Understanding the Impacts on Automobile Leasing Firm Loss in China: An Analysis of Vehicle Residual Value Risk and Lease Price Patterns

ABSTRACT The paper addresses vehicle depreciation and pricing issues in the automobile leasing industry in China. Under the current industry climate, operating lease firms face large residual value risk, and therefore, how to price contracts that minimises such risk is an important question. By analysing market data of used vehicles, an exponential decay function was developed to model the price dynamics across different brands and model series. Specifically, we estimate the depreciation rate directly from the data. In addition, by considering all revenue and cost components and converting them into present value terms, appropriate deposit and rents combintions were sought under different profit expectations. Length of contracts, age of vehicles and purchase cost factors were also considered to detect any further patterns in rents. The research outcomes will provide guidance on lease pricing given the current development of the industry, thereby improving firms’ profitability position as well as helping maintain their competitiveness and growth.