Vicious Incentives

Calling the continuous cycle of incentives “vicious” as a long-term brand deflater, analyst Jie Cheng lists five characteristics that can prop up resale values for “loser” nameplates.

Cheng, an executive of Power Information Network, says long-term residual values can be shored up for brands with the following assets:

Calling incentives “vicious” baffles some dealers who mostly welcome them. The current high level of incentives began in response to an economic downturn that followed the terrorist attacks of Sept. 11, 2001.

“I agree incentives are a double-edged sword for dealers,” Cheng says. “Short term, they help sell cars. Long term, they damage the brand in terms of off-lease losses, keeping residuals low and raising monthly lease payments above those of low-incentivizing competitors.”

In lieu of incentives, Cheng praises auto makers resorting to pull-ahead lease deadlines that “raise owner loyalty.” GM has offered to take in leases expiring next July 31 if another GM vehicle is purchased or leased, he noted.

Brands that have been afflicted with reduced resale values because of past incentivizing and subventing — despite new models with enhanced styling — include Buick, Hyundai, Jaguar, Mitusbishi and Saab, he says.

“Hyundai's and Mitsubishi's extended warranties support their improved powertrains and durability in general, but owners have long memories of past problems,” says Cheng.

He says domestic auto makers often resort to rental fleet sales, but that practice has hurt brand residuals.