Just What GM, Ford and Chrysler Needs - Pricing Pressure From Toyota

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October 6, 2008

Automotive News ran a story today about GMAC all but getting out of the automotive leasing business, confirming what I wrote on Friday.

“The banks have also been reducing their exposure to leases with Chase being the latest. In the first half of 2008, Chase Auto Finance had nearly 5.2 percent of the overall U.S. auto lending market, trailing only Toyota Financial Services and GMAC Financial Services, according to Experian AutoCount. Chrysler was the first to discontinue subsidized leases back in July and I recently discussed the losses incurred by both Ford and GM on off-lease vehicles. Since that time both have also cut back on their leasing programs. At one time leasing accounted for approximately 25% of vehicles sold. As residuals and used vehicle prices are in question (downward trend), leasing as a percentage of sales should be significantly reduced. I will estimate that leasing will drop to about 10% of sales and be limited primarily to European luxury vehicles and possibly to some Honda and Toyota models with good resale value.”

According to the story, leases accounted for 12.3 percent of all new-vehicle sales in September. That's down from 18.0 percent a year earlier.  Data I have seen as of June was showing leasing made up approximately 25% of all new vehicle sales.

Since GM sold a controlling 51% share of GMAC to Cerberus Capital Management in 2006, the company can no longer set auto finance policy including subsidized lease deals.  Given the current global financial conditions, GMAC is having difficulty raising money by selling securities backed by bundles of auto leases.   The table below illustrates that leasing has all but stopped for GM brand vehicles.  Even luxury brand Cadillac saw leasing drop from almost 1/2 of all sales to less than 10%.  For the month, Cadillac saw its sales drop almost 40%.  GMAC and Cerberus are not in a finacial position to make risky moves in the current economic climate.  There already is speculation that GMAC" is facing their own crisis over the housing meltdown in the US with parts of the company being shut down or possible bankruptcy.

By contrast, Toyota just announced last week they will offer offering zero-percent financing on a wide range models.  The marketing move comes off the company’s worst sales drop ever in the US market, with sales declining 32%.  Historically Toyota has not offered big discounts on their product and resisted incentives.

Toyota because of its excellent corporate credit rating also has not stopped their leasing program (industry leading resale value) and will continue to offer loans to the subprime auto buyer.  In other words, Toyota is now about to wheel and deal to get customers to buy product just like the domestics.

There are a number of reasons why this is important to the US auto market.  Toyota is the most profitable auto company in the world with net profits around $15 billion a year.  Specifically in the US, Toyota commands premium pricing.  As a result, this gives Toyota a lot of price elasticity.  Given the recent collapse of auto sales in the US, Toyots’s commitment to their workers, they have to keep their plants running.  In many ways, Toyota has to cover a large overhead which in now comparable to the domestics.  Of interest is how much Toyota's sales will be up in the month of October and what it will do to the rest of the marktet.

Toyota spent $1,481 per vehicle in September, compared to $3,972 for General Motors Corp. when the Detroit automaker ran its employee pricing for everyone promotion. GM's incentive spending fell 2 percent in September. Ford Motor Co. spent $3,696 and Chrysler LLC spent $4,705.

In the 1970s, GM had the same price elasticity as Toyota does today.  At the time it was deemed possible that GM could put Ford, Chrysler and American Motors out of business by dropping their premium pricing to be inline with the other companies.

The question is will Toyota inflate October’s auto sales or will the overall market remain at September rates of about a million sales and pull sales from the rest of the industry specifically the domestics?   Because of the tight credit markets, the domestics do not have the financial means to inflate sales with cheap subsidized leases, offering car loans to those with a poor credit history or other costly marketing gimmicks.  Toyota can and is in a position where they have to and these moves by Toyota can have dire consequences for GM, Ford and Chrysler.

According the Automotive News Toyota's offer runs through Nov. 3 and will cover loans of 36 to 60 months, depending on the model. The qualifying nameplates are some of the markets most poplular models including the Matrix, Corolla, Camry, RAV4, Highlander, FJ Cruiser, 4Runner, Sequoia, Sienna, Tacoma and Tundra.


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