On the heels of Ford Motor Credit’s $2.1 billion writedown of its leasing portfolio yesterday, today Chrysler Financial announced that it plans to stop offering leases in the U.S. effective Aug. 1.
Though it came a little sooner than I had expected, I can’t say that I was surprised. In fact, I wrote in this space yesterday that “the lease product may finally have met its demise.”
Sure, I didn’t think Chrysler would be the first one to make the move, but that leads me to think that Chrysler’s losses are even more severe than Ford’s.
The bottom line is clear: No matter how high-tech analytics becomes, financiers will have no way to accurately predict the cost of gas, consumer preferences, and the state of the economy years in advance.
So long, leasing.
Like many aspects of the auto business, leasing too shall rise again like the phoenix from the ashes. Leasing does indeed become volatile when you have no clear way to predict what a vehicle will be worth in the market 3 years from now. Add to that the manufacturers influence to have a low lease payment by boosting the residual value; you just put off the evitable loss in value of the vehicle.
Setting residual values has always been a challenge. ALG, whom most lessors rely on for their values has NEVER been right in setting their values. If a lessor ever set a realistic value they would get no volume, as there will always be a player taking a risk and bumping some values.
What message does it send to the public, when the captive finance arm of the manufacturer discontinues leasing? When the manufacturer doesn’t want their own vehicle returned in three years why would the consumer want to buy that vehicle? All the lessors had to do was put a realistic (conservative) residual value on the vehicle indicating the true estimated future value. Yes the payment would be higher, and it might take some selling skills to close the deal but in the end the manufacturer is showing they stand behind their product.
To paraphrase a dealer in Kentucky, “A rebate on a vehicle is an apology for their product; a boost in residual value is a reward for their product.”