Big 3 models' residual values tumble
Import brands stable despite rebate wars
By Arlena Sawyers
Automotive News / September 29, 2003

Falling behind
Here are some automakers' average residual values based on vehicles returned in 2003 after a 36-month lease.
COMPANY AVERAGE RESIDUAL VALUE
Honda, Acura 52.20%
Toyota, Lexus 49.00%
Nissan, Infiniti 45.00%
GM* 40.10%
Chrysler group 39.20%
Ford** 38.70%
*Does not include Saab
**Does not include Premier Automotive Group
Source: Automotive Lease Guide

The rebate wars have eroded the residual values of Big 3 cars and trucks.

According to Automotive Lease Guide, 3-year-old Big 3 vehicles that came off lease this year retained just 39 percent of their sticker prices. That's a sharp decline; a 1997-model Big 3 vehicle returned after three years was valued at 45 percent.

A sizable gap has opened between the residual values carried by the Big 3's vehicles and those carried by the vehicles of their foreign rivals. Three-year-old foreign vehicles retain 47 percent of their sticker prices, showing little change in recent years.

Automotive Lease Guide, of Santa Barbara, Calif., publishes the auto industry's bible on residual values.

If the residual value of a leased vehicle falls below expectations, the automaker must eat the difference when the customer returns it.

That's one reason General Motors, Ford Motor Co. and the Chrysler group sharply have reduced their reliance on leasing. All three companies have switched their focus to 0 percent financing and generous rebates.

Those incentives propped up sales. But low residual values reduce the value of a customer's trade-in. Moreover, sagging residual values can damage consumer perceptions of a brand's value.

Meanwhile, strong residual values allow a company such as Honda to avoid big incentives on its vehicles. Honda sells the brand - not the deal.

Upside-down

In showrooms, falling residuals are creating more "upside-down" customers. These people owe more on their car loans than the vehicle is worth. And if they purchase a new vehicle, they must add the unpaid balance to their new loan.

Six out of 10 prospects who enter Mark Beardmore's Chevrolet dealership in Carroll, Iowa, are upside-down on their loans.

Some customers owe $8,000 to $10,000 more than their vehicles are worth. It is difficult to find financing for these customers, Beardmore says.

"You know how consumers shop, shop, shop," he says. "I think they go from dealership to dealership trying to find someone who can bail them out."

The gap between the Big 3 and foreign competitors is especially wide for mid-sized cars. After three years in the marketplace, the 2001-model Dodge Intrepid and Ford Taurus have residual values of 30 percent, and the Chevrolet Impala is valued at 33 percent of its sticker price.

By contrast, a 3-year-old Honda Accord is worth 50 percent of its original sticker. In fact, Honda could be considered the gold standard of the mass-market brands. On average, 2001-model Hondas and Acuras carry residual values of 52.2 percent.

American Honda Motor Co. Inc. keeps residual values high by selling very few vehicles to rent-a-car companies. The company also is fairly stingy with factory rebates. Currently, American Honda is offering low-interest loans to clear out some 2002 and 2003 models, but it has avoided big incentives on its 2004 models.

In place of big rebates, American Honda prefers to offer value packages or special-edition vehicles, says Dan Bonawitz, vice president of corporate planning and logistics. For instance, after the CR-V had been on the market for several years, Honda freshened it with a leather interior.

American Honda's policies keep residual values high. And that, in turn, has allowed it to increase its lease rate this year in contrast to GM, Ford, the Chrysler group, Toyota Motor Sales U.S.A. Inc. and Nissan North America Inc.

"The finance arm, the dealer and the customer can count on the product down the road," Bonawitz says.

Guesswork

In part, the industry's decision to cut back on leasing is a reaction to aggressive leasing policies of the 1990s.

At the time, manufacturers often projected artificially high residual values in an effort to lower monthly lease payments. Lenders typically set aside reserves to cover the losses, but many were burned badly when the market values of their off-lease vehicles were much lower than expected.

The auto industry's residual losses totaled $7 billion last year, estimates Art Spinella, president of automotive research at CNW Marketing/Research in Bandon, Ore. He predicts losses will approach $5 billion in 2003. That would be $1,555 per vehicle.

"The industry is working on razor-thin margins now," Spinella says.

The auto industry is acutely aware of the problem. According to R.L. Polk, GM leased 378,515 vehicles to retail customers last year, a drop of 44 percent compared with 1998. Ford's personal leases fell 48 percent compared with 1998, and the Chrysler group's leases dropped 48 percent.

To shore up residual values, GM is cutting the number of vehicles sold to car rental companies. And it is working hard to manage used-vehicle supply and demand. According to Paul Ballew, GM's executive director for market analysis, GM has stepped up its certified used-vehicle program and expects to sell about 450,000 units this year.

Ballew says that will prop up residual values and build the company's brands.

Downward spiral

But the factors that caused the Big 3's low residual values - high rebates, 0 percent financing and heavy fleet sales - seem likely to persist.

The Big 3 continue to lose market share to the imports, upping the need for heavy incentives. Ford, GM and the Chrysler group already have begun to offer substantial rebates on newly introduced 2004-model cars and trucks.

Raj Sundaram, president of Automotive Lease Guide, acknowledges that rebates are a fact of life in the short term. But he has some advice for automakers:

* Avoid introducing new models with big discounts.

* Don't raise a vehicle's sticker price if you are going to offer rebates anyway.

* Minimize sales to daily rental fleets.

* Make sure the customer knows why your company's car or truck is better.

Sundaram believes that a coming wave of new products will help the Big 3 to revive residual values. Ford, GM and the Chrysler group will have an opportunity to sell a vehicle on the basis of design, style and features - not price.

"The domestics are launching a ton of new vehicles over the next few years," Sundaram says. "The timing couldn't be better."

Not intended to knock your article - thanks for posting it.

Britt

Originally posted by guionM
No worries. I personally don't understand why anyone would lease in the 1st place.

But just because I don't understand it, doesn't mean they don't have good reasons..... really good reasons.

Originally posted by lymelizzard
So in three years the cars are selling for 47 - 53% of MSRP. Thats fine, IMO cars are overpriced way overpriced. So the way my rose colored glasses see it is the cars are really selling used for about what they should have sold new for. The car market needs to be shook up a little, the pricing needs to be more in line with with reality.