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GM, Ford lead spike in residuals

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GM, Ford lead spike in residuals

Tight rein on spiffs, output have impact

Arlena Sawyers

Automotive News -- June 7, 2010 - 12:01 am ET

Because automakers are trying not to produce more vehicles than the market needs, the projected residual values of today's cars have risen dramatically.

Residuals for General Motors Co. and Ford Motor Co. vehicles, in particular, are improving, giving those companies opportunities for more competitive leases.

Traditional residual-value leaders Toyota Motor Sales U.S.A. and American Honda Motor Co. remain strong. But lower incentives and a shortage of used vehicles are lifting the residuals of several Asian brands, as well as those of GM and Ford.

Automotive Lease Guide projects that 2010 vehicles from continuing GM brands and 2010 Ford brand cars will retain more than 40 percent of their sticker prices after 36 months. Five years ago, the residual forecasts for those brands' cars except Cadillac were under 40 percent.

Automotive Lease Guide separates ratings for Ford and Chevrolet cars and trucks. Historically, those brands' trucks have had higher residuals than their cars and did not change greatly over the five-year period.

Other fast risers were Asian brands Mazda, Hyundai, Suzuki, Kia, Mitsubishi and Subaru.

Aggregate residual values for 2010 Honda vehicles were 53.7 percent, an increase of 2.3 percentage points. For Toyota, aggregate residual values were 51.0 percent, flat from five years ago.

At GM and Ford, well-received new vehicles have garnered higher projected residuals. Chrysler Group isn't faring as well as its Detroit competitors; the automaker has lacked new product, and new models usually help boost residual values.

Matt Traylen, Automotive Lease Guide's chief economist, says a fresh product lineup is a key to strong residuals. "All new models always have a price bump," he says. "The average is a 7 or 8 percentage-point bump for an all-new model compared with the old one."

Chrysler brand 2010 vehicles, in aggregate, have the industry's lowest projected residual among continuing brands at 39.4 percent after 36 months, 2.1 percentage points lower than its 2005 projection. But the aggregate residual value for Chrysler Group's Dodge brand is up a dramatic 8.2 percentage points to 41.8 percent. This does not include Ram brand trucks.

Residual value is what a vehicle in average condition is forecast to be worth at open auction at the end of a lease -- 36 months, in the case of the Automotive Lease Guide forecast. The value is expressed as a percentage of the vehicle's original sticker price.

One reason Detroit 3 residuals had been low was that the companies had high incentives. That meant the sticker was much higher relative to the transaction price than it was for Asian and European brands.

Many lenders base their monthly lease payments on Automotive Lease Guide estimates. The higher the residual, the lower the monthly payment.

Less is better

The Detroit 3 say they no longer overproduce vehicles just to keep factories running, eliminating the need to use the rental companies to soak up the excess. In April, Chrysler said it would cap sales to rental fleets to bolster residual values and strengthen its brands.

Detroit companies are spending less on incentives, too, according to Edmunds.com. In April, GM's spending was down $769 per vehicle compared with April 2009. In the same period, Ford's spending was down $359, and Chrysler's was down $1,053.

As part of its reorganization, GM dumped Hummer, Pontiac, Saturn and Saab and closed factories. The company says it will pass up some rental business because it doesn't have the capacity to supply the rental companies with all the vehicles they want.

"There are times when we can't supply them with the volumes they want at the time they want them; that's part of managing the fleet," says Brian Small, general manager of GM's fleet and commercial operations.

Eric Ibara, director of residual-value consulting at Kelley Blue Book, says GM's residual increase has nothing to do with shedding brands. Citing vehicles such as the Buick LaCrosse sedan and Chevrolet Equinox and GMC Terrain crossovers, he says, "This renovation of GM's product lineup is contributing to its improvement in residual values."

Big difference in leasing

Greg Cole, owner of a Chevrolet store in Pocatello, Idaho, and another in Athens, Ga., agrees. He says Chevy's higher residuals have helped his lease business grow in the past 18 months.

He says he is looking forward to getting the new Chevrolet Cruze this summer -- a vehicle he says can go head to head with the Toyota Corolla and Honda Civic.

Says Cole: "This has made us competitive with other models in the market."

Jim Farley, Ford's group vice president of global marketing, said the quality and the value of a used Ford vehicle is important to customers.

Now the company can "eliminate the discount and get back to pricing on quality and parity," Farley said during recent conference call.

Ford's increase is most dramatic in cars rather than in Ford's traditional strength, which is trucks.

Automotive Lease Guide projects 2010 Ford cars at an average residual of 48.8 percent after 36 months, up 11 points from five years ago. Ford's 2010 trucks have projected residuals of 43.4 percent, up just 0.4 points from five years ago.

Traylen of Automotive Lease Guide says Ford's brand perception is aided by the company's avoiding a federal bailout and by restyled vehicles such as the 2010 Taurus mid-sized sedan.

But despite the residual gains achieved by GM and Ford, they still have a ways to go to catch the front-runners.

Automotive Lease Guide's 36-month projected residual value for 2010 Honda brand vehicles is 53.7 percent, up 1.6 percentage points from the 2000 projection and 2.3 points better than 2005.

No to rental

Larry Katzke, national incentive manager at American Honda Motor Co., says the company avoids putting its vehicles in rental fleets and favors special financing rates over cash incentives to consumers.

"We're not discounting the car, we're discounting the financing," Katzke says.

New-car incentives in any form can wreak havoc on residual and resale values if they are too heavy and last too long.

Under the cloud of massive vehicle recalls for problems involving unintended acceleration, Toyota Motor Sales U.S.A. in March introduced free maintenance, 0 percent financing and subsidized leasing.

Current resale values on some Toyota vehicles took an immediate hit, but incentives have not damaged the brand's projected residuals -- so far.

Automotive Lease Guide predicts that 2010 Toyota brand vehicles will hold 51 percent of their value after 36 months, 2 percentage points higher than in 2000 and unchanged from 2005.

Paul Moss, corporate remarketing manager at Toyota Financial Services, says current incentives "may be having a small to moderate" impact on current resale values of the company's vehicles. But he says Toyota's 36-month residual-value outlook is optimistic.

How long is too long?

Moss says current incentives should not hamper residuals unless Toyota uses them for a long period. He says he cannot quantify how long is too long.

"It's 'what's the reaction of the industry?' and how the outside analysts look at it as well," Moss says.

Up-and-comer Hyundai also has seen significant improvements in residuals, with predictions of 46.1 percent for 2010 models. That is a jump of 7.3 percentage points from the 2000 prediction and 9.1 points above 2005.

Bill Wallace, owner of Wallace Hyundai in Stuart, Fla., says public perception of Hyundai as a brand trails competitors Toyota and Honda but is still "smokin' hot."

"In the past we had to sell Hyundai on price, but that's less and less," Wallace says. "These are great cars that hold their value."

Gainers, losers

These 10 brands showed the biggest gains in projected 36-month residual values when compared with those of 2005 model vehicles.

Projection for 2010 model yr. Point increase from 2005

Suzuki 46.70% 12.6

Ford cars* 48.80% 11

Mazda 54.10% 10

Hyundai 46.10% 9.1

Buick 43.10% 8.2

Dodge 41.80% 8.2

Kia 42.40% 8

Subaru 54.00% 7.8

Chevrolet cars* 42.50% 7.5

Mitsubishi 43.60% 6

These 10 brands showed the biggest residual value losses when compared with the 2005 model year.

Projection for 2010 model yr. Point increase from 2005

Porsche 44.40% 8.2

Volvo 43.30% 4.4

BMW 47.40% 3.7

Jeep 43.00% 3.3

Infiniti 51.40% 3

Ram trucks 40.80% 2.9

Mercedes-Benz 45.80% 2.9

Land Rover 48.30% 2.6

Chrysler 39.40% 2.1

Acura 51.80% 2

* ALG projects car and truck residuals separately for Ford and Chevrolet.

Source: Automotive Lease Guide

Read more: http://www.autonews.com/apps/pbcs.dll/article?AID=/20100607/RETAIL04/306079991/1142#ixzz0qGy9pUX9

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