Return of Subvented Leases

Since the government took ownership in General Motors and Chrysler, people have been floating various conspiracy theories.

One of the first was the assertion that the Democratic administration singled out Republican dealers for termination. I haven't heard much credence put in that one recently.

Most dealers are Republican, so the cuts are going to skew to people of that political persuasion. And it was the auto makers themselves who selected dealers for the chopping block.

Another conspiracy theory has been the assertion that the government had sat on information regarding Toyota's sudden acceleration issues and had only brought it to light recently to give the domestic manufacturers, especially the two owned by taxpayers, the opportunity to gain ground on the industry leader.

Toyota hasn't taken their recent problems lying down and has launched the most aggressive incentives in company history. In an effort to keep pace, other auto makers, including the Detroit Three, have also launched counter-incentives of their own.

This return to push-marketing strategies includes some dramatically subvented leases with residual forecasts that most likely won't be supported by the real market when vehicles come off lease.

This practice allows the manufacturers to avoid a large up-front rebate that immediately comes off the corporate books in its entirety, in exchange for a real number dictated by whatever the market sets at some point down the road. “Down the road” is the key issue here.

While auto makers may set up some reserves in anticipation of future losses, it is quite likely that the end result is that current quarterly results will look better than they should.

As GM is aiming for an Initial Public Offering at some point this year to buy out the taxpayers, there may be some additional motivation for an enhanced residual vs. immediate rebate strategy. It is easy to imagine a strategy to create results that look somewhat better than they are, in an attempt to achieve maximum stock bounce come IPO time.

GM just returned some taxpayer money, calling it a “repayment” rather than a “return of unneeded borrowed cash.” While it is encouraging that business fundamentals support a return of taxpayers' money, I'm not sure GM's repayment claim is entirely accurate.

For Ford, showing healthy profits now while gambling on a minimal loss down the road in an attempt to maintain current stock price might be a part of company strategy. Ford is promoting extremely aggressive short-term leases on select vehicles, in particular Lincoln models.

In the meantime, Chrysler is just trying to maintain whatever market share it can until it brings new products to market.

The industry has been up significantly this year. The bottom line is that recent gains have been largely incentive driven.

The economy is still weak, despite a few green shoots, and unemployment is a huge drag on recovery. And we're back to push marketing again.

The downside? Downward pressure on the value of late model pre-owned vehicles which impacts consumers who own them, rental car companies, and fleets. It also cheapens brand image. This increases the likelihood that the optimistic residuals will fall short of projections.

A continuing shortage of pre-owned vehicles will somewhat mitigate this downward pressure, a factor manufacturers are counting on.

The upside? Push marketing sells new vehicles and creates jobs. There might even be a reopening of shut factories. States and cities receive sales tax revenues through additional sales. And the administration can show a decrease in unemployment in an election year.

The domestic auto makers have shed enough costs that they can still make money at aggressive rates of incentives.

The government and other factors could push GM and Chrysler into aggressive push marketing, prompting others to follow suit. Then what?

Former dealership veteran David Ruggles is a consultant with 40 years experience in the auto industry. He can be reached at [email protected].

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