GM, Ford Scale Back Car Leases as Era Ends

By JOHN D. STOLL, LIZ RAPPAPORT and MATTHEW DOLAN
July 30, 2008; Page A1 WSJ.com

Detroit’s money troubles are starting to put a key part of the American dream — a pricey new car — out of reach for some people.

Squeezed by falling used-vehicle prices, as well as continued tumult in the credit markets on Wall Street, Ford Motor Co. and General Motors Corp. are significantly scaling back their auto-leasing business.

Ford on Tuesday began telling dealers that it is essentially ending leasing deals on most trucks and sport-utility vehicles. GMAC LLC, GM’s financing arm, is also expected to rein in leasing offers in the U.S. soon, possibly this week, people familiar with the matter said. On Tuesday, it said it will no longer offer subsidized leases in Canada. Chrysler last week said it is ending all leasing deals in the U.S.

Leases at the Big Three auto makers account for about 20% of their total new-vehicle business, according to Automotive Lease Guide.

The rise of hefty auto incentives — including subsidized leases — came amid the same broad expansion of easy borrowing in the 1990s and 2000s that buoyed American housing prices. Now, in both houses and autos, the previous virtuous circle has yielded to a vicious one, with prices falling and credit growing tighter.

Banks are also turning their backs on leasing as falling used-car prices make the business less profitable. The auto-finance unit of Wells Fargo & Co. has also told dealers it will no longer finance leases beyond this month, a spokesman confirmed. In reaction to Chrysler’s announcement, Chase Auto Finance, a unit of J.P. Morgan Chase & Co., decided it will no longer provide lease financing for any Chrysler, Dodge and Jeep models.

For years, leases have made it possible for millions of Americans to drive newer, more expensive cars than their budgets might otherwise let them buy. In a lease deal, the vehicle is owned by a bank or a finance unit like GMAC, and the customer merely rents it, usually for two or three years. That keeps monthly payments lower.

Auto makers, for their part, loved leases because they could sell higher-priced vehicles, which generate more profit.

Leases aren’t disappearing entirely. Japanese and European auto makers aren’t in the same bind as the Big Three in the leasing business, and some lenders such as credit unions continue to offer lease deals, though the terms are likely to tighten.

For the Big Three, the pullback from leasing is likely to further cut into vehicle sales a bit, and could help foreign auto makers win over customers. Chrysler and Ford said leasing accounts for about 20% of unit sales in the U.S. For GM it’s about 40% of the retail sales financed through GMAC.

Subsidizing Payments

By piling on incentives of their own, such as rebates or 0% financing deals, auto makers are able to subsidize consumers’ lease payments further. As a result, Americans have been able to get into vehicles their parents never imagined driving — from tricked-out trucks costing $40,000 to $50,000 to luxury sedans and sport cars that list for tens of thousands of dollars more.

For Richelle Babcock, a mother of two young boys in Ann Arbor, Mich., leasing has made it possible to get new cars every couple of years. A few years ago, she took advantage of a trade-in deal and other incentives Chrysler was offering and got a $180-a-month lease on a 2006 Jeep Commander with a sticker price of about $35,000.

There’s “no way,” Ms. Babcock says, that she would have bought the Commander outright. “I don’t want to have to own it and drive it forever,” she said. Indeed, in December she turned it in and instead leased a new 2008 Commander. Her payment roughly doubled, but that’s mainly because the lease is much less restrictive about her annual mileage.

For the Big Three, leasing became a key part of their business strategy — and the Detroit economy. Leasing new cars and trucks to customers every three years has helped keep their plants humming, and propped up the Michigan economy.

Japanese auto makers like Toyota Motor Corp. aren’t yet in as big a leasing bind. While they lease many vehicles, they’re not as dependent on trucks as the Big Three. In addition, Japanese cars have relatively high resale values, which makes it easier to turn a profit on leases. Leases make up a big chunk of the business of luxury-car makers like BMW AG, but they also benefit from strong resale values.

Now that Big Three auto makers are scaling back their leasing business, they may have a harder time getting some customers into the kinds of vehicles they’ve become accustomed to driving. “To totally withdraw from leasing, this is going to cost some people some business,” said Earl Hesterberg, chief executive of Group 1 Automotive Inc., a large dealership chain.

Both the Detroit auto makers and their foreign rivals are suffering this year from a steep decline in auto sales amid the sluggish U.S. economy. At the same time, they’ve been whipsawed as high gasoline prices spurred buyers to suddenly shift toward cars and away from trucks — which had been much more profitable for auto makers.

Those trends are combining with Wall Street’s jittery credit markets to turn the economics of auto leasing upside down.

Impact of Gas Prices

The main problem stems from the declining resale values of trucks and SUVs that were leased two to three years ago, before gasoline prices shot to $4 a gallon. When leases expire, the auto makers’ finance units must sell the vehicles and recoup some of their costs. But with today’s fuel prices, used trucks and SUVs are selling for far less than the Big Three had anticipated. So they’re losing money when they sell those vehicles.

Ford last week wrote down $2.1 billion in pretax profits as a result of unprofitable leases. GM and Chrysler are likely to suffer big lease-related losses through their own lending units.

As of March 31, GMAC held $33 billion in lease assets on the books. Of that, about $14 billion is at risk of being written down as financial losses.

Tom Webb, chief economist at Mainheim Consulting, which tracks used-vehicle prices in auctions run by its parent company, said the declines in recent months are unprecedented. In June, the average sale price of full-size SUVs was 27% lower than a year ago, he said. Pickup-truck prices were down 25%.

The overall decline for all cars and trucks was just 6.2%. Only compact cars saw an increase, of 12.7%, for the month.

Skittish Lenders

The increasing risk of losing money on auto leases has made banks skittish about lending money to the auto maker’s finance units. Chrysler Financial is trying to renew a $30 billion credit facility with 22 banks. But amid concerns about Chrysler’s declining sales and lower used-vehicle values, only about half the banks have renewed their commitments so far, people familiar with the matter said.

Chrysler Financial’s talks with the banks have involved Stephen Feinberg, founder of Cerberus Capital Management LP, the private-equity firm that acquired Chrysler and its finance unit last year, along with Chrysler Chief Executive Robert Nardelli and Vice Chairman Jim Press. It’s an unusual showing from top brass; traditionally, heads of the finance company wouldn’t attend such talks, people familiar with the matter said.

Ford isn’t going as far as Chrysler, although its move amounts to a way of getting out of the riskiest part of the business without saying it is abandoning it entirely. Instead of abandoning leasing altogether, Ford aims to make vehicles like the F-Series trucks and Explorer SUVs “lease proof” by making terms on leases so tight that the monthly payments are too high to justify.

More details on GM’s approach to leasing will be laid out when GMAC discloses earnings Thursday. “The world is changing” in the leasing business, GMAC spokeswoman Toni Simonetti said, “and obviously we have to pay closer attention to it and adjust.” She said the firm, which is owned by GM and Cerberus Capital Management, is “working with [GM] on a daily basis.”

In Southern California, Ron Fodrey, general sales manager at Santa Monica Ford, said his dealership depends on leases for more than half of its new-vehicle business. Though the dealership doesn’t rely on pickup-truck leasing, SUVs remain a big part of the business. But declines in the values of SUVs at the end of the lease period have meant that Ford Credit is taking huge losses, he said.