The Apparent Situation: Leasing is back in the dealer showroom – With supposedly less risk based on the “right” residuals to keep the trek toward 16M new vehicle sales going, all while being a “catalyst” to transform what “dealer” think they must do.
The Real Situation: Retail auto leasing penetration is approaching 30% going into the last quarter of 2013. The “use” of a lease to fund a car or truck is probably the most impactful factor in the recovery and sales volume to date for the U.S. Auto Market. Just study sales results from Toyota, Honda, and Hyundai and you’ll see.
Who’s Nervous About Leasing? Well, all of the participants in this 2013 market trend seem nervous – except for the dealers who are making big money on nearly every lease transaction. There is much talk of risks and the return of residual deficiencies among major banks and even captives – all of whom bailed from a booming business five years back. OEM, captives, and banks now claim that the “residualization” process and predictive algorithms have made lease underwriting less risky. Leases are structured based on the lessons and the sins of the past, with portfolio data management heretofore ignored or not considered.
What Happened During the Last Leasing Boom? Major banks and the captives got into a fight for market share and messed with the residuals to gain dealer business and lessee volume by reducing the depreciation reserve in order to lower the lessee’s payments. Banks and the OEM captives took a bath on lease portfolios and engaged in boiler room telemarketing centers to call every lessee to see if they could convince them to buy the vehicle at lease end. Dealers could not really buy the returned leased car unless the lessor-bank agreed to take an immediate loss on the inflated book value of the vehicle.
Transfer of the Residual Risk: The solution for the retail auto market and the lending institutions was to get back to “Loaning” where all the real residual risk and responsibility was with the buyer-loanee and the collateral risk was with some bank, credit union, or securitized captive finance company. Leasing was to be avoided unless the lessee was gold plated and the car was a luxury vehicle with a history of retaining value over a period of three to five years.
Consumers Buried in Loans – This time it was and still is the car buyer, and not the lease finance company, who is taking all the risk. For years, consumer “loanees” were buried in car loans, particularly if they accepted a 5-year or longer finance period. Dealers then got them out of the underwater loans by literally moving the loss of value or residual to another loan for a new vehicle. further burying the loanee in the new car in many cases.
A Car is a Block of Ice: The challenge for auto users [aka consumers] is to gain the use of a vehicle that has the slowest rate of devaluation (melting) or depreciation of the period of usage or vehicle life cycle. Further, the basic structure, concept, and element of leasing are ideal for funding the use of an automobile. The big argument for leasing has been that the nature of a depreciating asset made a financial arrangement that could cover the rate of the loss of valuation over time was truly smart and sound. Further, why must people continue to think that they actually “own” their vehicle when in most cases, they could not sell or even trade the vehicle and realize enough equity or money to pay off the loan?
What, then, should dealers (automotive retailers) do to not be a dealership?
- Offer lease financing as a sound financial way to fund the use of a vehicle.
- Use Internet & your showroom to make it mind bogglingly easy get a vehicle.
- Capitalize on the consumer’s need to gain a payment to go with the car.
- Do not be a “dealership” any more – Stop calling yourself a “dealer.”
- Become a complete “Personal Vehicle Transportation Center.”
- Use the leasing concept as a part of the transformation of the way you sell cars.
- Seek to be a place where people come to get transportation solutions, not deals.
- Offer every possible vehicle service needed to move people & their goods.
- Provide leasing, loaning, rentals, Zipcars, electric bikes, and dealer-to-door service.
- Transform your former “dealership” into a Constant Car Care Center for Consumers.
- Promise your clients that they will never have to worry about personal transportation ever again.
- Seek to take on & manage the risk & hassle of owning and operating a vehicle.
- Remove the reasons why people have avoided coming to see you all these years.