Back to the Future: The Leasing Mess

Posted by: David Welch on July 30, 2008

General Motors and Ford are pulling back on leasing. Chrysler and Wells Fargo Bank will stop writing new car leases altogether. Ford and BMW have already taken charges because of losses in their lease portfolio. Should the carmakers have seen this coming? Yes, but not for the reasons you might think.

Granted, none of the carmakers saw the recent spike in fuel prices that precipitated the opposite reaction in suv sales and resale values. That freefall in sales of gas guzzlers means that when carmakers get these three-year-old suvs back after a lease, they’re worth far less than they thought they would be. That explains why BMW took a nearly $400 million charge in the first quarter for lease problems and Ford said bad lease deals will cost it $2.1 billion.

That auto makers missed a wicked shift in the market isn’t surprising. What’s far more unnerving is the fact that they took huge losses from leasing just a few years ago and didn’t learn. In the late ‘90s, carmakers went wild with leasing to offer consumers low monthly payments and goose car sales. Leasing accounted for as much as 30% of all vehicle sales back then, says Jesse Toprak, executive director of industry analysis at Edmunds.com. Now, it’s about 25%. But when all those used cars came back and flooded the market, resale pries dropped and many lenders lost money. By 2003, leasing became just 11% of U.S. car sales and carmakers collectively lost billions on the value of their leased vehicles.

So here we are in 2008. Sales and prices of suvs have been on the wane for at least three years and the auto makers are just now pulling back on leasing. They should have seen this coming and pulled back earlier. Auto executives have bemoaned falling vehicle prices in the U.S. since 2000. That means someone knew they had pricing problems. But like mortgage lenders who sold Americans bigger homes than they needed, leasing was a way to get the middle class into larger, more luxurious suvs than they needed. And now the bill is due for everyone.

Reader Comments

Dearborn Observer

July 30, 2008 5:22 PM

It's not that the automakers didn't learn - it's that short-term sales pressures will always trump the collective memories of the pain caused by residual losses. All of the leasing underwritten by the Big 3 during the past three years occurred at a time when their sales divisions (and dealers) have had unprecedented levels of inventory to push. And for many markets (Detroit, the Northeast, and the urban West)leasing is critical and the default tool for getting customers in the showroom when all else fails.

Snoz

July 31, 2008 5:30 AM

Robin: Holy Batman! What does he mean when he sez: "it's that short-term sales pressures will always trump the collective memories of the pain caused by be residual losses" ?
Batman: It means the Big3 got drunken greedy and couldn't remember anything else.
Robin: Holy Batman, you're a Wiz! Here's another one: "All of the leasing underwritten by the Big3 during the past 3 years occurred at a time when their sales divisions have had unprecedented levels of inventory to push.":
Batman: Robin, because of your virgin ears, you may not like the hear the real translation: In desperation, the Big3's dealership push-and-shoved their F-ing,*!?*%!!#**!#? Bang, Slamp, Pop, *!!%#**#? Boom ?*!%*&#*! lease on the unwary buyers.
Robin: Holy Batmobile! That makes the Penquin look like Mother Theresa!

Banker

July 31, 2008 9:21 AM

DO is spot on.

Like the subprime mortgages, you need to sell to compete, but the execs have to manage (limit) the exposure. Neither did.

It's easy to say that, but it is the discipline that managers get paid for to protect the company.

BTW: Fuel doubled in price between Jan'04 and Aug'05 (18 months). You would imagine that a good managers would have hedged their product lines and financing exposure on that signal. Yet, as evidenced by the larger models released this year by nearly every manufacturer (3-4 production lag), they missed a very strong signal - completely.

Vhalen

July 31, 2008 4:03 PM

Live and learn, maybe that little axiom is not for everyone >:)!

chris

August 1, 2008 10:06 AM

i agree!

Sam

August 4, 2008 1:20 PM

Love the dialogue SNOZ lol. You are right on point SNOZ and blog poster! Greed is GOOD as once said by Michael " Gordan Gecko" Douglas. Its good, but he forgot to mention it is painful too! The BIG 3 were greedy- and now the pain of that greed is coming back on them. I think if the automakers would have stuck to selling vehciles that were worth a SHAZAAM they wouldnt be crying right now. Tisk Tisk!

Squeezebox

August 7, 2008 5:05 PM

C'mon, the big three weren't the only ones to miss the clues. Toyota's inventory of Rav4 and Tundra leases are just as worthless.

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Want the straight scoop on the auto industry? Our man in Detroit David Welch, brings keen observations and provocative perspective on the auto business.

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