Ford Increases Lease Prices, GMAC Ends Canadian Leases

Following Chrysler's announcement of its decision to shutter its leasing operations, come the announcements that Ford (F) is tightening credit terms/raising prices for truck leases in the U.S. (due to massive losses) and GMAC (GKM) is ending auto leases in Canada.

(From the WSJ): "Ford Motor Co. has informed dealers that it is raising the price on leases of its most profitable trucks and sport-utility vehicles due to the "extreme losses" its lending arm is taking on these vehicles.

The move by Ford is expected to make several 2008 model year trucks and SUVs "lease proof," according to the company. In other words, prices will be so high on these leases that consumers won't be willing to agree to terms, according to a dealer briefed on the matter.

In a memo sent via email Monday, Ford officials informed dealers "due to extreme losses Ford Credit is taking on off-lease vehicles, it will be necessary for Ford Motor Credit Company to adjust residuals mid-quarter on the following vehicle lines." The memo was obtained by The Wall Street Journal."

While Ford hasn't outright ended auto leases for trucks and SUVs the "lease proof" pricing amounts to the same thing, the only real difference is by saying that they're just "changing the terms" they avoid the PR hit of having to say that they can't even lease cars affordably anymore. Personally I think the move is just a way to buy time while Ford makes a decision to either wait things out, shutter its leasing operations or find a way to make things profitable again.

While GM (GM) is facing similar issues the overall picture is complicated by the fact that GM no longer owns a controlling interest in the company that finances the sale of most of its vehicles, and the company with the controlling interest (Cerberus) owns Chrysler and has already shuttered that automakers leasing operations.

(From the WSJ): "GMAC LLC has informed dealers that it will suspend subsidized leasing of automobiles in Canada as of Aug. 1 as the conditions for financing these types of loans has tightened.

GMAC, the biggest auto lender in North America in terms of volume, follows Chrysler LLC's Chrysler Financial arm, which informed its dealers of a similar decision concerning U.S. leasing Friday. GMAC, like Chrysler Financial, is controlled by Cerberus Capital Management. General Motors Corp. holds a minority stake in GMAC, relying on the lending arm to finance a majority of the new cars and trucks it sells...

..."We informed [dealers] as of today that as of August 1st, we're suspending incentivized leasing in Canada," spokeswoman Gina Proia said Monday evening.

GMAC is also restricting leases in the U.S. as well:

(From the WSJ): "Meanwhile, GMAC LLC, which is minority-owned by General Motors Corp., has decided to stop extending lease deals to consumers with the lowest credit ratings. The decision affects car buyers who fall in the lowest two of six credit-rating categories, said George Fowler, general manager of Superior Buick Pontiac GMC in Dearborn, Mich."

GM's situation is particularly interesting because they no longer have a controlling interest in GMAC, and while GM may be willing to swallow leasing losses to prop up sales volume it's doubtful that Cerberus is interested in same. I would say it's just a matter of time before Cerberus decides to end auto leasing for GM cars in the U.S. as well; if they don't want to lose money leasing the cars of a company they own (Chrysler) it's doubtful that that they're going to do it for a competitor.

While Ford and GMAC may present this situation as a function of the credit markets (which it is to some degree) it's really a function of selling a rapidly depreciating product that simply isn't profitable to lease anymore; I seriously doubt that BMW, Honda and Toyota are experiencing similar problems with their leasing arms. Until Detroit is able to address the depreciation problem it's unlikely that they're going to be able to lease cars at the same levels (if at all) as they did in the past.

While Chrysler, Ford and GM really have no choice but to end their leasing programs, it does present a catch 22 of sorts because they're going to lose leasing business to other auto makers and the impact on some dealers could be devastating. However considering that Detroit's foreign competitors have been beating it on a profit per car sold basis for years now, any move towards ending subsidies for unprofitable car sales is a positive one. In many ways closing or restricting leasing programs is no different from cutting buyer incentives or reducing fleet sales, it's just another step in the evolution towards a being company that focuses on making profitable sales as opposed to sales for sales sake.

• You can read about GMAC's decision here.
• You can read more about Ford's decision here.

Sources:

The WSJ: "GMAC to Halt Auto Leasing in Canada" --- John D. Stoll, July 29, 2008.

The WSJ: "Ford's Finance Arm Tightens Lease Terms on Trucks, SUVs" -- John D. Stoll and Matthew Dolan, July 29, 2008.

Disclosure: At the time of publication, the author didn't own a position in any of the companies mentioned in this article.

Comments

[helplessobs...:]

Imagine, a year ago we were told the trouble was only in the sub-prime market and it was likely that the troubles would not spread to the rest of the credit markets. So much for the "seeers". Business will slowly collapse over the next 18 months as consumer credit is cut off as repayment of credit card balances dwindles.

2008 Jul 30 03:05 PM

[Nextel Acce...:]

if smaller cars are holding value better, why not lease them?

2008 Jul 30 10:56 PM

[Paul Killinger:]

Automakers made a kiiling leasing cars and trucks over the years, especially big ones. However, it comes as no surprise that they're now pulling back temporarily in these unsettled times, only prudent business sense. They'll be at it again soon, though, once they have a better idea of which models consumers are buying and at what price points.

Care to hazard a guess? They'll be willing to pay alot of money to whoever calls this one correctly.

2008 Jul 31 02:05 PM

[Paul Killinger:]

As I recall, independent leasing companies dominated this space not all that long ago. What you're saying, then, is that they're very likely to take it over again.

2008 Jul 31 02:09 PM

[Paul Killinger:]

Now there's an investment idea with real possibilities. Thanks!

2008 Jul 31 02:10 PM

[Ames Tiedeman:]

Ford should abandon leases on its SUV's completely. It should move to a model of low financing. Ford simply cannot recycle these lease returned SUV's into the market place again. I never knew the acronyms SUV and SIV would both mean horror! One horror for the auto industry and another horror for the banking/finance industry!

2008 Aug 02 03:01 PM