Most automakers view leasing as today's most successful form of pseudo-direct marketing. It allows them to focus directly on selected models and stay competitive by limiting what they often consider excessive dealer profits.
Leasing has far exceeded the success of overused direct efforts such as interest-rate subvention, rebates and dealer incentives.
But now, some of the avoidable down sides are returning to haunt those who did not exert discipline and maintain realistic control.
The incredible growth in leasing began when marketing vice presidents finally realized that monthly payments and the money due at the time of delivery are the primary considerations of most car buyers.
Marketing vice presidents, not greedy inefficient dealers, are now able to formulate the numbers they feel are necessary to move the iron and be competitive. Hallelujah!
Let's see: Cost plus money factor plus profit minus residual value minus term equals payment.
Why wasn't leasing so popular until now? Again, the answer is payments. They are lower now in relation to the manufacturer's suggested retail price. For many, that is also the start of the problem.
A key variable in the payment equation is the residual value, and it is no longer determined by experienced, independent used-car market prognosticators. It is done in-house where the experience is mainly related to the results of factory auction sales of vehicles coming off daily rentals.
Those are 1-year-old hot models that are well maintained and easily routed and scheduled to an auction of choice.
There, they are swallowed up by same-make dealers who are willing to pay high prices to balance their inventories with a few nearly new cars that are still under warranty.
The success of factory auctions and the ability to set residuals placed an irresistible golden apple in front of marketing executives. Using study groups to answer the '... what would you pay for ...' question places this year's 'hero' award within their grasp.
But tinkering with residuals takes the form of 'pay me now or pay me later,' and the 'later' payments are now coming due at an alarming rate.
Those who implied that their brand would be worth as much as a Honda Accord or a Toyota Camry or a Ford Taurus in two or three years are coming face-to-face with reality. Wishful thinking is not a substitute for superior products with high resale value and wide consumer acceptance.
Cars coming off lease are unlike rentals. They are two to four years old. They are returned sporadically throughout the year and at thousands of locations. They must be inspected and often need substantial reconditioning; yet to confront a customer with a claim for abuse of the vehicle immediately jeopardizes any future sales.
Factories are woefully understaffed to handle those problems.
The volume of returns is increasing at a rate greater than dealers are inclined to repurchase. Increased pressure is being applied to absorb the influx, but dealers cannot be expected to repurchase same-make cars of about the same age in quantities approaching 35 to 50 percent of their new-car sales.
Nor can they be expected to continue paying high prices to cover poor residual decisions made by some now-departed marketing vice president.
Added to that are other costly factors seldom recognized by factories:
Depreciation and maintenance continue; it takes more than two months for the average off-lease vehicle to reach the auction block.
Seasonality extracts a dreadful toll in some areas.
Cash-flow problems escalate when the dealer makes the final payment and the vehicle remains in inventory. Many dealers feel they are entitled to charge a lot fee while those vehicles remain on their premises.
The mistakes made in overstating residuals will continue to plague many manufacturers for many years and will slice deeply into future earnings. Those mistakes will become realities when franchised dealers are no longer willing or able to purchase all the off-lease vehicles.
When that happens, those cars will begin showing up at open auctions, where dealers will inevitably hammer values down another 5 to 15 percent.
That is the makers' worst nightmare.