DETROIT (Reuters) - Chrysler LLC said its financing arm would stop offering vehicle leases to U.S. consumers, a sharp break in strategy in response to tighter credit and the plunging resale prices for gas-guzzling trucks.
The abrupt announcement on Friday afternoon was the latest sign of the stress on Chrysler from an industry downturn that has hit all automakers. Earlier this week, Chrysler said it would cut 1,000 white-collar jobs by the end of September.
The move comes as Chrysler Financial’s $30 billion credit facility, backed by loans to consumers and dealers for vehicle purchases, is up for renewal in early August and the lender could see its borrowing costs rise amid the continuing credit market turmoil.
U.S. auto sales have dropped to their lowest level in 15 years, and the sudden premium on fuel-efficiency in the face of record gasoline prices has forced consumers to abandon SUVs and other light trucks.
The result has been a sharp decline in the resale prices for light trucks that has forced major automakers and related lenders to take large losses to write down the value of leases on those once-popular vehicles.
“You have got the dropping of the used car vehicle prices. You have got people that are struggling with the credit crunch,” Chrysler Financial spokesman Bill Porter said. “It is very difficult right now to offer competitive lease products. So we are switching our strategy.”
Dave Cole, chairman of the Center for Automotive Research in Ann Arbor, Michigan, said the credit crisis has put “an enormous amount of pressure” on automakers’ captive finance arms, which have been key profit centers in the past.
Leasing was very popular with automakers in the earlier part of the decade, when the U.S. auto market was booming, and automakers were able to boost sales by offering attractive lease programs.
“Leasing has grown over the years,” said Erich Merkle, an automotive consultant with accounting and consulting firm Crowe Chizek and Co LLC. “It goes through cycles. It’s off a little bit right now.”
While the move by Chrysler could protect its balance sheet from a further drop in used-car values, it also could be a drag on its already sluggish vehicle sales, Merkle said.
Chrysler’s larger rival Ford Motor Co this week 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.
Cerberus also owns a 51 percent stake in GMAC, the former captive finance company for General Motors Corp.
GMAC spokeswoman Gina Proia declined to comment on Chrysler’s announcement or on whether the lender would follow Ford in writing off vehicle loans on its books.
Chrysler’s decision could add to the pressure on dealers that already are reeling from a slump in vehicle demand.
Alan Helfman, a dealer at Helfman River Oaks Chrysler Jeep in Houston, Texas, said the news from Chrysler had been a shock, since it represented such a potentially disruptive break with the way sales have been made for years.
“When I first got the news I was hoping that I could have had a second floor on the dealership so I could jump,” he said, adding that he had relaxed after talking to local bankers.
Chrysler dealers can still offer leases through independent finance firms, Chrysler Vice Chairman and President Jim Press said on a conference call.
“We really reached a point today, in this environment, where the economic advantages of leasing have really disappeared,” Press said, adding that he anticipates that some sales could be lost due to the pull back from leasing.
Nationally, Chrysler said about 20 percent of consumers lease vehicles.
Chrysler, which has seen its sales drop 22 percent in the first half, relies more heavily on sales of light trucks than its rivals and it has been the most aggressive in discounting.
The announcement of the Chrysler Financial move to stop leasing came as the automaker extended a zero-percent financing for up to 72 months on some of its key larger vehicles such as the Dodge Aspen, Jeep Grand Cherokee and Commander.
U.S. automakers are not the only ones that have been hit by the slump in SUV and pickup truck resale values.
Nissan Motor Co Ltd Chief Executive Carlos Ghosn said this week that the reserves needed to cover losses on vehicle leases had been the one major surprise of the downturn for the Japanese automaker.
Reporting by Poornima Gupta, writing by Kevin Krolicki editing by Gunna Dickson and Carol Bishopric
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