General Motors of Canada Ltd. is offering a new carrot to keep customers buying its cars after their leases expire and a stick to make sure they switch from leasing to other kinds of financing.
The carrot is $2,000 cash that GM will provide to its dealers to pass on to GM customers who bring back their leased cars and trucks and buy another GM vehicle.
But the stick, for those who insist on getting another lease, is no cash and lease rates that as of this morning will "Skyrocket!" according to one full-page advertisement by a Toronto Pontiac-Buick-GMC dealer.
These are the main features of GM's plan to encourage Canadians to surrender their leased vehicles and purchase new ones instead.
"This is a great reason for dealers to contact their lease customers and have them migrate into a finance contract or purchase a new GM product," the auto maker said in a memo to dealers outlining the new incentive program.
GM customers switching out of leases to cash or financed purchases, and other GM buyers, will be able to tap into another incentive - interest-free loans for as long as six years on almost all of the vehicles in the company's lineup.
The move comes as GM, Chrysler Canada Inc. and some other car companies retreat from a financing technique that represents almost half the market for new vehicle deliveries in Canada.
The $2,000 GM "Lease Loyalty Bonus" outlined in the memo can be used to reduce the purchase price for someone paying cash; as a down payment on a new finance deal; to pay off remaining amounts on an existing lease; or to cover wear and tear damage or excess kilometre penalties on returned vehicles.
BMW Canada Inc., which generates about 60 per cent of its sales through leases, will also try to scale back leasing somewhat and emphasize more financing transactions, Ian Smith, president of BMW Group Financial Services Canada, said in an interview yesterday.
"Leasing is still part of our core strategy, without question," Mr. Smith said. But "as a lot of these other manufacturers are looking at bringing on more financing, that will maybe influence consumer behaviour. We want to make sure we position ourselves that we can offer products and services to the consumer that they're looking for."
A pullback in leasing by the Detroit Three could further erode those firms' market share, Citigroup Global Markets analyst Itay Michaeli said in a research note yesterday.
U.S. drivers returning their vehicles at the end of their leases could buy a new, less expensive vehicle from the same brand they're returning; buy a used car; lease a new vehicle from a competitor; or simply return the vehicle and walk away without buying a new one, Mr. Michaeli said.
More evidence emerged yesterday of the beating automotive finance companies are taking from a plunge in the values of trucks and SUVs and the difficulties they're having securitizing loans attached to those vehicles.
GMAC LLC, which is the lead financing entity for GM vehicles but now is controlled by hedge fund Cerberus Capital Management LLP, took a $716-million (U.S.) impairment charge on its vehicle portfolio. That contributed to a $2.48-billion second-quarter loss at the financial services giant.
The finance companies are taking a hit because the values of the leased vehicles being returned - known as the residual values - have plunged to levels considerably lower than forecast when the leases were set up two, three or four years ago.
"Record fuel prices are pummelling used vehicle prices," GMAC's chief financial officer Robert Hull told a conference call.
The losses for finance companies are "alarming," Standard & Poor's Corp. noted yesterday as it lowered the ratings on debt held by GM, Chrysler and Ford Motor Co. further into junk territory.
"Liquidity for all three auto makers is adequate for now, but will be significantly reduced in the second half of this year and during 2009 by continued heavy losses and cash outflows," S&P said.
