A year after exiting the leasing sector, GM is already talking about a return.
GM Vice Chairman Bob Lutz said earlier this week that the automaker would likely start to lease again, as early as Aug. 1. Though details have yet to be finalized, Lutz said GM would focus on leasing for luxury vehicles — those with higher sticker prices that consumers generally have a harder time paying for in full.
“We will get back into leasing, but we are not going to use massive subsidized leasing to drive volume because it’s volume without profitability,” Lutz told Automotive News.
I applaud GM’s effort — there certainly have been lost sales because of the lack of leasing options — but I worry that this move is just the beginning of another downward spiral for the OEM. As I see it, GM will reenter the lease market for luxury vehicles with very conservative residual values. When, after a couple years, it sees that losses are nowhere near the $716 million it lost in 2Q08, it will loosen terms a bit. First, non-luxury vehicles will be included. Then residual values will be relaxed. And before we know it, GM will be suffering from hundred-million-dollar residual losses once again.
Another consideration: Part of the reason for GM’s huge lease-portfolio loss last year was the unprecedented plunge in SUV values in the wake of record-high gas prices. I know Lutz said this week: “If we lease, it is going to be a lease rate that truly reflects the value of the car or truly takes into account the true depreciation level of the car in the first two or three years.”
Take a look at these two graphics from GMAC’s 2Q08 earnings presentation, which show U.S. sales proceeds as a percent of original ALG estimate. This one tracks proceeds by year:
This one tracks proceeds by vehicle segment:
“True” values or not, another gas hike like the one we saw last year would wreak havoc on GM’s lease portfolio.
A credit score should be used as a benchmark but not necessarily the answer to how credit worthy the customer is. To help address the lower credit scores, manual decision making will enable one to dig deep into the credit with taylored customer interviews to learn what the root causes were that harmed the credit. I call this Story Telling financing; there is a story behind the scarred credit. The story may allow for better terms on a credit score that may not look so good on paper. Take the time to get to know the applicant and avoid passing up on good deals that may not look so good.
I’m afraid you are correct. However, their announcement that they will get back into consumer vehicle leasing is great news. Even if it is only available on their luxury lines, it will hopefully spur action with the other captive finance companies and hopefully create a spark with the banks. Hopefully, they all have learned conservative residuals are a GOOD thing – even for the consumer.
The market is in desparate need for new lease funding sources – particularly with late model pre-owned. Unfortunately, most banks’ risk managers have unfounded fear about pre-owned leasing (POL).
If they would think about it, a 36 month pre-owned lease on a 1YO vehicle poses LESS residual risk than the same vehicle leased a year ago for 48 months. Both vehicles will come off lease at the same time but the pre-owned lease encountered most of its depreciation under different ownership.
There used to be some legitimate concerns about existing equipment on a pre-owned vehicle – or lack thereof. However, Chrome Data and other vehicle configurators are mitigating much if not all of that risk.
I just don’t get the banks’ negative views on POL.
Regardless, GM’s re-entry into the leasing market is good news. Here’s hoping they learn from past mistakes and resist setting unrealistically high residuals.
Let’s compare “aggressive” residuals with up front rebates on new vehicles. The rebate is a known quantity, but comes off the books IMMEDIATELY. An aggressive residual MIGHT create a loss down the road.
There are many advantages to short term leasing. Cycling the buyer through more often is one. Creating a supply of pre-owned is another. In addition, the impact of trade equity or money down, or any form of capital reduction, is a lot higher on short term leasing. For example, the payment is reduced about $50. for every thousand of cap reduction on a 24 month lease. A grand lowers a 60 month finance payment about $20. An additional benefit would be the fact that the OEM/captive can take depreciation credits on new leased vehicles as the title is held in their name. I’m not a CPA but I suspect that is more of a benefit when actually making a profit. Actually, there is that “loss carry forward” thing, but I need an accountant to explain that one.
But the domestics crap in their own nest, and I have NO sympathy for them. At the same time they subvent short term leases with cheap money and aggressive residuals, they flood the fleet rental market with the same vehicles. They are the ones who drive down the residuals of their own products. Shoddy quality has also contributed to lousy residuals in the past. Driving down their own resale value has not only hurt the domestic OEMS. It has betrayed the trust of people who buy their product new. They have created a scenario where their vehicles are excellent values when pre-owned, and lousy when new, at least compared to Toyota and Honda and others. They have created a scenario where the purchaser of an import might see positive equity after a couple of years into a finance contract while the domestic OEM’s owners are locked in for a much longer time span, not able to buy a new vehicle from anyone, let alone the domestic who back stabbed them in the first place. Discussions of quality parity need to center on the issue of resale value as much as anything. I’ll listen to their claims of equal quality only AFTER they have closed the resale/residual gap.
In the meantime, it is assured that residuals will be solid going forward due to the shortage of pre-owned inventory caused by the reduced SAAR and the diminished quantity of lease and rental returns. These firmed up residuals will be “found money” to the domestic captive finance arms. Since there has been an abundance of “write downs” for “present and future residual losses,” there may be some pleasant surprises hit the P&L.
Now what will the independent banks do with leasing? Done correctly, they benefit from all the same advantages of an OEM captive finance arm EXCEPT the don’t get to build and sell more vehicles when the consumer changes vehicles more often. I have often wondered why the independent banks would try to compete with folks who have an obvious “death wish.” In other words, why try to match a lease program from an OEM who isn’t trying to make money on the lease, but is trying to build more vehicles. They have used subvented leases as loss leaders to keep production up because of their UAW and supplier contracts. Their projections have been overly optimistic, because of their own juvenile projection processes. What brand manager wants to appear to be “weak” on his sales projections. Its like the typical dealership sales projection meeting ….. “Hey Joe, how many will YOU sell this month. John says he’ll sell 25. Don’t be a “wuss!” ” So Joe is afraid to say what he really thinks and provides a phony objective to get through the moment. Its hard to believe this goes on at the highest corporate level, but it does. After they establish overly optimistic projections, they do their best to achieve them, including “push marketing” sales and fleet incentives that come back to bite them and their customers in the ass! The pricing they receive on the parts to make these vehicles are based on these projections and are contracted for. And these are MBAs running these companies? These are the same geniuses who decided they could improve their results by voluntarily giving up shelf space by terminating dealers. Its would be like Gillette giving up shelf space at the grocery store or pharmacy to Schick. MBAs! Humbug!
So the independent lenders can pick their spots on new. But seem so married to their processes that they would rather take residual losses than make some fundamental changes that might require a little extra time and attention. God forbid there might be some technology they could use to identify problems BEFORE they buy them. The concept of pre-owned leasing should be as natural for independent banks as new is for the OEMs. One of these days maybe someone will explain it to me.