The Wall Street Journal reports that GM will go back to its leasing habit in August, after nearly a year of cold turkey. According to the WSJ‘s anonymous sources, GM “is looking at various models across its four-brand lineup as candidates for leasing. Those include the Cadillac CTS, which competes in a luxury market that is heavily dependent on the availability of lease deals.” CTS sales which had hovered around the 5k units/month level since the last redesign are now fighting to hold on to 3k units/month. And that’s the latest, hottest Caddy out there. GM and GMAC probably see no alternative to burning even more bailout cash trying to move the CTS oversupply. But the source of the burnt cash is the only thing that has changed since they walked away from leasing. The WSJ notes that the “firming up of resale values” is contributing to GM’s decision to go back to leasing. Maybe they can’t smell the desperation. If you want a whiff of why this is a bad idea, check out eBay’s recently completed CTS auctions, where 2006 and 2007 CTS 3.6 models are consistently failing to attract $15K bids.
This doesn’t really have anything to do with the article, just the picture. I went to the Cadillac site, and these are the words they use to describe the CTS Wagon:
‘The versatility of a crossover, and the fuel efficiency of a sedan …’
That made me laugh, and cry.
I would be careful about complaining about how others use fuzzy comparisons when you make claims about CTS resale value based upon ebay bids for the previous-generation model.
The reason the 2006-2007 CTS 3.6 models are failing to attract $15k bids on eBay is probably because the dealers are too chicken to sell them with no reserve. Cars with a reserve tend not to sell.
I think this is an incredibly intriguing issue.
Does anyone have a solid set of numbers about how much profit a company can make from just selling a car outright to how it can do if a lease goes well or poorly?
I’m the beneficiary of BMW’s circa-2007 great lease deals: a Z4 for a monthly payment of a nicely optioned Honda Accord. Of course it’s plain to see BMW’s getting toasted on this deal — the MSRP of the car was $38,000, the negotiated price was something like $35,500, and the lease buyout cost is $31,000. Autotrader searches for low-mileage 2007 Z4s imply they’ll be fortunate to resell it for $25,000.
Obviously transactions like this are why GM got out of leasing in the first place, but did it ever make sense?
While I’m not defending Cadillac resale values, the entire used luxury segment has nose-dived. A local Audi dealer is flogging an 09 ex-Audi rep 3.2 A4 for low $30s and you can buy a fully optioned up ’07 335 coupe with less than 20K miles for $32K. YSE is hitting everyone.
z4eva – that’s how luxury brands do “cash on the hood”. They avoid discounting the RRP and put all the cash in the finance deal.
Luxury cars in general have relied on a lot of leasing to move the metal over the past decade. The subsidized leases have allowed people that could only afford a 60 month payment on an Accord step up into a BMW, Lexus, Caddy, etc. It’s been extremely popular, and a huge tool in bringing new customers into dealerships. The problem is that when the cars are returned, they’re not fetching the residual values. Balance that, and it can work.
Writing leases at artificially high residual values contributed to GM’s bankruptcy. This practice makes the numbers look good for a few years, then big losses are incurred as the vehicles come off lease.
I predict another too-big-to-fail-in-an-election-year bailout in 2012.
bunkie: true enough. There aren’t as many recently-closed 2008 CTS models on ebay, but the two most recent examples failed to reach their reserves/buy it now prices. One bid out at $15k, the other at $24,500.
I’m not arguing that WSJ is fudging resale numbers, or that ebay is a more accurate measure of residual value. My point is that leasing cars with already-weak residuals in order to make up for falling sales is a recipe for re-softening those resales and losing money.
Slightly off-topic…
Is Cadillac the only manufacturer to offer a wagon in the luxury market? I’m sure I’m forgetting someone, but I can’t think of anyone.
Mercedes, Lexus, BMW, etc. all offer SUVs, but no station wagon.
I dunno…”luxury station wagon” just sounds wrong to me. Makes it sound more like a high-trim Chevy than a Cadillac.
Unless, of course, the Cadillac is nothing more than a high-trim Chevy to start with…
Is Cadillac the only manufacturer to offer a wagon in the luxury market? I’m sure I’m forgetting someone, but I can’t think of anyone.
Mercedes, Lexus, BMW, etc. all offer SUVs, but no station wagon.
Huh? Mercedes, BMW and Audi all offer wagons. You’ve never seen a 3 series wagon or an E class wagon or an A6 wagon?
afabbro,
http://usnews.rankingsandreviews.com/cars-trucks/rankings/Luxury-Wagons/
That wagon would be so hot if they’d just extend the real window more. I don’t like how thick the rear panel is in relation to the window, looks ugly. Kudos to Caddy for having the balls to sell a wagon though. I wish Lincoln would do it. The MKT is sexy but doesn’t count, it is too high and not sporty enough.
“Unless, of course, the Cadillac is nothing more than a high-trim Chevy to start with…”
Wow, did Chevy bring back the rear wheel drive platform in a four-door sedan while I was’nt looking?
Regarding residuals, I’ve been saying for a year now that this is going to change. The tanking of of the new-car market will put upward pressure on prices in the used-car market. I’m guessing that the incredible values you get now buying a 2-year-old used car will be a thing of the past come 2011 or 2012. Perhaps it’s risky to bet on it, but I wouldn’t be surprised if those residuals on the new CTS end up being pretty accurate.
Wow, did Chevy bring back the rear wheel drive platform in a four-door sedan while I was’nt looking?
No, sadly no wagons at all unless you count the HHR. A Malibu wagon would be awesome if they would do it.
Another question – if automakers are the ones taking a bath on leases – why do so many people here think they are a bad idea? The consumer isn’t the one taking a loss – the automaker – or its captive finance arm is.
@jmo:
I stand corrected!
If GM is going to stay in the luxury market, it probably has to offer leasing.
Now seems like as good a time as any to (re)start. With consumer sentiment having nowhere to go but up, and a dearth of used 2008/2009 inventory coming down the pipeline, it isn’t a stretch to say that residual values can only strengthen between now and 2013. Today’s problems are almost never tomorrow’s problems…. quite the opposite.
It is also good timing in the sense that consumers no longer expect sky-high leasing residuals. It is finally getting through that $399-a-month was never the true price of driving a luxury car.
jmo: if automakers are the ones taking a bath on leases – why do so many people here think they are a bad idea?
These subsidized lease deals are great for the guy driving the car. If I might be so bold as to answer for the B&B, these cheap leases are only bad for car fans in general when the companies offering them get bled to the point of death, then have to go to the government for billions upon billions of our dollars so that they can barely survive and then discontinue lots of their more interesting cars.
Leasing is critical to selling a luxury car, from two standpoints:
1) People who buy luxury cars tend to be more educated and savvy. These people are smart enougn to know that putting a huge down payment down on a car to keep the monthly payment low is a gigantic waste of money. They prefer to put nothing down if possible.
2) Leasing is perfect for small business owners – they can write the lease off through theie businesses.
Calling this a “habit” implies it’s a bad idea. Funny, nobody thinks it’s a bad idea when all of Caddy’s competitors do it.
If we’re gauging the resale value of cars via Ebay, I think that’s kinda unscientific…
ALG, which is the company that sets residuals for leasing purposes, puts the residual for the CTS at 46% after three years. Not quite as good as the 3-series or Mercedes C-Class, but equal to or better than the Lexus GS, and Audi A6.
I’m sure GM’s travails have something to do with that, and as soon as consumers’ confidence in the company goes up, I think their residuals will as well.
christina:
“‘The versatility of a crossover, and the fuel efficiency of a sedan …’”
So funny, so sad…
Maybe they can’t smell the desperation.
Or variation on a theme; “I love the smell of burning depreciation in the morning”.
Being a tree hugger I would have trouble with the terrible 16 mpg fuel inefficiency of this car but it is great looking.
Small business people who need to appear successful will want to be able to lease this car.
Driving around in a SUV or crossover just makes a person look awkward now.