Get Ready for Leasing's Revival
November 23, 2009

Leasing may have been down, but it isn't out.

After all but abandoning leasing for the past year, Ford Motor Co., General Motors Co. and Chrysler Group LLC each have reported either a re-entry or expansion in the leasing business. And other manufacturers who never got out of the game are in a position to increase their lease penetration.

Through the remainder of the year, Edmunds.com expects a modest increase in non-luxury leasing commensurate with the announcements by the domestics, as well as a slight increase with at least one import brand: Toyota Motor Corp. has room to grow its lease portfolio.

The figures above reveal that although lease rates this year are running below Toyota's recent   peak in 2008, the figure still is higher than 2006 and 2007 levels. The company's resale values have remained so strong that Edmunds.com analysts see room for growth. In fact, Toyota had a significant spike in leasing in October to 19.6 percent of total sales. This level is too high to maintain, but given Toyota' relatively low numbers for the year to date, its resale values should not be adversely affected at maturity. If these levels continue, however, Toyota may see some volume-related value decline after a couple of months into the time these begin to mature.

Leasing at Honda, meanwhile, seems to be sustaining at what are optimum -- and consistent -- levels for the brand.

Chrysler Group LLC, in fact, appears to have the most room for growth, as just three years ago one of every five Chryslers was leased. But the company's uncertain near-term future poses increased risk that will continue to weigh on its ability to reconstruct a leasing portfolio resembling anything like the past.

Domestics Will Increase Leasing by Fits and Starts

The domestic automakers will continue to seek the right mix over the coming months and will not reach the high levels we have seen in the recent past. But Edmunds.com CEO Jeremy Anwyl predicts that leasing will soon enough account for 20 percent of all new-vehicle sales.

To jump-start the practice, there will be some subvention of leases, but Ford and GM will not need to throw too much money at lessors, while Chrysler will spend more. Lease/retail mixes will vary by model, with growth kept in check.

GM and Ford are in a position to grow leasing in a healthy way. Both are in a strong position because the new products they have made available for lease are competitive -- and equally important, are forecast to retain their value at a much higher rate than the outgoing models. In many cases, several new 2010 models are projected to be among the best performers in their respective segments.

At GM, Buick's Enclave and LaCrosse are great candidates for leasing, with strong residual forecasts and consumer demand for the former and expected demand for the latter.

GM also could ramp up leasing of the Chevy Tahoe and GMC Yukon, as the decline in full-size body-on-frame SUV sales and leasing are boosting residual forecasts.

Leasing is a crucial component for Cadillac to get back in the game and compete with import luxury brands for volume. The current-generation CTS's resale values have held up well and the new SRX should also perform better.

For Ford, leasing should look quite favorable with the new and larger Taurus and certainly with the Flex. Some level of leasing can be sustained with vehicles such as the Fusion and Edge, as well.

Chrysler's approach is different: is making available all 2010 models for lease. However, if the company maintains a responsible mix -- growing to a short-term maximum of 5-8% lease mix (and eventually increasing to about 10-12%), for example -- the rebuilding company will be able to support better residuals than it has in the past.
 
Edmunds' data indicates Chrysler was leasing at more than 25% prior to the moratorium before its bankruptcy, with leasing rates in some months even higher. Chrysler cannot return to those levels and maintain healthy residual values.

Lux Leasing: Steady as She Goes

Leasing in the luxury market will remain similar to last year's monthly levels for most manufacturers, but will increase with the ramp-up in leasing for Cadillac's CTS.

Several luxury brands have climbed to higher lease ratios as the year progresses -- and, perhaps, the economy and auto market begin to stabilize.

 

Turning Off the Taps Helped

While a mere scaling back in leasing would have sufficed to gradually generate the correct mix in retail/lease business for the domestic automakers, there is a tremendous upside to having almost completely turned it off.

The most obvious advantage: The radical cutback in leasing created a pending shortage of off-lease vehicles, which deliver a significant and steady supply of used vehicles for franchised dealers. The curtailed supply of used vehicles now is contributing to the increase in residual forecasts for many models.

But there are other factors contributing to projected higher residuals for the domestic brands, particularly Ford and GM:

- Commitment to matching production to demand

The production plans manufacturers share with Edmunds are confidential, but it can be said manufacturers are working diligently to keep production aligned with demand. Recent labor negotiations and greater flexibility of assembly lines has helped facilitate this.

Maintaining lower inventories will increase used-car values vis-a-vis high-residual brands such as Toyota, which has strong value retention and the industry-standard certified pre-owned program.

Keeping production in line with demand also means brand equity is improved. For example, in some areas Buick Enclave availability is just shy of demand. This keeps transaction prices high and elevates the image of the brand. It also increases resale values.

- Designing more relevant and improved products

These initiatives have been in the works for years. Marginally competitive domestic models have been replaced with vehicles with improved interior materials, better designs and vastly improved fit and finish.

There may be no better example than GM's Chevrolet Malibu: The current-generation car -- launched as a 2008 model -- demonstrated GM's ability to vastly elevate and improve a mediocre car and nameplate.

In 2007, GM did a creditable job improving the interiors of the Chevrolet Silverado and the full-size Chevy and GMC SUVs based on the GMT800 architecture.

At Ford, the 2009 Fusion is an example of a more subtle improvement, but it did not have as far to go. Building on an already well-engineered car, the Fusion Hybrid has many innovative features.

Leasing will strengthen over the levels seen over the past year, but will be kept in check as the industry recovers. Leasing is necessary from a competitive standpoint and by and large, improved residual forecasts are allowing the rebuilding of the leasing business to happen as a natural course of business.  -- Joe Spina, Edmunds.com Senior Manager, Remarketing

Posted by Michelle Krebs at 6:10 AM under Analysis , Business , Companies , Featured | Comments (2) | digg this | Seed Newsvine

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