Chrysler announced the other day that they would discontinue their automotive lease program. When I first heard this I assumed that it was to due to credit-related issues and Chrysler being under new management. Then I heard that Ford and GM are mulling over the same idea, and it has nothing to do with credit.
The automotive lease program has long been a favorite of the big three American automakers. There are only two businesses in the world where you sell something but still get it back to sell again, prostitution and the automotive lease business. A useful tool to put people in cars that they couldn’t normally afford, the lessee makes a down payment and leases the newness of the car. The lessee pays the depreciation of the new car and then, after a predetermined period, turns the car back in to the automaker to resell as a used car.
To some leasing makes sense, but many used it as a way to obtain what their credit score wouldn’t allow. Many found that when they turned the cars in the dealers went over the vehicle with a grease pencil, charging back fifty to a hundred and fifty dollars for scratches, door dings or coffee stains. Leveraging the lessee to purchase or pay the dealers who then financed the now used cars for four more years, scoring twice. An associate of mine leased a Mitsubishi for his wife. At the end of the lease period the purchase price was $9,700 while the identical models on the dealer lots were $8,500, but they were playing on an emotional attachment to the vehicle.
Now the world has changed. It is not the credit situation that has let the hot air out of the leasing balloon, and it's not even the struggling American consumer that have so dimmed their sights, instead it is a self-inflicted wound. Tens of thousands of Suburbans, Explorers, Navigators, Escalades, Jeeps, and Ram pickups with Hemi engines are coming back to the dealers like swallows to Capistrano. Cars that aren’t selling, cars filling dealer lots, cars that will soon be the sole property of Ford, GM and Chrysler.
Carmax reported last month that they were swamped with customers nationwide trying to unload the big gas hog models for small, fuel-efficient models. The problem for Carmax is how to make the swap because they don’t want the Denalis on their lots either. Contacts inside the wholesale market report seeing the big vehicles with $15,000 book values going for $5,000 at auction and even the auctions themselves will only handle a few at a time for fear of depressing the prices even further. Now if you are a Ford or GM executive, sitting in your corner office, you lose sleep at night thinking of the hundreds of thousands of vehicles that will soon be returned to your dealers every day for the next three to four years.
The big three made a bet that they could sell the returned cars and now it looks like the big three are in for a good, old fashioned, barnyard screwing. With the number of leased vehicles in the millions, at even just a $5,000 loss per vehicle, it could be a very dark day for the big three. Not unlike the falling home prices across the country, the big three find themselves caught upside down in a trap of their own making.
In 1931 the Ford Motor Company found itself in a similar predicament, their sales were falling because of the great depression. The market was awash in Model T’s; they were traded and wagered on. My own father was even given one because his brother couldn’t find anyone who would give him cash for it. Ford management came up with a program where the company would buy up the old Model T’s and crush them. However, at the time Ford was self-contained; they owned iron mines, coal mines, rubber plantations, and they estimated the resource cost out of the reclaimed T’s versus the production cost of new vehicles. The program didn’t last long; Ford couldn’t crush enough T’s to raise the value of all the other used cars left on the market. The number of new customers was fatally hemorrhaging and by 1932, half the Ford dealers in the country had closed their doors, victims of their own success and the rapidly changing economic conditions.
These current lease numbers, along with collapsing sales numbers, spell not just dark days for automakers but for us all. The media won’t tell you the whole story, for two simple reasons: 1. Their bosses don’t want to as it might hurt their ad revenue. 2. It will scare the sh*t out of you.
With major US corporations facing bankruptcy, millions of Americans being thrown out into the street, a US GDP number that was horrible despite $78 billion in federal bailout rebate checks, the media is cheering wildly about adding 9,000 new private sector jobs in an economy that takes 150,000 a month just to break even. But they’re not through yet , they want to tell the biggest lie to ever come down the pike. A lie for the stupid, a lie for the dim-witted, a country on the verge of economic collapse and they want to tell us that this election is all about Barack Obama and not about the last eight years.