Leasing pullback threatens Detroit market share

By Poornima Gupta - Analysis

DETROIT (Reuters) - Detroit automakers have pulled back from leasing to protect already-strained balance sheets.

But the cost may be a further loss of U.S. market share to better capitalized rivals led by Toyota Motor Corp (7203.T), industry executives said this week at the Reuters Autos Summit in Detroit.

U.S. consumers who prefer to lease vehicles rather than buy outright could now pull away from the domestic manufacturers, strengthening the hold of import brands in the U.S. market.

Chrysler LLC stunned the industry when it announced its exit from the vehicle lease market in late July. General Motors Corp GM.N and Ford Motor Co (F.N) followed by severely curtailing their leasing programs and raising rates to minimize exposure to the drop in residual values.

"This was not a good development," said Chief Executive Mike Jackson of AutoNation Inc (AN.N), the largest public U.S. auto dealership group. "That core leasing group, you cannot convert them to purchase. There's no way."

"They will go to another brand where they can lease," Jackson said, adding that most of the new lease business is moving to Japanese or Korean brands.

Jerry York, an adviser to billionaire investor Kirk Kerkorian and his $1 billion investment in Ford, said up to 20 percent of U.S. vehicles are sold to customers through leases.

The pullback from leasing will hurt Detroit automakers and put added pressure on U.S. auto sales already running at 15-year lows, York said.

"No one knows how much is going to be lost, but I would wager on the order of 50 percent is lost from the market by way of deferring or going to a foreign competitor," York told Reuters.

U.S. automakers and their affiliated financing companies have posted large lease-related write-downs because of the plunge in the resale values of trucks and SUVs this summer in the face of record high gas prices.

In recent years, automakers had been able to boost sales by offering attractive lease programs but profits on leases depend on the companies being able to sell vehicles for near their forecast residual value when the contracts are up.

But because of the sudden premium on more fuel-efficient cars, resale values for light trucks have dropped by as much as 30 percent, saddling finance companies with heavy losses.

Ford took a $2.1-billion charge for its finance company when it reported second-quarter results, in large part because of the hit it took on the declining value of SUV and truck leases. GM also took a $2-billion hit in the past quarter.

By contrast, Japanese automakers have been shielded from the worst of the U.S. market downturn because of their heavier reliance on car sales and their better access to funds.

GM Chief Operating Officer Fritz Henderson said the automaker's decision to restrict leasing was a necessary step.