Ever so cautiously, some automakers have begun experimenting with lower residual values and higher lease payments in a bid to avoid big losses when their cars come off-lease and go to auction.
In leasing, the customer finances only the difference between a vehicle's 'purchase' price and its stated residual value, so a higher residual means lower monthly payments for the consumer - and higher sales. But the incentive can create a big loss for lenders if the market value of an off-lease car is lower than expected at wholesale auctions.
The big question is this: Will the automakers accept lower sales in return for lower losses on off-lease cars?
'We're betting (the move to lower residual values) cannot be sustained. We are very concerned - very concerned,' said Raj Sundaram, vice president of Automotive Lease Guide, the benchmark for residual values.
Fearing a glut of off-lease vehicles fueled by incentives, Automotive Lease Guide lowered residual values in its January-February 2001 guide from the November-December 2000 guide. On average, it cut residuals $625 for mid-sized cars; $1,100 for compact sport-utilities; $1,400 for full-sized sport-utilities; $900 for full-sized pickups; and $1,000 for compact vans.
'We have seen a slight reduction in incentive spending overall. Some have done it, but now they have to make some decisions. They probably didn't expect things to drop that much,' Sundaram said.
Lower residuals were a hot topic at the National Automobile Dealers Association convention in Las Vegas earlier this month.
'This is a year of dramatic change,' said Ed Tinsley, president of Bank One Credit Co. in Phoenix. Its parent company, Bank One Corp. of Chicago, was one of several big banks that began cutting back on lease incentives last fall.
'The manufacturers are going to have to balance the manufacturing vs. the sales side,' Tinsley said.
Volvo Cars of North America Inc. felt the pain in January, when sales of the S40 sedan/V40 wagon dropped 57.9 percent, in part because Volvo Finance North America dropped a factory-supported lease program. Volvo's U.S. sales overall fell 15.1 percent in January, to 8,175.
'It was a generous offer - too generous,' said Angelo Nyars, Volvo Finance vice president of sales. In January, he said, Volvo Finance started asking for bigger down payments on lease deals.
Volvo uses Automotive Lease Guide as a benchmark, but it does not copy the guide's residual values exactly, Nyars said.
Rival Saab Cars USA also raised down payments on some lease deals, said Dan Chasins, president. But Saab sales improved 16.9 percent in January, to 2,314.
The monthly lease payment on a nationally advertised special on the 9-3 hardtop stayed at $339 a month in January, but Saab hiked its required down payment to $1,299, from $999, Chasins said.
'We're watching the residual situation pretty closely. I'm preaching consistency,' Chasins said. Dealers have criticized Saab for on-again, off-again incentives.
Mercedes-Benz USA Inc. stopped offering discount leases in the mid-1990s, said Paul Halata, president.
'The residual issue does not affect us, because we do not do that (inflate residuals),' he said. 'We did that in the early 1990s, and we learned our lesson.'