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.