment
leasing trusts and issue securities or paper out of such
trusts. Colombian companies use the commercial paper,
medium term notes, and bond markets extensively. Chil-
ean pension funds are very important investors and have
enormous potential to funnel funding into leasing and
equipment financing companies.5
Independent leasing companies, however, are not
allowed to raise funds from the public, so they must
obtain funding elsewhere. According to a recent survey
made by the Chilean Leasing Association, 53% of leas-
ing company funding comes from banks and 17% from
the placement of bonds. Since the average equity of the
leasing companies is 15%, the remaining 15% of funding
comes from vendors and other sources.
Staffing
Human resources are critical to the success of the leas-
ing and finance company no matter the locale. The chal-
lenges in this area, however, vary based on the market.
Mexico, for example, has an adult literacy rate of 92%,
whereas other Latin American countries have rates as
low as 70%. Although a U.S. company
may use expatriates to a certain extent,
U.S. financiers ultimately will have to
depend primarily on local talent. This
necessity has a cost benefit associated
with it, though, since local employees
work at a lower cost (around 20% of
expatriate wages in China, for exam-
ple).
Attitudes toward the workplace also are important.
Brazil has a literate and generally well-educated work-
force, but most leasing staff have been raised in an en-
vironment in which innovation is not encouraged. This
tendency is exacerbated by the inherent bureaucracy as-
sociated with prevailing business practices in Brazil.
The employment systems in many emerging mar-
kets can be very complex, highly protected, and rigid.
Some employment contracts are subject to minimum
statutory benefits and conditions stipulated by collective
bargaining agreements with employment unions, even at
the professional employee level. Other employment reg-
ulations create additional costs. In Mexico, for instance,
nonmanagement employees must have the right to share
up to 10% of their employer’s profits before taxes. Mexi-
can lessors address this burdensome requirement by cre-
ating special-purpose, service provider companies.
RISK CONSIDERATIONS
As previously mentioned, being a successful lessor is a
challenge even in one’s own market; thus it is even more
so in an emerging market. An international expansion
strategy, therefore, also must be supported by a very sol-
id risk management culture and organization. The strat-
egy must assess unique market risks, including country,
operating, currency, and funding risks. Lastly, a prudent
lessor will analyze and define a sound exit strategy.
Sovereign Risk
Sovereign risk is a prime example of the type of unique
risks that U.S. lessors may face internationally but do
not have to contend with at home. One aspect of sov-
ereign risk is political risk, which encompasses political
violence and revolution, expropriation, and other factors
such as government breach of contracts.
The likelihood of arbitrary nationalization of for-
eign companies is fairly low in many emerging markets
while very high in certain others such
as Venezuela, Nicaragua, Ecuador, and
Bolivia. Although the size of the leasing
portfolios at risk in these countries is
not that large, the risk still exists, as ev-
idenced by Venezuela’s nationalization
of Venezuela’s largest lessor, the Banco
de Venezuela (from the Spanish Grupo
Santander). As a result, a careful study
of the risk of expropriation should be undertaken before
investing in an emerging market.
It should be noted that there are protections against
expropriation. For example, Mexico, under the North
American Free Trade Agreement (NAFTA), may not ex-
propriate property, except for a public purpose and only
on a nondiscriminatory basis. In China, there have been
no cases of outright expropriation of foreign investment
since China opened to the outside world in 1979, al-
though the U.S. State Department believes that there are
several cases that may qualify. U.S. lessors may obtain
protection against political risks through the Overseas
Private Investment Corporation or the Multilateral In-
vestment Guaranty Agency, a World Bank Agency that
The employment systems
in many emerging markets
can be very complex,
highly protected, and rigid.
5
THE OPPORTUNITIES AND CHALLENGES OF EMERGING MARKETS JOURNAL OF EQUIPMENT LEASE FINANCING • Spring 2009 • VOL. 27/NO. 2
provides political risk insurance to international inves-
tors.
Market Size
Another market entry risk to be considered is the size of
the market itself, as it does not make sense to incur the
costs of entering a market in which there is little incre-
mental business to be gained. This de-
cision is easy for some markets, such as
China, in which the potential is great,
although market size can be deceiv-
ing. India, for example, has as much
potential as China in terms of popula-
tion and growth. The leasing market in
India, however, is still plagued by un-
certainty and regulatory hurdles that
should be considered in the market
entry decision.
Other factors to be considered
include the level of competition in
the market and the types of products
offered. There are over 10,000 do-
mestic leasing companies in China,
for instance, although most of these
companies offer relatively unsophisti-
cated leasing services and concentrate
on financing simple, commodity-type
equipment such as automobiles. Such
companies lack any funding strength and are, in general,
relatively unstable.
The primary leasing product offered in emerging
economies is the finance lease, in which there is little
if any residual position taken. Residual management is
very poor, such that residuals are not even on the hori-
zon in some markets. On the surface, this would appear
to present a great opportunity for U.S. lessors to offer
operating leases. Unless the U.S. lessor has global—or at
least regional—asset management capabilities; however,
this is not an advantage as the secondary equipment
markets in developing economies do not exist.
Credit Risk
Credit risk always is of primary concern whenever a les-
sor enters a new market. Listed companies typically pro-
vide the best source of information through the firm’s
filings with the stock exchange. Credit reporting agen-
cies, though, are not well developed, if they exist at all,
in many emerging leasing markets. As a result, most leas-
ing and finance companies rely on informal sources of
information and local partner knowledge.
This being said, Mexico has an increasingly effec-
tive credit information system through Buro de Crédito,
a privately owned company. In addition, a legal bureau
tracks lawsuits against credit appli-
cants, which is a valuable tool for credit
evaluations. Credit reporting agencies
such as Veraz in Argentina, Datacredito
in Colombia, and Serasa in Brazil have
existed for many years. The informa-
tion provided by these agencies is not
yet comparable with what is available
in the United States, as the coverage is
not very comprehensive, both in terms
of quantity as well as in quality.
Exit Risk
Finally, exit risks should be an impor-
tant element of the analysis to conduct
business in emerging countries. Joint
ventures, while allowing foreign les-
sors to shorten the learning curve, also
are more difficult to terminate, as they
require the parties to work out satisfac-
tory terms if the structure is unwound.
Repatriation of capital also is of primary concern. Mexico
and China do not have any restrictions on repatriating
capital, but other countries do. U.S. financiers should be
aware of any withholding taxes on repatriated profits, or
any other government restrictions.
OTHER CHALLENGES
It is fairly obvious that a lessor operating internation-
ally will face differing tax, accounting, and legal rules
and regulations. These differences can be reduced to a
set of common differences, however. As an example, al-
though legal systems differ between countries, they gen-
erally may be classified as either common law or civil law
systems. Common law systems are present in all former
British colonies and protectorates such as India. Civil law
systems, on the other hand, are present in countries col-
onized or influenced by continental European cultures,
such as Spain, Portugal, France, and Germany.
The primary leasing
product offered in
emerging economies
is the fi nance lease, in
which there is little if any
residual position taken.
Residual management
is very poor, such that
residuals are not even
on the horizon in some
markets.
6
THE OPPORTUNITIES AND CHALLENGES OF EMERGING MARKETS JOURNAL OF EQUIPMENT LEASE FINANCING • Spring 2009 • VOL. 27/NO. 2
Legal Challenges
The legal ownership of equipment subject to a lease in
the emerging economies is determined on either a form
or a substance basis. Legal ownership in Mexico, for
example, is based on the form of the transaction rather
than its economic substance, as is the
case in Brazil and most other Latin
countries. In a form country, the lessor
always is the owner of the equipment
for legal purposes. As a result, the le-
gal definition of a lease may not exactly
match the accounting or tax definition
of ownership.
Once legal ownership of the asset
is established it also is important to be
able to enforce the lessor’s ownership
rights in the event of disagreement.
The components necessary to enforce
leasing transactions in any economy
include (1) the rule of law, (2) a cor-
ruption-free environment, and (3) an
efficient legal system. U.S. financiers entering emerging
markets should, therefore, be fully aware of the time and
cost to resolve legal disputes. Commenting on this con-
cern, Karel van Laack, of Atradius Seguros de Credito in
Mexico, has stated, “Mexico’s sluggish legal system is a
known problem; trying to execute security like personal
guarantees and mortgages can take years.”6
The time and cost to resolve legal disputes in se-
lected emerging economies is shown in Table 1, which
also includes the United States as a benchmark.
Table 1.
Resolving Legal Disputes Cost to resolveCountry Days to resolve (% of claim)
United States 300 9%
Brazil 616 17%
Russia 281 13%
India 1,420 40%
Venezuela 510 44%
China 406 11%
Mexico 415 32%
SOURCE: Doing Business in 2008. Washington, D.C.: World Bank, Sept. 2007.
Taxation
The tax systems of the various countries of the world
also share common threads. The particulars will differ,
but each country has a tax on income, some form of cost
recovery, and a tax on consumption. U.S. lessors none-
theless must be cognizant of the dif-
ferences in application of the tax laws.
Top managers of enterprises in China,
for example, may be held criminally
liable if the company’s tax returns are
deemed as concealing or evasive.7
There are a range of taxes that must
be considered in other jurisdictions,
many of which are a mix of federal,
state, and local taxes. Although every
country has a tax on income and con-
sumption (value-added tax, or VAT)
additional types of taxes not found in
the United States are imposed. In ad-
dition to these basic taxes, the U.S.
financier may encounter the following
taxes, depending on the country:
• stamp duty
• central sales tax
• lease rental tax
• service tax
• cross-border lease tax
• lease development tax
• alternative minimum tax
• vehicle tax
• business tax
Like the variety of taxes, corporate tax rates between
countries. Most income tax rates fall somewhere between
30% and 35%, although they may range from a low of
10% in Paraguay to upward of 40% in Brazil. As a gen-
eral rule, however, U.S. lessors can expect a tax burden
similar to the United States’s as it relates to income taxes.
The rates for VAT, withholding, and other taxes must
be determined on an individual country basis. How the
taxes are applied also will vary as, for instance, the VAT
paid on transactions between states in India may not be
reclaimed. Suffice it to say that U.S. financiers will en-
counter a wider variety of taxes in emerging countries
than in the United States.
In a form country, the
lessor always is the owner
of the equipment for legal
purposes. As a result, the
legal defi nition of a lease
may not exactly match
the accounting or tax
defi nition of ownership.
7
THE OPPORTUNITIES AND CHALLENGES OF EMERGING MARKETS JOURNAL OF EQUIPMENT LEASE FINANCING • Spring 2009 • VOL. 27/NO. 2
U.S. lessors establishing operations in emerging mar-
kets will find that tax ownership of leased assets is deter-
mined based on one of two systems. In form countries,
such as Brazil, the lessor always is considered the tax
owner. In other countries, such as India, tax ownership
is based on the economic substance of the transaction,
which is similar to the methodology used in the United
States. Lessors in emerging markets also are allowed to
depreciate their assets, typically on a straight-line, rather
than accelerated, basis.
Accounting
Accounting regulations are always an
issue in any international expansion,
but there is not much divergence in the
accounting for leases between coun-
tries. At the present time, all countries
make a distinction between finance
leases and operating leases, whether
that distinction is based on either a
form or substance concept.
Many emerging markets now fol-
low International Accounting Standard
No. 17 (IAS 17) or a local lease ac-
counting standard based on IAS 17 or
FASB 13. Interestingly enough, several
countries, such as Colombia, Argentina, and Uruguay,
prohibit application of international accounting stan-
dards. Even so, and although accounting requirements
still may be different in line with the local legal systems
and business cultures, there is a continuing trend toward
international harmonization of these rules.
This unification may create localized operational
issues. U.S. lessors in Brazil, for instance, will need to
have the systems capability to adjust leases classified as
finance leases for accounting purposes to reflect the le-
gal ownership required for fiscal and tax-reporting pur-
poses. This also will require an integration process with
the U.S. lessor’s legacy lease management system. In this
regard, there are few to no local lease management and
reporting systems available in emerging leasing markets.
CONCLUSION
Equipment leasing in emerging markets can become a
major business opportunity for international lessors in
the coming years. To be sure, these economies pose a
number of significant risks that must be managed to be
successful. Furthermore, there still is much market de-
velopment activity to be done before leasing is accepted
as a mainstream financial product in some of the devel-
oping countries. U.S. financiers can compete successful-
ly, however, if they enter the target market with sufficient
study, preparation, and rigorous execution.
As U.S. lessors consider entering these emerging
markets, they should be aware of these significant fac-
tors:
• There is no single, successful busi-
ness model.
• Identifying and managing the risks
of doing business is the critical factor
to success, but the task should not be
overwhelming.
• The lack of trained local personnel
should be factored into the business
plans.
• Leasing may be a new concept for
many businesspeople in these mar-
kets.
• The used equipment market is largely
undeveloped, but it could be a huge
opportunity for certain assets.
As a final note, successfully entering a new market does
not happen overnight, so lessors should plan on every-
thing taking longer than anticipated. The opportunities,
however, are there for the prepared.
Endnotes
1. This number does not include hire-purchase agreements.
Including hire-purchase transactions pushes the rate closer to
40%. Source: Knocking Down (Great) Walls: Identifying Factors for Success in the Chinese Equipment Leasing Market, by The Alta
Group. Washington, D.C.: Equipment Leasing and Finance
Foundation. www.store.leasefoundation.org/product/chinarpt/
2. “China Country Commercial Guide FY 2004. A Guide to
Doing Business in China & Information on Current Economic
Conditions,” prepared by the U.S. Embassy, Beijing.
3. The amount of the deposit is 30%, pursuant to Comuni-
cación A 435 of the Central Bank of the Argentine Republic,
effective Oct. 6, 2005.
4. The amount of the deposit in Colombia is 40%, pursuant
to Resolution 8/2000 of the Board of Directors of the Banco de
la Republica, as amended in 2007.
At the present time,
all countries make a
distinction between
fi nance leases and
operating leases, whether
that distinction is based
on either a form or
substance concept.
8
THE OPPORTUNITIES AND CHALLENGES OF EMERGING MARKETS JOURNAL OF EQUIPMENT LEASE FINANCING • Spring 2009 • VOL. 27/NO. 2
5. Further details about the capital markets in Chile can be
found in the study “Capital markets in Chile: from fi nancial
repression to fi nancial deepening,” available at www.bis.org/
publ/bppdf/bispap11g.pdf, and in the Capital Markets Reform
paper posted www.buyusa.gov/chile/en/capital_market_re-
forms.pdf
6. InsideARM: Report: Mexican Legal Collection System
Provides Poor Protection to Creditors, March 12, 2008. www.
insidearm.com
7. Article 201 of the Peoples Republic of China Criminal Law,
as amended in March 1997.
Shawn D. Halladay
Shawn D. Halladay, based in Salt
Lake City, Utah, is a principal of
The Alta Group and is the managing
principal of its professional develop-
ment division. He began his career in the audit division
of Arthur Andersen & Co., and over the past 25 years,
he has developed significant expertise in all areas of leas-
ing, including accounting, pricing, taxation, funding,
and operations. Mr. Halladay has international teaching
and consulting experience on leasing practices and poli-
cies, having conducted consulting assignments or taught
classes in more than 25 different countries. He has writ-
ten eight books on various aspects of equipment leasing,
served as managing editor and co-author of the Handbook
of Equipment Leasing, and regularly contributes to various
industry trade journals. He is a member of ELFA’s Finan-
cial Accounting Committee and serves on this journal’s
editorial review board. A certified public accountant, he
received his BS in accounting and MBA in finance from
the University of Utah, Salt Lake City.
Jonathan L. Fales
Jonathan L. Fales, based in King-
sport, Tenn., is a principal in The
Alta Group. For more than 31
years, he has worked in the IT and
equipment leasing fields. Prior to joining Alta, he held
numerous positions around the world with IBM Global Fi-
nancing, including general manager of Asia Pacific South
Global Financing and a member of IBM Credit General
Business Customer Financing Group, which focused on
marketing leases through indirect dealer channels. Mr.
Fales has helped Alta clients launch and manage vendor
finance programs in Latin America, Europe, and Asia as
well as the United States. He also works in benchmark-
ing operations, litigation support and strategic consult-
ing, including market-entry analysis and business case
development. A former member of the ELFA board of
directors and executive committee, he frequently pres-
ents at global leasing conferences, writes articles for lead-
ing industry magazines, and is considered an expert in
vendor finance. Mr. Fales received a BA in mathematics
from Vanderbilt University in Nashville, Tenn.
Rafael Castillo-Triana
Rafael Castillo-Triana, based in
Weston, Fla., is a principal in The
Alta Group and its managing prin-
cipal for Latin America. Previously, he was executive
vice president of Leasing Grancolombiana, S.A., lead-
ing a successful turnaround of the company; the first
CEO of Megaleasing S.A., for big-ticket leases in the
energy leasing business in Latin America; the first CEO
of Equileasing S.A., captive for Canon in Latin America;
and eventually advisor and counsel to Siemens, Mitsui,
Corporacion Financiera Union, AT&T Capital, New-
court, CIT Group Inc., and the International Finance
Corp. (the private arm of the World Bank). Mr. Castillo-
Triana was instrumental in drafting the leasing laws of El
Salvador and Tanzania. He has represented Colombia on
the advisory board of UNIDROIT for the Model Law on
Leasing, including the third draft adopted in 2008. Mr.
Castillo-Triana received both his master’s in economics
and JD from Javeriana University in Bogota, Colombia.
Knocking Down (Great) Walls: Identifying Fac-
tors for Success in the Chinese Equipment
Leasing Market was first published by the
Equipment Leasing and Finance Founda-
tion in October 2005. Recognizing the need for better in-
formation about equipment leasing in China, Great Walls
provided data regarding the environment and described
the unique risks as well as how others have entered the
market or could enter the market. We hoped lessors
would use this data to make informed
decisions as to how, or if, they should
pursue the opportunity.”1
More than three years have elapsed
since Great Walls was published, and
much has changed, both in China gen-
erally and in the Chinese equipment
financing market in particular. This
article examines the most important
changes as they pertain to equipment
financing and leasing companies and
is designed to provide up-to-date in-
formation on several important issues
in the equipment financing industry in
China.
SUMMARY OF KEY POINTS IN GREAT WALLS
The Great Walls study included core
research on the Chinese equipment
financing market, a primer on how to
establish a leasing/financing company
in China, an analysis of risk considerations, and five case
studies. Among the key research and information items
from Great Walls were:
Knocking Down (Great) Walls: An Update on the Chinese
Equipment Financing MarketBy Jonathan L. Fales and Jason Zhou
• The domestic Chinese equipment leasing market had
existed since the first leasing company was estab-
lished there in 1981. By 2005, over 10,000 leasing
companies existed in China, though the vast major-
ity of these were small vehicle leasing companies.
• Leasing companies were required to obtain a license
from the Ministry of Foreign Trade and Economic
Cooperation, or MOFCOM. Paid-up capital re-
quirements varied by ownership structure. Wholly
foreign-owned enterprise leasing com-
panies (WFOEs) were permitted for
the first time in March 2005, and a
small number of Western lessors had
obtained WFOE licenses by October of
that year. The People’s Bank of China
(PBOC), which approved the creation
of bank-owned lessors, had placed
a moratorium on new licenses, and
PBOC-approved licenses were frozen
at 12.
Key challenges for lessors included
poor availability of credit information,
unclear lessor ownership and reposses-
sion rights (although legislation had
been proposed in 2005 to address these
issues), lack of skilled and experienced
resources, and an undeveloped used
equipment and operating lease market.
In addition, the concept of leasing was
not well understood by many businesspeople and pro-
spective employees, making lease sales and recruitment
difficult.
Chinese large-ticket
fi nancing and vendor
programs both should
continue to grow over the
next two to three years,
even with the current
worldwide economic
slowdown. This article
updates the Great Walls
study the Foundation
published in 2005.
2
KNOCKING DOWN (GREAT) WALLS JOURNAL OF EQUIPMENT LEASE FINANCING • Spring 2009 • VOL. 27/NO. 2
• Vendor programs have become much more popular
among multinational manufacturers, particularly
since the establishment of MOFCOM WFOE licens-
es in 2005. As of year-end 2008, over 100 MOF-
COM financing licenses had been granted. Some of
the larger manufacturers that have obtained WFOE
licenses include Caterpillar, Cisco, GE, Hitachi, and
Doosan.
• Large-ticket financing transactions have grown rapid-
ly as China’s economy expands. Both multinational
and Chinese lessors have financed equipment used
in China’s large infrastructure and transportation
expansion projects over the last three
years. Aircraft in particular has re-
ceived focus from lessors. According to
the World Leasing Yearbook 2008, “Major
foreign aircraft manufacturers have es-
timated that China may acquire more
than 2,800 aircraft in the next 20 years.
It is generally believed that demand for
leasing of equipment will assume expo-
nential growth in the near future.”6
Another important factor—and one
with significant implications for the
future—has been the reemergence of
banks in the Chinese leasing industry.
“Measures for the Administration of
Financial Leasing Companies,” written
and administered by the China Bank
Regulatory Commission (CBRC), was
issued in early 2007 to serve as the reg-
ulatory framework for bank-affiliated
leasing companies, and was put into
force on March 1, 2007.
Since that time, five large Chinese banks have ob-
tained CBRC leasing licenses; their collective paid-in
capital totals more than RMB 14 billion (approximately
US$2 billion), and a sixth bank acquired an existing,
independent Chinese lessor and injected approximately
RMB 8 billion (US$1.2 billion) in fresh capital. These
six bank lessors, in little more than 18 months, together
have amassed equipment financing portfolios in excess
of 46 billion RMB.7 It should be noted that, at the time
of this writing, the CBRC appears to have slowed down
the pace of issuance of new licenses in 2009, to ensure
CHANGES IN CHINA SINCE 2005China has undergone a number of changes since 2005
that are reflective of its tremendous growth. China’s gross
domestic product (GDP) surged to over RMB 30 trillion
by the end of 2008 (the renminbi, or RMB, is China’s
currency; this amount represents approximately US$4.4
trillion)—up from less than RMB 20 trillion in 2005
(about US$2.9 trillion)—while its population increased
2.3%, to 1.33 billion.2 Its foreign currency reserves have
grown to US$1.9 trillion,3 and it is by far the largest
holder of U.S. government debt securities.
Although the 2009 outlook for Chinese GDP growth
has been reduced to 8%—still robust
by Western standards—China’s govern-
ment enacted a large domestic stimulus
package in late 2008 worth $586 bil-
lion in response to the world credit cri-
sis.4 Most of these funds are to be used
for infrastructure projects, which will
create large funding opportunities for
equipment financing companies.
China’s currency was floated with-
in a managed bandwidth beginning in
July 2005, and the RMB has strength-
ened 21% since then, to approximately
6.8 RMB/dollar at the time of this writ-
ing. This has had the important effect
of making the large cash position of
China’s major banks (discussed in more
detail below) of even more relevance
with respect to prospective future in-
vestments in the equipment financing
industry.
CHINA’S EQUIPMENT FINANCING INDUSTRY IN 2009
The Industry Today
China’s equipment financing industry has grown from
RMB 21.36 billion in annual lease originations in 2005
(approximately US$2.6 billion at the then-current rate of
exchange) to RMB 100 billion, or US$14.7 billion at the
December 2008 exchange rate, by the end of 2008.5
Much of this growth has been fueled by the expan-
sion of vendor programs and large-ticket financing in
China:
Although the 2009
outlook for Chinese GDP
growth has been reduced
to 8%—still robust by
Western standards—
China’s government
enacted a large domestic
stimulus package in late
2008 worth $586 billion
in response to the world
credit crisis.
3
KNOCKING DOWN (GREAT) WALLS JOURNAL OF EQUIPMENT LEASE FINANCING • Spring 2009 • VOL. 27/NO. 2
that capital enters the Chinese market on a carefully con-
trolled basis.
The small and medium business sector (SMB) re-
mains largely unpenetrated by lessors. As it was in 2005,
reliable Western-style credit information is difficult to
obtain, and credit decisions involv-
ing SMB companies must be made
by manual research. This makes the
SMB market uncompetitive from an
expense standpoint for most Western
lessors. This may change in coming
years, however. Large Chinese banks
have significant amounts of data on
SMB companies as well as experience
in extending credit to many of them.
In addition, the government has identi-
fied SMB growth as a priority for the
country, which creates an incentive for
banks with CBRC leasing licenses to
enter the market. This has not yet hap-
pened but is a distinct possibility over
the next two years.8
A new development in the Chinese equipment fi-
nancing market is the emergence of captive vendor fi-
nancing programs owned and operated by Chinese
manufacturers. Manufacturers in the construction,
power generation, and transportation industries, among
others, have created their own captive subsidiaries over
the last three years, and in 2008 three of them exceeded
US$100 million in financing originations.9
Although most of the financing activities of the
captives are within China, several captives have plans
in the next two to three years to support their parent
companies in international markets. This will provide
both opportunity and risk for other captives and ven-
dor program providers in these countries. There is also
a distinct possibility that Chinese banks could enter the
vendor program business, which, with their ample cash
reserves, could provide formidable competition to West-
ern lessors.10
Status of Leasing Legislation
The Great Walls study referenced new legislation, slated
for approval by the National People’s Congress (NPC) in
2006, which would “eliminate the duplication of effort
[regarding leasing regulation] between CBRC and MOF-
COM. The new leasing law will authorize, regulate, and
govern leasing operations.”11
This legislation has not yet been passed into law.
The proposal was tabled, as the NPC considered and
passed large amounts of legislation on issues pertinent
to the Olympic Games during its 2006
and 2007 plenary sessions. Unfortu-
nately, the proposal was not included
in the new NPC legislative agenda in
March 2008 and now does not appear
likely to pass into law within the next
few years. The key issue appears to be
that the NPC does not understand the
necessity of the new law, as there are
an existing property law and a contract
law that cover some of the same issues
as the proposed leasing law.
The ramifications in the interim
for most Western lessors are that tax
incentives for manufacturers may not
pass automatically to lessors. Also, cer-
tain funding options for nonbank lessors, such as the
issuance of corporate bonds or public equity offerings,
will not be available until the legislation passes.
Other Notable Developments
• The market for operating leases, other than for
large-ticket equipment, has not yet developed in
China, in large part because of the perception that
a business tax of 5% applies to the entire amount
of an operating lease payment. By contrast, the tax
applies only to the interest portion of capital lease
payments. This perception is being challenged by
many in the industry, notably the Leasing Business
Committee (LBC) of the China Association of Enter-
prises with Foreign Investment (CAEFI). Although
the State Authority on Taxation (SAT) has not yet
issued a position on this interpretation, the CAEFI,
LBC, and others continue to pursue a favorable rul-
ing from SAT.
• A part of the economic stimulus issued by the
Chinese government in November 2008 has inad-
vertently placed some lessors at a significant disad-
vantage. The stimulus allows manufacturers to claim
value-added tax (VAT) offsets for equipment pur-
chased for use in the manufacture of its products;
Although most of the
fi nancing activities of the
captives are within China,
several captives have
plans in the next two to
three years to support
their parent companies in
international markets.
4
KNOCKING DOWN (GREAT) WALLS JOURNAL OF EQUIPMENT LEASE FINANCING • Spring 2009 • VOL. 27/NO. 2
however, the offset is not available if the equipment
is leased. Several leasing industry trade associations,
as well as some captive lessors, are working with
SAT to remedy the situation at the time of this writ-
ing.
• The service provider industry for the leasing indus-
try in China is growing, albeit slowly. Mandarin-
language leasing software is now available from one
major provider, and a new Man-
darin-language e-trading platform
for construction equipment began
operation in 2008. This latter de-
velopment is an important step in
the creation of a viable used equip-
ment market in China.
• China implemented a new lease
accounting standard on January 1,
2007, which aligns Chinese stan-
dards closely with International
Accounting Standards (IAS).
• An important new property law
was enacted on October 1, 2007;
it is a milestone law that provides for the protec-
tion of property ownership in China. The property
law makes clear that government- and state-owned
entities cannot usurp the ownership rights of pri-
vate entities. Unfortunately, two issues important to
equipment financing companies—asset registration
and the enforcement of hell-or-high-water clauses—
were not included in the law.
• A new income tax law, implemented on January 1,
2008, equalizes the general income tax rate at 25%
among both foreign investors and domestic inves-
tors. The law it superseded, which had been in ef-
fect since 1993, provided significant tax incentives
to foreign investors to invest in China. Thus these
incentives no longer exist.
FINAL THOUGHTS
The original Great Walls study predicted that the equip-
ment financing market in China would continue to
evolve steadily in coming years and that Western lessors
would need to exercise caution before establishing op-
erations in China.
Although the admonitions for vigilance still exist,
“steady growth” proved to be an understatement. Fi-
nancing origination volumes have grown an estimated
368% since 2005 and are on pace to continue expanding
rapidly in 2009. The biggest surprise has been that much
of the growth has come from Chinese equipment financ-
ing companies, in particular from Chinese banks.
Many of the risks analyzed in Great Walls still exist,
to be sure. Notably, there is still a lack of available West-
ern-style credit information (particularly for small and
medium business sector companies),
there is no leasing-specific legislation
that protects the ownership rights of
lessors, and nonbank lessors have lim-
ited funding options available to them.
But it is noteworthy that both Chinese
and Western lessors have found ways
to deal with these issues, and they have
expanded their equipment financing
business remarkably over the last three
years.
Chinese large-ticket financing and
vendor programs both should contin-
ue to grow over the next two to three
years, even with the current worldwide economic slow-
down. If the Chinese banks choose to enter the small and
medium business sector, this growth could accelerate
dramatically. Western equipment financing companies
would do well reexamine the Chinese market, if they
have not done so recently, as a rich source of potential
growth.
Endnotes
1. Knocking Down Great Walls: Identifying Factors for Success in the Chinese Equipment Leasing Market, Washington, D.C.:
Equipment Leasing and Finance Foundation, October 2005;
p. 5 (Preface).
2. https://www.cia.gov/library/publications/the-world-fact-
book/print/ch.html
3. www.bloomberg.com, Jan. 23, 2009.
4. www.forbes.com, Nov. 11, 2008.
5. The Alta Group estimate, based on analysis of public and
proprietary information from CBRC- and MOFCOM-licensed
lessors in China.
6. World Leasing Yearbook 2008, Euromoney Yearbooks, p.
176. www.euromoney-yearbooks.com
China implemented a new
lease accounting standard
on January 1, 2007,
which aligns Chinese
standards closely with
International Accounting
Standards (IAS).
5
KNOCKING DOWN (GREAT) WALLS JOURNAL OF EQUIPMENT LEASE FINANCING • Spring 2009 • VOL. 27/NO. 2
Jonathan L. Fales
Jonathan L. Fales, based in King-
sport, Tenn., is a principal in The
Alta Group. For more than 31
years, he has worked in the IT and
equipment leasing fields. Prior to joining Alta, he held
numerous positions around the world with IBM Global Fi-
nancing, including general manager of Asia Pacific South
Global Financing and a member of IBM Credit General
Business Customer Financing Group, which focused on
marketing leases through indirect dealer channels. Mr.
Fales has helped Alta clients launch and manage vendor
finance programs in Latin America, Europe, and Asia as
well as the United States. He also works in benchmark-
ing operations, litigation support and strategic consult-
ing, including market-entry analysis and business case
development. A former member of the ELFA board of
directors and executive committee, he frequently pres-
ents at global leasing conferences, writes articles for lead-
ing industry magazines, and is considered an expert in
vendor finance. Mr. Fales received a BA in mathematics
from Vanderbilt University in Nashville, Tenn.
7 .The Alta Group research. Sources included Chinese regula-
tory agencies, bank lessors, and industry trade groups in
China.
8. Based on The Alta Group research among Chinese bank
lessors.
9. The Alta Group research. Sources included Chinese captive
lessors and industry trade groups in China.
10. Ibid.
11. Great Walls, p. 22.
Jason Zhou
Jason Zhou is the managing princi-
pal of The Alta Group in the Great
China region. He oversees the firm’s
practices of consulting, financial ad-
visory, and professional development in the region. He
has over 15 years of experience in multinational firms
and China state-owned enterprises. From 2004 to 2007,
he was one of the founding executives of Caterpillar Fi-
nancial’s business in China. Mr. Zhou received his mas-
ter’s degree from Foster College of Business, Bradley
University, Peoria, Ill., and a BS from Zhejiang University
of Science and Technology in China.
Transportation Equipment Financing: Tracking the
Forces Shaping the MarketBy Mark Lauritano
People often say, “The darkest hour is just before
the dawn.” Financing opportunities within the
transportation equipment sector have steadily
declined since the middle of 2008. Has the in-
dustry reached the darkest hour? Can the dawn of re-
covery be far off? What are the early
signals that a rebound is about to
commence, and what type of recovery
should industry participants expect?
The answers to these questions depend
a great deal on which segment or mar-
ket niche of this highly specialized sec-
tor one’s business supports.
This article highlights the findings
from a four-part study commissioned
by the Equipment Leasing and Finance
Foundation on the equipment finance
outlook within the transportation sec-
tor. IHS Global Insight was selected
to conduct the research and prepare
reports on four equipment financing
market segments: truck and trailer, rail
and locomotive, aircraft, and marine.
The studies published between Sep-
tember 2008 and February 2009 offer
a review of the current situation and analysis of future
trends, providing insights on the underlying factors driv-
ing the market.
As a general rule, transportation equipment financ-
ing should not be viewed as a single asset class, because
each type of equipment is designed to serve a unique set
of shipping requirements and has distinctive operating
constraints. Despite the unique characteristics of the var-
ious segments within transportation equipment finance,
a common set of factors shapes the market. These factors
center on two forces: (1) the general state of the econo-
my, which drives the demand for the underlying ship-
ment of goods (or people, in the case of aircraft) from
point A to point B and (2) the liquidity
of financial markets, which influences
the ability to raise capital and in turn
has a direct impact on asset values.
Unfortunately the news on both of
these fronts, the economy and capital
markets, is currently very dark indeed,
and even the healthiest segments of the
transportation equipment sector can-
not escape these forces. As the worst
recession in the post-World War II
era, the present downturn is now se-
vere enough to warrant the descrip-
tion “great” (see Fig. 1, next page). IHS
Global Insight now pegs the 2007 to
2009 peak-to-trough drop in real gross
domestic product (GDP) at 4.8%. Giv-
en the extent of the current downward
momentum, real GDP is expected to
fall 3.7% in 2009, and the unemploy-
ment rate is expected to peak at 10.3% in the first half
of 2010.
The government’s efforts to inject demand through
the fiscal-stimulus package, shore up the financial sector,
and revive lending to consumers and businesses will take
time to become effective and will need to be expanded.
Making matters worse, a key dimension of this stimulus,
the banking sector fix, is not yet in place and will require
A brighter day is coming
for those who can adapt
to the current environment
and take the long view.
Rail and marine should
lead the way. But the fi rst
signs of a turnaround in
transportation fi nancing
are not likely to appear
until the end of 2009.
2
TRANSPORTATION EQUIPMENT FINANCING JOURNAL OF EQUIPMENT LEASE FINANCING • Spring 2009 • VOL. 27/NO. 2
spending as yet unauthorized. IHS Global Insight’s anal-
ysis suggests the various stimulus efforts will gradually
ease the rate of GDP decline as 2009 progresses and pro-
duce a modest positive growth rate in the fourth quarter
(see Fig. 2).
When an economy is in the midst of a severe glob-
al recession, virtually all sectors are in alignment and
pointing downward. Yet several indi-
cators have a particularly strong bear-
ing on the outlook for transportation
equipment. For example, the manu-
facturing production process places
great demands on transportation ser-
vices for the movement of raw materi-
als, components, intermediate goods,
and finished goods. Recent indicators
suggest that inventories are still far too
high relative to sales and must contract
sharply. The demand for manufactured
goods is currently driven by weak do-
mestic demand, as well as a collapse in
exports. In 2008 real exports expanded
by 6.5%, but IHS Global Insight ex-
pects U.S. export volumes to fall 14.7%
this year as world trade contracts.
Another bellwether for the transportation sector
is the state of the construction sector. With greater in-
security among potential purchasers, housing starts
are plumbing new depths. IHS Global Insight expects
housing starts to hit bottom only in the second quar-
ter of 2009, at just 502,000 units (annual rate), and to
improve only very gradually thereafter. Unlike housing,
nonresidential structures spending is just now beginning
to turn down with a vengeance, as overcapacity in retail
and office space mounts and financing for commercial
real estate tightens sharply.
The stabilization of the housing market is a neces-
sary precursor to a turnaround in the financial crisis.
The recovery of the capital markets will
require a more comprehensive plan
from the U.S. Treasury than has been
announced so far, but there is some
short-term relief in sight as the Federal
Reserve Board launches its new Term
Asset-Backed Securities Loan Facility
(TALF) program to provide financing
directly into securitized consumer and
business credit markets. This should
help to unclog a portion of the second-
ary market capital channel, which has
been generally frozen since the col-
lapse of the mortgage-backed security
market.
With these financial and eco-
nomic indicators as a backdrop, how
will the transportation equipment fi-
nance market fare? As might be expected, the short-term
outlook for purchases of transportation equipment is
down sharply. In fact, IHS Global Insight is forecasting
real transportation equipment investment to drop 12%
in 2009, a third consecutive annual decline in spending.
This drop-off in spending is marginally better than the
The short-term outlook
for purchases of
transportation equipment
is down sharply. In
fact, IHS Global Insight
is forecasting real
transportation equipment
investment to drop 12%
in 2009.
-5%
-4%
-3%
-2%
-1%
0%
0801908180737060575348
Figure 1
GDP Declines During Postwar Recessions(Peak-to-trough percent change, date is year of peak quarter)
SOURCE: U.S. Dept. of Commerce, IHS Global Insight.-8%
-6%
-4%
-2%
0%
2%
4%
6%
11Q311Q110Q310Q109Q309Q108Q308Q1
Figure 2
2009 Begins About the Same As 2008 Ended
(Real GDP, annualized percent change)
SOURCE: U.S. Dept. of Commerce, IHS Global Insight.
3
TRANSPORTATION EQUIPMENT FINANCING JOURNAL OF EQUIPMENT LEASE FINANCING • Spring 2009 • VOL. 27/NO. 2
17% drop expected in overall equipment and software
investment, because the transportation equipment in-
vestment was already down sharply in 2008.
TRUCK AND TRAILER EQUIPMENT FINANCE
Among the four major transportation segments, the situ-
ation in the truck and trailer leasing and financing market
looks especially grim, and the verdict is that things will
get worse before they get better. The markets on which
the truck and trailer segment is dependent (manufactur-
ing production, construction, and con-
sumer spending) are weak, tonnage is
down, and companies are going under.
The situation has been exacerbated by
the environmental regulations, which
caused overcapacity and reduced the
desire to acquire new vehicles while
increasing running costs.
The credit crunch has been espe-
cially harmful to finance companies
serving the needs of smaller operators,
which comprise a significant propor-
tion of the demand for trucks and
trailers. Fleets are being shrunk, and
full-service leases are being used by
lessees to manage their risk.
On the bright side, when demand
picks up in 2010, things will improve
rapidly and significantly. With nearly 2,000 trucking
companies failing in the just the first half of 2008, many
of the weaker players will have exited the market. In
addition, up until this year the export market for used
trucks was quite strong, helping to move older equip-
ment overseas. With higher demand for capacity kicking
into gear in 2011 and 2012, those old trucks will not be
available, and demand for new vehicles will soar.
Furthermore, with companies being forced out of
the market during the period of low demand, overcapac-
ity will not be a problem, shipping prices will rise, and
carriers should be flush with money and searching for
vehicles. The timing of the slowdown in freight is likely
to reduce the pre-buy before the 2010 Environmental
Protection Agency rules come into effect, but this will
smooth things out in the medium to long run and benefit
the survivors of the current inhospitable market.
RAIL AND LOCOMOTIVE EQUIPMENT FINANCE
Although the near-term economic outlook leaves much
to be desired, the railroad industry is well positioned as a
long-term, stable source of equipment finance demand.
Existing order backlogs helped prop up deliveries of rail-
cars at the outset of 2009. Nevertheless, with rail traffic
in retreat and the credit crunch still in play, new orders
for equipment will weaken appreciably in the short term.
IHS Global Insight is not anticipating any meaningful
snapback in new equipment demand
until well into 2010. As we look fur-
ther out, the prospects for freight-car
financing will brighten as traffic builds
up a head of steam and the pressures
resurface to expand or upgrade carry-
ing capacity.
Railcar demand and supply can-
not be effectively viewed as a single
market. Instead, one must realize that
different cars serve different purposes
and that the fortunes of those cars rise
and fall in tandem with the markets
and commodities they serve. For ex-
ample, conventional flatcar shipments
have been weak for some time now as
they are particularly sensitive to the
housing and auto industry downturn
and the subsequent drop-off in lumber, light vehicles,
and steel-mill product cargoes.
Coal production was a rare bright spot for open-top
hoppers in 2008, because of its competitive advantage
in a year of high fuel costs and a weak dollar driving
exports. That has abated, however, and production is
expected to decline in 2009. Steel production, which af-
fects open-top hopper traffic for coke and ore, also re-
mains weak. The covered hopper market largely reflects
the mixed outlook for agricultural output, which is gen-
erally lower than output growth in recent years because
of high crop prices and ethanol.
The fuel price crisis that hit the logistics industry
hard in 2008 has provided some lingering benefits to the
rail industry, however. Rail is a comparatively energy-
efficient mode of transportation, and green, fuel-efficient
logistics plans are often still intact despite the subse-
With companies being
forced out of the market
during the period of low
demand, overcapacity
will not be a problem,
shipping prices will rise,
and carriers should be
fl ush with money and
searching for vehicles.
4
TRANSPORTATION EQUIPMENT FINANCING JOURNAL OF EQUIPMENT LEASE FINANCING • Spring 2009 • VOL. 27/NO. 2
quent decline in fuel prices. Consequently, rail is looking
at modal share gains over the long term.
AIRCRAFT EQUIPMENT FINANCE
With more than 5,000 aircraft leased worldwide, rough-
ly one-third of the global freight and passenger fleet is
under lease. This is up from 25% in 2001, and analysts
predict that the proportion under lease will reach 50%
by 2010. The aircraft leasing industry usually runs coun-
tercyclically, because airlines seek more
financing during downturns.
The year 2008 was a rough one
for airlines. First, they had to deal with
volatile and sky-high fuel costs. Now
economic conditions continue to dete-
riorate, and air-travel demand is crum-
bling. The collapse in fuel prices is a
major relief, but weak demand means
airlines are looking to cut capacity, not
add it in the form of new aircraft. While
at this point 2009 production for new
aircraft is mostly set, deferments and
cancellations could occur for deliveries
scheduled for 2010 and beyond. The
severity and length of the economic
downturn will determine how long airlines will wait be-
fore looking to expand again.
Production delays at major manufacturers and the
machinists’ strike at Boeing in 2008 have been a godsend
to the aircraft financing industry. The deferred introduc-
tion of new aircraft models into the present well-sup-
plied market has been beneficial to the values of newer
narrow-bodied and wide-bodied aircraft. Meanwhile,
values for older narrow-bodied aircraft are crumbling
as airlines remove them from service in favor of their
newer generation counterparts. Values for wide-bodied
aircraft, which are used primarily for long-haul flights,
have held up better in comparison to narrow-bodies, but
their values are under increasing downward pressure in
the weakened global economy.
While the short-term obstacles are significant, long-
term fundamentals remain solid for aircraft financing.
New models will find niches that airlines and cargo car-
riers are eager to fill. International markets will show
strength in the coming years, and large established air-
lines tend to have benefited from the rough first half of
the decade to emerge leaner and more flexible. Rising
wealth in emerging markets is creating a new class of
citizens eager to travel.
MARINE EQUIPMENT FINANCE
The marine shipping industry is being squeezed by a
combination of forces. Most significantly, international
freight, which represents nearly 60% of total waterborne
tonnage, has deeply suffered. The U.S. economic slow-
down reduced domestic demand and
cut down import traffic, and as the
recession spread globally, exports—
the lone bright spot in the U.S. econ-
omy—began to drop off as well. In
the face of uncertainty, banks are re-
luctant to offer financing or to issue
letters of credit, which facilitate the
transport of goods. Cargo and ships
both are sitting idle at ports, resulting
in lack of freight revenue and creating
an overcapacity situation in the ma-
rine market.
Though weaker than last year,
coastal and inland waterborne com-
merce have not fully collapsed. For
the year ending in November 2008, internal waterway
tonnage was down 7.1%. Petrol and chemicals were
down 13.6%, food and farm products dropped 29%,
and manufactured goods and industrial commodities
rose 3.7%. Coal has been a bit stronger in recent months
and traffic was up 3.8%. Buoyed by high water levels,
iron ore traffic on the Great Lakes was up 11.5%. Stone
shipments were flat. The drop in demand has allowed
shipping companies to lay up aging equipment, which
comprise a higher percentage of the U.S. Jones Act fleet
than of the total fleet sailing under the U.S. flag.
Declining vessel values were also detrimental to all
ship owners and lessors. The price of scrap fell precipi-
tously during the final quarter of 2008, and ship own-
ers held on to their retirement-aged vessels. Much lower
iron and steel prices meant that owners would not easily
recoup the value of the vessel. Further, a large number of
vessels were scrapped when prices were near their highs,
and ship breakers currently have a full inventory. While
demand remains low and ship breakers’ inventories re-
main full, ship owners will have to adjust by laying up
While the short-term
obstacles are signifi cant,
long-term fundamentals
remain solid for aircraft
fi nancing. New models
will fi nd niches that
airlines and cargo carriers
are eager to fi ll.
5
TRANSPORTATION EQUIPMENT FINANCING JOURNAL OF EQUIPMENT LEASE FINANCING • Spring 2009 • VOL. 27/NO. 2
extra vessels now and concentrate on rightsizing and op-
timizing their fleets for future operation.
LOOKING FOR SIGNS OF RECOVERY
In the current climate it is premature to start looking
for signs of recovery in the transportation equipment
finance industry. Chances are high that things will get
worse—possibly a lot worse—before they get better.
That being said, it is only prudent to think about the in-
dicators that should be monitored for
signs of recovery.
Before shippers are willing to
make a significant commitment to fi-
nancing new equipment, they need ev-
idence that demand for the services of
their existing equipment is on the rise.
Among all products dependent on the
transportation services industry—raw
materials, components, intermediate
goods, finished goods, and in the case
of aircraft, business and leisure travel-
ers—the first category likely to see a
rebound in demand will be raw mate-
rials. When inventories hit bottom, the
first thing needed to replenish produc-
tion will be raw materials. As produc-
tion ramps back up, the other markets
for transportation services will follow.
One of the best measures to gauge the global sup-
ply and demand of commodities is the Baltic Ocean Dry
Bulk Freight Index (BDI). The BDI is a daily index of
overseas shipping rates for dry bulk commodities such as
grains, coal, and iron ore. Due to the high cost of taking
oceangoing ships out of circulation, the supply of vessels
is relatively fixed in the short term. As a result, the BDI
responds sharply to changes in demand. For example,
the dramatic ride of the freight market was apparent in
2008, with the BDI reaching 11,793 on May 20 and fall-
ing to 663 on December 5: a 95% drop. The BDI did
experience a move upward in February 2009, but this is
considered to be just a temporary shift caused by an inef-
ficient positioning of ships and a short-term movement
in demand. As that short-term demand is covered, the
BDI is expected to drift back down (see Fig. 3).
Of course, it always helps to have confirmation of an
economic recovery in more than one indicator so as not to
interpret a false-positive signal. Other early indicators for
a rebound in production include average weekly hours
and temporary employment. Typically, weekly hours in-
crease before manufacturing firms make the leap to hire
new workers. Along the same lines, temporary workers
are usually the first to be hired when demand improves
and the first to be let go when demand softens.
In summary, the players in the transportation equip-
ment finance industry that are able to adapt to the cur-
rent environment and take a long view
of their market opportunities will see a
brighter day. Among the four segments
of the industry addressed in this arti-
cle, the first to see an improvement will
be the services that primarily transport
commodities, namely rail and marine.
Based on IHS Global Insight’s perspec-
tive on economic and capital markets,
the first signs of a turnaround in trans-
portation financing are not likely to ap-
pear until the end of 2009.
In addition, it is a pretty safe bet
that lenders will be fairly cautious com-
ing out of the great recession of 2008–
2009, based on recent losses. Deals
will be limited to customers carrying
low debt levels and generally solid bal-
ance sheets. As the overall demand for
transportation services improves and liquidity returns to
the capital markets, there will be significant opportunity
to finance new equipment in the second half of 2010
and beyond.
Among all products
dependent on the
transportation services
industry, the fi rst category
likely to see a rebound
in demand will be raw
materials. As production
ramps back up, the other
markets for transportation
services will follow.
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
2007 2008 2009
Figure 3
Shipping Rates(Baltic Ocean Dry Bulk Freight Index, Jan. 1985 = 1000)
SOURCE: The Baltic Exchange.
6
TRANSPORTATION EQUIPMENT FINANCING JOURNAL OF EQUIPMENT LEASE FINANCING • Spring 2009 • VOL. 27/NO. 2
Mark Lauritano
Mark Lauritano is executive manag-
ing director of IHS Global Insight in
Lexington, Mass., the world’s largest
economic forecasting and consulting firm. He directs the
business planning and strategy practice, a team of econo-
mists and business analysts that works with companies
to enhance their planning processes by implementing
state-of-the-art market sizing, product-line forecasts,
and market segmentation analysis tied to external eco-
nomic business drivers. The group provides advisory
services to a broad spectrum of industries including fi-
nancial institutions, consumer packaged goods, retail-
ers, heavy equipment manufacturers, and information
technology. Mr. Lauritano has more than 16 years’ ex-
perience at IHS Global Insight assessing global business
markets and their exposure to economic risks. Recent
studies completed for the Equipment Leasing & Finance
Foundation include 2009–2011 Transportation Outlook
Series, U.S. Equipment Finance Market Study, and Propen-
sity to Finance Equipment—Characteristics of the Finance
Decision. Prior to joining IHS Global Insight, he served as
the director of research for Hancock Realty Investors, an
investment subsidiary of John Hancock. Mr. Lauritano
received his MBA with a concentration in finance from
Boston University, Boston, Mass., and a BA in economics
and environmental studies from Colby College, Water-
ville, Maine.
2008 Article of the YearTh e Impact of Bundling on
Equipment Lease Syndications from the Purchaser’s Perspective
By Philip R. Rosenblatt, Stephen J. Patterson, and Richard S. Rosenstein
Philip R. Rosenblatt, Stephen J. Patterson, and
Richard S. Rosenstein are co-authors of the
winning 2008 Article of the Year from the
Journal of Equipment Lease Financing. Their
article, which appeared in the Fall 2008 issue, is titled,
“The Impact of Bundling on Equipment Lease Syndica-
tions From the Purchaser’s Perspective.” This article dis-
cusses the practice of bundling equipment acquisition
financing with services and supply contracts. It explains
that the incremental risks that come with purchasing a
bundled transaction must be properly understood and
appropriately allocated.
The three authors are with the Boston-based law
firm of Nutter, McClennen & Fish, LLP. Philip R. Rosen-
blatt is a partner in the business department, where he
co-chairs the firm’s commercial finance group. Stephen
Patterson is a partner, whose practice focuses on com-
mercial finance. Richard S. Rosenstein is senior of coun-
sel practicing in the business department.
The Article of the Year award is based on secret bal-
lots of members of the journal’s editorial review board,
voting on the three online issues published in the award
year. Excluded from voting are articles based on research
generated or commissioned by the Equipment Leasing
and Finance Foundation (the journal’s publisher) or the
Equipment Leasing and Finance Association.
The revised version of the article is available at
http://www.store.leasefoundation.org/product/fall08_
impact_bundling/.
.
Philip R. Rosenblatt
Stephen J. Patterson
Richard S. Rosenstein