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The way vehicles are sold in Canada is about to undergo a sweeping transformation as key auto makers rapidly retreat from leasing, amid a collapse in sales of pickup truck and sport utility vehicles that has infected their once-lucrative financing operations.
Detroit's auto makers, already restructuring to adjust to years of market-share decline, are now being battered by a cyclical downturn caused by the gas price surge and credit crisis that have hammered sales of their most profitable vehicles.
A decline in the value companies are able to recoup from the resale of large vehicles after leasing is changing the economics of the popular financial tool.
In recent years, leasing has not only boosted sales for the industry but has been a major contributor to the companies' bottom lines where it and other lending tends to offset losses on the actual sale of vehicles.
More than 42 per cent of retail vehicle purchases in Canada last year were done through leasing.
General Motors of Canada Ltd. told its dealers Monday in a closed-circuit broadcast that it is getting out of the leasing business effective Aug. 1.
Instead, the sales leader in the Canadian market will offer alternatives such as interest-free loans for as long as six years in hopes of keeping monthly payments on vehicles purchased with loans close to what monthly payments would have been if the vehicles were leased.
“This is an earthquake in the vehicle financing business,” said industry analyst Dennis DesRosiers, president of DesRosiers Automotive Consultants Inc. in Richmond Hill, Ont.
Dealers and other industry sources said other auto makers will likely follow suit, since GM and Chrysler sell about 36 per cent of the new vehicles delivered in Canada annually.
Chrysler Canada Inc. insisted Monday that its Chrysler Financial unit is still making leasing available to customers in Canada, contrary to the U.S. situation, where Chrysler announced on Friday that it is exiting the leasing market.
“The economic environment that has made leasing affordable for customers of all companies over the years has changed and that has made leasing more expensive for customers across the industry, so it has become less popular, but it is still offered in Canada,” Chrysler spokesman Stuart Schorr said.
The company's dealers countered Monday, however, that if they offer lease financing through Chrysler Canada's financial services arm, the interest rate they face is 11.5 per cent. “So, effectively, we are out of the leasing game and concentrating on 72-month payments as our only alternative,” said one Chrysler Canada dealer who spoke on condition that he not be identified.
The problem stems from the collapse in sales of pickups and SUVs that has sent prices for the used versions of those vehicles plunging.
In 2002, for example, four-year-old full-size pickups were selling for, on average, 57.2 per cent of their original manufacturer's suggested retail price. As of this January, residual values – or the forecast value of the vehicle when the lease ended – for four-year-old pickups had plunged to just 32.3 per cent of the original price.
Auto makers – especially in Canada – have relied on leasing for years as a way to move the metal. For one, it helped attract consumers, because the higher the residual value, the lower the monthly payment. Monthly payments on leased vehicles were usually substantially lower than those on vehicles financed through loans.
The other advantage to leasing was the fabulous profits it helped generate. Ford Motor Credit Co., for example, had always paid an annual dividend to its parent Ford Motor Co. That will change this year for the first time. The magnitude of the reversal in fortunes was evident in Ford's second-quarter financial results issued last week when Ford booked a $2.1-billion (U.S.) writedown on Ford Credit's portfolio of leased vehicles. In 2004, Ford's financial services arm posted a pre-tax profit of $5-billion.
“The vehicle companies did not anticipate the freefall in used car prices, therefore they're losing significant amounts of money when these vehicles return to the marketplace,” Mr. DesRosiers said.
Canada's chartered banks, which are not permitted to be in the auto leasing business, have responded by offering loans as long as eight years for financing purchases of new vehicles.
Bank of Nova Scotia, dealers said, is offering eight-year loans with a fixed interest rate for the first five years. At the end of that period, a new rate is set for the final three years based on the prevailing rates at the time. That leaves the consumer facing the risk of higher payments if interest rates rise.
Scotiabank spokeswoman Ann DeRabbie said the bank has been offering the 96-month loans for five years.
“It's a niche product, so it's really only to a certain kind of customer buying, for example, an expensive car,” she said.
With files from Tara Perkins and Matthew Campbell
