Be Careful What You Ask For

Nothing could describe the month of July better than a headline I read in CNW Market Research’s July 16 newsletter. It read: “Time to Panic: Industry Pushes Into Auto DefCon4.” I wonder what the headline would have read if the newsletter was released nine days later.

Chrysler announced on July 25 that it was dropping leasing. Then Chase announced shortly thereafter that it would no longer finance leases for Chrysler vehicles. Wells Fargo said it would no longer take leases for all U.S. automakers. Then GMAC said it would no longer extend leases to credit-challenged consumers and would stop offering lease incentives in
Canada. Ford then told its dealers it was ending leasing for SUVs, and said it would begin requiring bigger down payments from consumers. The onslaught of bad news ended with HSBC saying it was getting out of the auto finance business altogether.

Even scarier are the weekly reports I’ve read about dealerships closing their doors, some of them doing so without notifying the communities they serve. Last year we lost 430 franchise dealerships, according to the National Automobile Dealers Association. I have to wonder what that number will be next year.

So this is the correction everyone said needed to happen. Unfortunately, this rectification is picking off every back-up plan we had. Think about it, this year should have been the year of the used car. And although there’s nothing out there to say it won’t, the fear of anything subprime has really made it difficult to put those credit-challenged customers into a nice used vehicle. And as I reported last month, the used-vehicle profits many dealers hoped would offset low new-vehicle sales just isn’t panning out.

The truth is this correction was imminent whether it was right for the economy or not. Think about it. Forty percent of Americans are living beyond their means (half are living paycheck to paycheck). Foreclosure filings grew 50 percent in June vs. last June. Bankruptcy filings are outpacing college graduation rates.

I just wish the attempts to link what’s happening in this market to the mortgage industry — as one reporter attempted to do during Chrysler’s conference call to announce its end to leasing — would stop.

“I see no link between what’s going on and the mortgage debacle other than the mortgage industry sent the economy into a tailspin,” maintained Jack Tracey, executive director of the National Automotive Finance (NAF) Association. “I think there’s a tendency for the media to marry the two.”

Now, as daunting as that CNW headline I described earlier was, the article does say pent-up demand for new cars is the only thing separating what’s happening now and what happened in 1990. That was the year the industry hit DefCon5, as consumers weren’t buying and weren’t planning to either.

The negative part of the story is we lost more than 300,000 new-vehicle customers in the first half, with most saying they’re waiting for an economic rebound before entering the market.

By all accounts, leasing was on the comeback trail. Reports earlier this year said it, and the amount of leasing incentives automakers were throwing on the hoods of cars said it too. “If not for the gas situation we’re in, leasing would have made a comeback,” said Tracey. “Now residuals are uncertain, and no banker is going to set a residual for these bigger vehicles.”

And here’s the deal, insiders believe consumers are still in love with the truck and SUV category, but fuel prices have tempered that appetite. “What’s changed between the beginning of the year and now are fuel prices,” said John Blair, CEO of the Automotive Lease Guide (ALG).

I spoke with Blair after ALG announced it was repositioning residual values three days after Chrysler’s announcement, with values for trucks and SUVs being shifted downward by an average of eight percentage points vs. last year. What that means is a monthly lease payment will increase approximately $100 for a full-size SUV with a $42,000 sticker price and an 8.5 percentage point decline in its residual value.

Conversely, residual values for compact vehicles will increase by an average of five percentage points vs. last year. So why would Chrysler end leasing across all categories?

Blair suggested that Chrysler Financial’s motivation had to do with the company’s efforts to renew a $30 million credit facility. Still, how do you make a blanket decision like that when leasing represented 20 percent of your new-vehicle business?

So the credit crunch continues. Blair said lenders are closely watching what they advance, and added that he’s seeing a lot of lender-anticipated depreciation for cars they’re lending against. Tracey added that quality is the name of the game.

“Everyone is cautious, the mood is cautious,” said NAF’s Tracey. “No one’s putting pressure on sales and underwriting for volume. They’re being told, ‘If we don’t meet our numbers, it’s OK.’ Quality is the way to go right now.”

Now hopefully that message reaches your customers, because the only way for this correction to be effective is for them to understand what we’re up against.