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.
“The actions on leasing have been tough for us, but they were the right actions because this is the asset category which has been the toughest to finance, and in fact, in some areas you are not able to finance it,” he told Reuters
Toyota does not face the same difficulty.
“In our case Toyota Financial Services is triple-A rated,” Jim Lentz, Toyota’s U.S. sales chief, told Reuters. “They have access to capital. So for us capital is less of an issue than it may be for others.”
All three major U.S. automakers are rated deep in junk territory.
Lentz said Toyota’s lease transactions this year had risen to 15 percent of overall sales from 13 percent a year earlier. While that lease share could go a few percentage points higher, he said Toyota did not plan to mount a major push to take share through lease deals.
“We are going to stay in leasing,” Lentz said. “We have no intent to have a big increase in our leasing.”
Hyundai Motor Co (005380.KS) plans to lease up to 50 percent of the sales volume of its new luxury Genesis sedan, said David Zuchowski, vice president of Hyundai’s North American sales.
The Korean automaker also plans to try to capture sales from lease customers defecting from U.S. brands, he said.
“There are opportunities for us to lease ... and we know that the domestics, because of the condition they are in right now, are shying away from leasing a little bit,” he said.
Leasing in August in the United States plunged to its lowest level in four years to about 13 percent of all new-vehicle transactions, according to the Automotive News, which cited Power Information Network data.
Chrysler’s U.S. sales fell 34 percent in August, the first full month following its exit from the leasing business. GM’s U.S. sales declined 20 percent while Ford’s sales fell nearly 26 percent in the same month.
U.S. automakers commanded just 47 percent of the market through August. That was down from 51 percent at the same point a year earlier, according to Autodata.
(For summit blog: summitnotebook.reuters.com/)
For more on the Reuters Autos Summit, see <ID:nN15267022>