GM to Reduce Lease Programs to Save Money, Boost Car Value

By TERRIL YUE JONES

March 8, 2002 12 AM PT

TIMES STAFF WRITER

DETROIT —

Faced with spiraling costs from subsidizing auto leases to consumers, General Motors Corp. said it would reduce lease programs to save money and boost the value of used cars that return to the market.

Auto makers frequently promise high residual values--the money vehicles are worth at the end of a lease--to help keep down monthly lease payments and make deals more attractive to buyers, and to help move slow-selling cars and trucks off dealer lots.

But if the vehicles are worth less at the end of the lease than the declared residual, then the auto maker or finance company holding the loan must absorb the difference, which can be several thousand dollars per vehicle.

“The cost of leasing has gotten prohibitively expensive,” Paul Ballew, GM’s director of market analysis, said Thursday.

“We saw that residuals are starting to fall, and we anticipated softness in the auction market [for used cars], so we’ve been more aggressive than others in pulling back from leasing. We don’t want to add hidden costs to our behavior in the market.”

Auto makers lost an estimated $10 billion in the U.S. last year from lower-than-expected residuals, according to CNW Marketing Research.

That’s expected to improve only somewhat this year, to a loss of $8.5 billion, said Art Spinella, president of CNW’s automotive division.

“I expect a reduction in subsidized leases ... so they can boost profits and not get creamed on residual values,” Spinella said.

Leasing is a good option for drivers who like to get a new car every two or three years and drive fewer than 15,000 miles a year.

Typically, on a three-year lease they pay $100 a month less than they would on a five-year purchase loan, Spinella said.

The downside is that at the end of the lease they have no equity in the vehicle and must replace it.

For those who plan to keep a car five years or more, buying makes sense because drivers own the vehicle once it’s paid off, and, presumably, the car will run for several more years.

Leasing also allows consumers to drive a car they wouldn’t otherwise be able to afford because they’re effectively renting it for the lease period. Hence the high percentage of leases for DaimlerChrysler’s Mercedes-Benz, BMW and Ford Motor Co.’s Volvo luxury cars.

Lease rates for Volkswagen, Toyota Motor Corp. and Nissan Motor Co. are inflated by the high percentage of leases of their Audi, Lexus and Infiniti brands. Ford and Chrysler Group say they don’t plan to de-emphasize leasing, which accounted for 26.4% and 22.7% of their retail business last year, compared with 28.8% for GM.

“We have no intent to disenfranchise our customers who want to lease,” said George Pipas, Ford’s director of sales analysis.

People who lease Ford, Lincoln and Mercury cars and trucks tend to be more loyal customers, Pipas said.

Chrysler Group, made up of the Chrysler, Dodge and Jeep brands, is “right about where we want to be” with leasing, said Marc Henretta, Chrysler’s manager of sales communications.

Leasing has been decreasing across the board, down from a peak of 31.4% of light-vehicle sales in 1999 to 27.6% last year, according to the National Auto Dealers Assn.

“The percentage of new-car sales going into leasing programs has fallen in recent years as interest rates have fallen to levels not seen since the early 1960s,” said Paul Taylor, chief economist for NADA.

“I’ve never been a big fan of leasing,” said Jim Lynch, president of the Rydell Automotive Group’s San Fernando GM dealerships.

“When cars are returned, they’re auctioned off at lower prices than what they would get without leasing, it costs manufacturers tons of money, and the person who bought the car outright suffers because it’s worth less.”

Dealers, however, need leasing, because it represents a steady stream of business by repeat customers and regularly supplies late-model used cars that generally provide higher margins than new cars.

Shares of GM rose $1.49 to $61.41 on the New York Stock Exchange.

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Lease leaders

Percent of autos that were leased in 2001 by companies that sold more than 100,000 units in the U.S. last year (does not include fleet sales):

Mercedes-Benz 58.30%

BMW 52.1

Volvo 38.7

VW-Audi 37.2

Mitsubishi 36.8

Toyota 31.3

Nissan 29

Honda 28.9