Values of used sport-utilities are falling like high-tech stock portfolios.
That brings a sobering reality: weaker sport-utility values will pinch automakers' profits.
'The North American automotive industry may never be as profitable as it was in the 1990s,' states a report by McDonald Investments Inc. 'Near-term profitability will be significantly impaired.
'While the SUV segment has grown to represent 20 percent of total unit sales volume in the United States in 2000, it contributes nearly 50 percent of the total variable profit generated by the automakers in the U.S. market.'
The popularity of sport-utilities in the 1990s made it possible for automakers, banks and lenders to offer affordable leases. Nearly one out of every two sport-utilities was leased last year, the investment report says. Lease payments are based on the difference between the purchase price and the residual value, or the projected value at the end of the lease. When residuals fall, lease payments rise.
Now, residual values are dropping as growing numbers of used sport-utilities flood the market. For example, average residual percentages fell from 50 percent of the sticker price to 40 percent on 36-month leases from March/April 2000 to March/April 2001 on selected Ford Explorer, Jeep Grand Cherokee and Chevrolet Blazer models, according to Automotive Lease Guide, the industry benchmark for used-vehicle values.
The McDonald report says in the last year, falling residual values added $80 per month to Explorer lease payments.
How much do resale values matter to an automaker's bottom line?
In 2000, General Motors' net income would have been at least 17 percent lower - or $851 million less - if today's lower residual percentages had been in place, states the McDonald report. Ford Motor Co.'s net income would have been 11 percent lower, or $714 million less.
Nor are things looking up. Take, for example, the outlook in the critical compact sport-utility segment that includes such high-volume players as the Explorer, Grand Cherokee and Chevrolet TrailBlazer.
'We have seen the values on used vehicles in the compact SUV segment significantly deteriorate over the last 12 months,' said Raj Sundaram, vice president of ALG. 'The outlook for this segment is not bright.'
Three factors are undermining compact SUV values, according to Sundaram:
1. There is heightened competition in the segment. For example, GM is offering new models such as the Chevrolet TrailBlazer and GMC Envoy.
2. Smaller, cheaper SUVs such as the Ford Escape and Jeep Liberty are stealing sales from the larger offerings.
3. Ford is offering incentives on the redesigned but Firestone-beleaguered Explorer, an action that further pressures prices in the segment.
To counteract declining residual values, Ford will shift some of its marketing dollars out of leasing and into financing incentives, the company said last week.
The Chrysler group said last week second-quarter profits at its financial arm were hurt by falling used-vehicle prices.
Pricing pressures will increase as competition intensifies.
Last year, 24 brands fielded 45 sport-utility nameplates in the United States. This year, 31 brands offer 56 nameplates and more are coming, according to Ford.