Leasing grew to 30% of total car purchase volume in 2016 and off-lease volume grew by 25% compared to the year prior, which could signal a “plateau” in the leasing market, said Anil Goyal, senior vice president of operations at Black Book.
Leasing is a captive business, and the captives get support from the manufacturers who can take on more risk on behalf of their financial arms, Goyal told Auto Finance News during a meeting at the National Automotive Dealers Association Convention & Expo last week.
With the constant growth in auto over the past five years, it’s been advantageous for manufacturers to lower lease payments in order to gain market share, but now it’s time to start rethinking that strategy, he said.
“We’ve come to the point where the manufacturer has to realize it will be a losing proposition to keep subventing the lease to grow and to get market share,” Goyal explained. “I think we’ve hit a peak around where the leasing penetration can go from a reasonableness perspective. Not to say there won’t be some manufacturer that will still go through and prioritize market share over that bottom line. But if you look at that bottom line and look at the life cycle in terms of how much is this getting you in terms of return — we’ve hit a plateau.”
Incentives have crept up to 11% of the manufacturer’s suggested retail price and was a large reason 2016 was a record-breaking year for car sales, he added. But if those continue upward, manufacturers and lenders alike will have more problems with residual values, and used car pricing fighting with new car sales.
“The certified pre owned, although it has grown, is not going to save the day, because it only grew 3.5% last year versus 25% growth in lease returns,” Goyal said. “So there is only so much you can do through certified pre-owned and I think the low-hanging fruit has already been picked.”
One solution already being implemented by captives such as General Motors Financial Co. and Toyota Financial Services is to use the increased supply in off-lease vehicles for rideshare or car sharing lease programs.
“It’s a great idea in terms of that lease return not coming back and not creating an oversupply situation,” “You have a lightly used vehicle come back, something that is very reliable, something that is in demand from a ridesharing perspective, and you are essentially going to put 150,000 miles on it — so you take it away from the market on that leasing volume coming back.”