DETROIT - Ford Motor Co. is paying its dealers hefty incentives on 10 vehicle lines to keep off-lease units out of auctions.
The company wants dealers to buy off-lease vehicles to help sustain used-car prices by diverting vehicles from discounted auction inventory. Cheap off-lease units threaten used- and new-vehicle pricing structures. A flood of discounted off-lease vehicles depresses used-car prices and makes it difficult to establish strong lease-end values on new units.
The Ford Taurus and Ford Explorer - two of Ford's best-sellers - are included in the national program. The program began May 1 and ends June 30.
Ford is paying dealers $700 to $6,000 per unit, depending on nameplate and mileage. Dealers also receive an additional floorplan incentive of $200 to $450 per unit. The program covers vehicles leased for 24 months through Ford Motor Credit Co.
Other manufacturers do not share Ford's problem.
Ford is the industry's leasing leader. It accounted for 30 percent of personal-use leases written in the United States in the first four months of 1997, according to CNW Marketing/Research in Bandon, Ore. General Motors had 21 percent; Chrysler Corp. had 13 percent.
A FIRST FOR FORD
This is the first time Ford has dipped into its leasing residual reserve fund to pay dealer incentives, said Roger Olsen, Ford brand manager/Red Carpet Lease. The company is establishing more conservative residual values when crafting lease programs today.
Dealers let off-lease vehicles go to auctions because the auction value is hundreds of dollars - and sometimes thousands of dollars - less than Ford's anticipated residual value. That means it is cheaper to stock dealership used-car lots at auction. A sizable spread between the used and new vehicles also can provoke customer resistance to new-car prices.
Currently, dealers keep about 30 to 35 percent of the off-lease cars and trucks financed through Ford Motor Credit Co. in the 10 affected vehicle lines, Olsen said. Ford wants to boost that to about 50 percent, he said.
In contrast, in 1996 Toyota dealers retained 62.1 percent of the brand's personal-use off-lease vehicles financed through all sources, said Art Spinella, CNW vice president. When all vehicle lines and all financing sources are considered, Ford, Lincoln and Mercury dealers retained more than 40 percent of personal-use off-lease units in 1996, Spinella said.
Ford raises lease-end values and discounts finance rates to reduce a customer's monthly payment on a 24-month lease.
'If our residual value is higher than the Automotive Lease Guide, we set aside a certain number of dollars per percentage point,' Olsen said. 'I call it the rainy-day fund.
'We have taken some of the reserve and paid it out in dealer incentives,' Olsen said. 'It is not a case of having to spend more money. It has already been booked.'
Vehicles bought at auction will still be cheaper - even with the incentives, Olsen said. But Ford hopes dealers will want to retain their own off-lease units and avoid the time and reconditioning fees required when buying at auction.
Explorer Red Carpet lease expirations total about 5,000 a month at this time of year, Olsen said. About 4,000 Taurus Red Carpet Lease contracts expire monthly, he said.
Olsen downplayed the off-lease volume.
'The number of off-lease Ford, Lincoln and Mercury vehicles coming back in 1997 - and not kept by the customer - will represent roughly one percent of the total used-vehicle transactions in the country,' he said.
Nonetheless, so far this year leasing has accounted for more than one-third of the retail transactions at Ford and Lincoln-Mercury.
Today, Ford is reducing residual values on its lease programs to avoid the gap between anticipated and actual lease-end values and to allow customers to reach an equity position in their vehicles.
'We have been far more conservative in the past year,' Olsen said, referring to established lease-end values.
Ford's leasing strategy now calls for lower residual values so that customers more quickly reach a position of equity in the vehicle and can be moved into another new-vehicle lease, Olsen said.
'If we can have a customer in an equity position, we have a better chance of putting them in a new vehicle because there is enough equity to pay the remaining lease payment (on the expiring lease),' he said.
In addition, dealers have asked for an incentive program in order to buy their own off-lease units, Olsen said. Such units are desirable because dealers know the vehicle's service and driving history.
Ford's action is not a response to the softening of the used-car market in the last quarter of 1996 and the first quarter of 1997, Olsen said. 'Used-vehicle prices depressed slightly on 1-year-old and 4- and 5-year-old units but not 2- and 3-year-old vehicles,' he said. Ford's program covers 24-month-old units.