||Auto Industry's New Math Sends Leases Soaring
If there's a silver lining in the weak U.S. auto market, this may be it: Anemic new-car sales will mean short supplies of used cars in two or three years. That has made it possible for automakers to return to leasing in a big way -- with little fear that a glut of returns in 2012 or 2013 will hammer residuals and damage brand images.
Sure enough, leasing activity has begun to soar in recent months.
Leasing climbed to 21.1 percent of U.S. sales through September, compared with 16.6 percent for all of 2009, according to Edmunds.com. And although leasing did fall sharply last year as credit dried up, this year's level not only tops 2009; it is the highest in several years.
"A lot less sales now is a lot less used cars later," Don Esmond, Toyota Motor Sales' senior vice president of automotive operations, said recently in Detroit. "Our arithmetic says leasing is a good deal. It's a good bet that resale values will be a little better later on."
Automakers have jumped in with both feet, offering bigger lease subsidies, lower interest rates for customers and shorter lease terms to get vehicles back sooner, Edmunds.com data show.
All major manufacturers have boosted leasing in 2010. For Toyota Motor Sales, American Honda and Nissan North America, leasing accounted for at least a quarter of all volume through September.
General Motors Co., Chrysler Group and Hyundai-Kia Automotive also have increased leasing sharply this year. For each, leasing accounted for 11 percent of total new-vehicle transactions through September, compared with about 3 percent over the same period last year.
Ford Motor Co. shows the smallest increase this year, to 13 percent of sales, from 11 percent. But dealers say Ford is preparing a fall leasing promotion at least in some regions.
Still, in a wobbly recovery, more leasing has risk, say two analysts.
Kelley Blue Book has factored in lower used-car inventory in its residual-value forecasts but has given it less weight than some manufacturers anticipate, said Eric Ibara, KBB's director of residual-value consulting.
"There are manufacturers doing more leasing now, thinking the 2012-13 market will be more favorable," he said. "But that depends on a stronger economy and more robust new-car environment. We're still being cautious."
A strong recovery is no certainty, said George Magliano, a forecaster for IHS Automotive in New York.
"It all depends on our future forecasts being right," he said.
Future used-vehicle shortages also take some of the worry out of sales to daily rental fleets. Automakers boosted those sales 56 percent to 829,060 vehicles in the first half from the year-ago period, according to Automotive Fleet magazine.
But as fleet volume subsides in the second half of the year -- a normal seasonal phenomenon -- automakers' emphasis has shifted to leasing.
Leasing is more attractive for several reasons: Credit is more available this year, financing costs for manufacturers are cheaper because interest rates are falling, and automakers consider subsidized leases less damaging to brand perceptions than cash incentives.
"If it's just cash on the hood, you are not helping the residual," said John Mendel, executive vice president of American Honda Motor Co. "If it's leasing and you believe the residual will be higher, that plays into the market because you are getting those cars back. Usually cash plays into a lower residual value."
Manufacturers have boosted lease incentives to an average of $3,069 per vehicle this year, up more than $1,000 from 2009. All major automakers raised leasing incentives, but approaches varied. Nissan has bumped its incentives by $495 since last year, the smallest change. But Chrysler Group is spending $3,332 more this year and GM almost $2,000, according to Edmunds.
Interest rates on lease deals have fallen almost a point to 3.2 percent for the industry compared with last year. GM's lease interest rate averages 2.1 percent this year, down from 4.9 percent last year. Chrysler averaged 5.4 percent last year but 2.8 percent this year.
David Wilson Jr., vice president of Preston Auto Group, a Ford, Lincoln, Nissan, Hyundai and Mazda operation in Preston, Md., is embracing leasing.
"Anything that gets customers back to us faster will definitely help out," he said. "Residuals will stay up because there are not as many vehicles available."
Automakers are looking for ways to help dealers cope with used-car shortages, which will get worse through 2012, said Tom Webb, chief economist at Manheim Consulting. But manufacturers must be careful of the interplay between new- and used-car prices, he said.
Current high prices for used cars have helped boost transaction prices on new ones -- and healthy used-car prices support new-car volume, too.
"Fewer car owners are upside down on their loans when they come into dealerships, and more can afford to buy a new car," Webb said. "Conversely, manufacturers offering $199-a-month leases hurt used-car values."
But Tony Schnurr, CEO of the Larry H. Miller Automotive Division, a 39-dealership group based in Salt Lake City, is optimistic.
"It will all work out," he said. "If we don't have used cars, then manufacturers will have programs out there to boost new-car sales."
(Source: Automotive News, 10/18/10)
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