Automotive News - August 4, 2008 - (Page 8) 8 • AUGUST 4, 2008 advertising R E TA I L T U R M O I L Last-minute leases swamp Chrysler Bradford Wernle bwernle@crain.com A frenzy erupted on the floor of Carl Galeana’s Van Dyke Dodge store in suburban Detroit last Monday and Tuesday. Galeana moved 83 new vehicles — at least four times the normal business volume — in two frantic days as customers scrambled to get into new vehicles before Chrysler LLC got out of the leasing business Friday, Aug. 1. “Everyone is getting on the bandwagon before it’s too late,” says Galeana. “We’re moving everything we’ve got that’s leaseable.” Dealers in big lease markets such as Detroit and New York were scrambling last week to retool their business plans to cope with the news that broke with shocking swiftness July Lithia Motors’ Sid DeBoer: His group’s Chrysler stores will do better with retail only. 25: Chrysler Financial was getting out of the leasing business. Jim Abraham Jr., vice president and general manager of Allen Mello Dodge in Nashua, N.H., says the news broke so fast that Chrysler didn’t give dealers a script to use for reassuring concerned customers. After getting reassurances from Chrysler Financial, Abraham’s staff recorded a call that went out to more than 6,000 current and former lease customers. The robot call explained the news and told customers who might want to lease a new car that they should come to the dealership soon, because leasing would end at midnight July 31. He was initially skeptical, but now Abraham believes Chrysler did the right thing. “We had been watching them taking thousands of dollars in losses in vehicles returning off lease,” says Abraham. Chuck Fortinberry, owner of Clarkston Chrysler-Jeep in suburban Detroit, immediately went on his LeaseLink computer program, which lists all the lenders and programs they’re offering on various vehicles. “There’s a marketplace of indepen- dent leasing that will provide an opportunity for our customers” he says. Fortinberry says he’s concerned that the red-hot last week of July may “suck a bunch of business out of the first part of August.” Brandon Baker, owner of Baker Chrysler-Jeep-Dodge in Princeton, N.J., is not optimistic about finding new finance sources: “Right now we haven’t really found anyone who will be very aggressive.” Sid DeBoer, chairman of Lithia Motors Inc., a Medford, Ore., dealer chain with 38 Chrysler stores, believes those stores actually will do better with retail only. “We’re going to see zero (percent financing) for 72 (months) and a lot of other tools,” DeBoer says. “That helps Lithia sell more cars.” c LEASING Tumbling residuals wreak havoc continued from Page 1 Taking the plunge Residual values of big pickups and large SUVs are sinking. For some new 2008 models, here are projections of the percentage of sticker price they will be worth after 36 months, compared with their 2007 versions. FULL-SIZED PICKUPS FULL-SIZED SUVS Despite the anticipated loss of sales, domestic automakers had to change their lease practices, says Toprak of Edmunds.com. The captives routinely have subsidized leases to keep customers’ monthly payments down, he notes. of about 25 percent in the resale prices of full-sized pickups and SUVs. Many captives’ lease portfolios are heavily weighted with big SUVs. And those leases are generating hellish losses for lenders. Chrysler Financial is losing an average of $5,000 on every big truck it takes back at the end of a lease, estimates Jesse Toprak, executive director of industry analysis for the automotive Web site Edmunds.com. As the truck market disintegrates, Wall Street investors are increasingly reluctant to buy corporate securities backed by auto leases, analysts say. And they add that problems related to leasing aren’t temporary. Automotive Lease Guide sets the auto industry’s residual values. Every two months, the guide publishes its projections of a new vehicle’s likely worth at the end of a lease — typically 36 months. Automakers use these projections to calculate monthly lease payments. If a vehicle depreciates more than expected, the lessor must absorb the loss. Last month, Automotive Lease Guide downgraded residual values across the board for 2008-model big pickups and large and mid-sized SUVs. In three years, a new 2008 Ford F-150 pickup is expected to be worth 28.3 percent of its sticker price. By comparison, the 2007 model had a projected residual value of 40.5 percent. Detroit 3 residuals A vehicle with a lower residual value generally requires higher lease subsidies. The Detroit 3 tend to have lower overall residuals than import brand competitors. “Even though the residual values fell more than automakers anticipated, it wasn’t reckless,” Toprak says. “It’s because the market fell so dramatically.” Although leasing is a traditional sales tool for luxury brands, it has grown among mass-market brands in the past five years. Dealers say a lease often is the only way to finance an “upside down” customer who owes more on his trade-in than it is worth. A lease can roll in that negative equity and still keep monthly payments reasonable. Leasing varies by region. In the Northeast, J.D. Power and Associates says, leases represent 28 percent of this year’s new-vehicle sales. In the Midwest, it’s 24 percent. But in the Southwest, it’s just 7 percent. The Detroit 3 are providing dealers new sales incentives to make up for their cuts in leasing. And dealers express confidence that they will find other financial institutions to back the leases they write. “Banks are scrambling to fill the void,” says Eric Van Ace, general manager of David Ellis Chrysler-Jeep in suburban Los Angeles. “We can always find people who will carry the paper.” c Jamie LaReau and Alysha Webb contributed to this report Nissan Titan 2007 2008 Dodge Ram 1500 Ford Expedition 2007 2008 2007 2008 Chevrolet Tahoe 2007 2008 41.0% 30.2% 35.9% MID-SIZED SUVS 26.5% 44.3% 32.6% 42.1% SMALL CARS 31.7% Ford Explorer 2007 2008 Chevrolet TrailBlazer 2007 2008 Honda Civic 2007 2008 Ford Focus 2007 2008 51.8% 57.5% 37.7% 46.7% 42.7% 31.8% 35.2% 27.2% Source: Automotive Lease Guide $6 a gallon? John Blair, CEO of Automotive Lease Guide, says his company is basing its new residuals on the assumption that U.S. gasoline prices will rise to $5 to $6 a gallon in the next several years. “This is almost entirely driven by fuel prices,” Blair says. “The consumer has been awakened and anticipates fuel will be expensive, now and in the future. They’re going to be very reluctant to buy a vehicle that is not fuel efficient. That’s why we readjusted the residuals.” Lower residual values are especially costly for the Detroit 3, which rely heavily on truck sales. Chrysler Financial’s decision to abandon U.S. leasing is unprecedented for a captive, says Randall McCathren, a vehicle leasing consultant in Nashville. Ford Motor Co. and General Motors say they remain committed to leasing, but with new limits. Last week, Ford Credit cut residuals for a wide range of trucks. A memo to dealers from a Ford executive cited “the extreme losses Ford Credit is taking on off-lease vehicles.” Also last week, GMAC Financial Services said it is cutting back on leasing to U.S. customers, especially those with poor credit. GMAC has stopped subsidizing leases in Canada. The company also is raising interest rates on dealership floorplan financing. GMAC CFO Robert Hull told industry analysts that “the inherent risk in auto leasing is testing its place and scale in our business model.” GMAC expects to cut its North American leasing rate — now about 18 percent — by half “in the very near term,” says Himanshu Patel, an auto industry analyst with JPMorgan. With leases off the table, Chrysler offers new sales incentives On Friday morning, dealer Troy Allen got the details of Chrysler LLC’s first monthly incentive program since the automaker ended leasing. Allen, owner of Allen Motors, a Chrysler-Dodge-Jeep store in Derry, N.H., immediately huddled with his sales staff to figure out the rules, regulations and restrictions. His assessment of the new program: “It’s super-confusing. We’re still trying to figure out how to make it anything the salesman can explain to a customer.” On Friday, Aug. 1, Chrysler’s captive finance company stopped offering leases. The company promised dealers it would provide retail financing with the kinds of monthly payments that made leasing so attractive. The August “Shop ’Til You Drive” promotion offers 40 percent discounts on most 2008 Dodge Ram 1500 pickups. Chrysler is cutting prices on other cars and trucks as well. The company also is expanding its range of 72-month loans, selling five vehicles with 0 percent interest rates. To compensate for not offering leases, Chrysler Financial is giving $2,000 to customers who finance the vehicles they buy with the captive. For customers who still want to lease, Chrysler will offer $2,000 toward third-party leases. — Bradford Wernle http://www.zadv.com http://Edmunds.com http://Edmunds.com http://www.zadv.com
Table of Contents Feed for the Digital Edition of Automotive News - August 4, 2008 Automotive News - August 4, 2008 Losing leases: It hurts already Crisis at Chrysler: Buyers bail GM's really bad news: Its revenue Lincoln reworks bonus plan for dealers Pain spreads beyond Detroit: Nissan offers employee buyouts Mitsubishi changes dealer advisory board GM repeats employee discount program Ford merges brands' sales, marketing After 5 funky years, Toyota's Scion now finds itself in a funk It's a body, er, a bus by Fisher At Tech Center, form follows function Industry nemesis again turns up heat on climate Right products, diverse customers raise suppliers' profits Last-minute leases swamp Chrysler With leases off the table, Chrysler offers new sales incentives GM favors 4 endorsed vendors of dealer management systems GKN to supply F-150 FX4's differential For sale: 2 Metaldyne plants 1 week's notice: Chrysler dealers deserved better Get used to the roller coaster That 1934 Reo had a clutch pedal We sell what the public wants Decision makers can't use hindsight Detroit's truck trauma is self-inflicted Why won't consumers buy Detroit cars? Speaking of ads, don't overlook VW Software helps dealers manage parts Service survey: Customer satisfaction rises Researcher: Vehicles can prevent crashes Personnel Microsoft will offer Live Search Dealers Picture This Nissan offers buyouts to its Tenn. workers Lincoln-Mercury exec joins Kia Kaline out at Ford Penske earnings drop slightly Asbury will move; profits slip S&P downgrades American Axle Best sales news: July is over Now THAT'S resale value ... Sirius-XM satellite radio deal: A mixed bag Don't be misled by Chery's sales; it's a key player McCurdy applies some political (tire) pressure A star is born: The saga of the shrinking sticker Our flag is still there Obama-mobile? Or McCain-carrier? Automotive News - August 4, 2008 Automotive News - August 4, 2008 - (Page Intro) Automotive News - August 4, 2008 - GM's really bad news: Its revenue (Page 1) Automotive News - August 4, 2008 - GM's really bad news: Its revenue (Page 2) Automotive News - August 4, 2008 - Ford merges brands' sales, marketing (Page 3) Automotive News - August 4, 2008 - After 5 funky years, Toyota's Scion now finds itself in a funk (Page 4) Automotive News - August 4, 2008 - After 5 funky years, Toyota's Scion now finds itself in a funk (Page 5) Automotive News - August 4, 2008 - Right products, diverse customers raise suppliers' profits (Page 6) Automotive News - August 4, 2008 - Right products, diverse customers raise suppliers' profits (Page 7) Automotive News - August 4, 2008 - With leases off the table, Chrysler offers new sales incentives (Page 8) Automotive News - August 4, 2008 - With leases off the table, Chrysler offers new sales incentives (Page 9) Automotive News - August 4, 2008 - For sale: 2 Metaldyne plants (Page 10) Automotive News - August 4, 2008 - For sale: 2 Metaldyne plants (Page 11) Automotive News - August 4, 2008 - Decision makers can't use hindsight (Page 12) Automotive News - August 4, 2008 - Decision makers can't use hindsight (Page 13) Automotive News - August 4, 2008 - Speaking of ads, don't overlook VW (Page 14) Automotive News - August 4, 2008 - Service survey: Customer satisfaction rises (Page 15) Automotive News - August 4, 2008 - Personnel (Page 16) Automotive News - August 4, 2008 - Dealers (Page 17) Automotive News - August 4, 2008 - Dealers (Page 18) Automotive News - August 4, 2008 - Picture This (Page 19) Automotive News - August 4, 2008 - Picture This (Page 20) Automotive News - August 4, 2008 - Picture This (Page 21) Automotive News - August 4, 2008 - Picture This (Page 22) Automotive News - August 4, 2008 - Picture This (Page 23) Automotive News - August 4, 2008 - Nissan offers buyouts to its Tenn. workers (Page 24) Automotive News - August 4, 2008 - S&P downgrades American Axle (Page 25) Automotive News - August 4, 2008 - S&P downgrades American Axle (Page 26) Automotive News - August 4, 2008 - Best sales news: July is over (Page 27) Automotive News - August 4, 2008 - Best sales news: July is over (Page 28) Automotive News - August 4, 2008 - Best sales news: July is over (Page 29) Automotive News - August 4, 2008 - Obama-mobile? Or McCain-carrier? (Page 30) Automotive News - August 4, 2008 - Obama-mobile? Or McCain-carrier? (Page 31) Automotive News - August 4, 2008 - Obama-mobile? Or McCain-carrier? (Page 32)
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