Chrysler says it will end leasing next week
Remember this is just through Chrysler Financial.
From the Detroit Free Press:
Chrysler says it will end leasing next week
Decline in value of used trucks, SUVs prompts move, automaker says
BY TIM HIGGINS • FREE PRESS BUSINESS WRITER • July 26, 2008
Chrysler LLC will stop issuing new car and truck leases next week through its financial arm and instead turn its resources to financing loans for customers, it told surprised dealers Friday.
This could mean car shoppers with less-than-perfect credit will have a harder time finding leases to acquire a Chrysler, Dodge or Jeep. But those who want to purchase a vehicle with a loan through Chrysler might get better deals.
The decision comes as the value plummets for used vehicles -- in particular trucks and SUVs -- leaving manufacturers with vehicles with poor value at auction once the leases expire.
In the meantime, Chrysler Financial is working to refinance a big chunk of its working capital.
Chrysler executives said it made more sense to direct limited resources into financing incentives rather than into leases, which make up about 20% of the company's business.
"We've really reached a point today in this environment where the advantages of leasing, the economic advantages, have really disappeared," said Jim Press, a Chrysler president and vice chairman. "From a standpoint of trying to continue to make leases available, we're taking resources that really should better be used for retail financing."
Chrysler is struggling.
Its U.S. sales are down 22% so far this year -- more than double the decline seen by the rest of the industry. The automaker has announced more than 28,000 job cuts over the past 18 months.
Last Monday, Chrysler Chief Executive Officer Bob Nardelli acknowledged a report in the Wall Street Journal that said Chrysler Financial was in midst of trying to persuade more than 20 banks to renew a $30-billion credit facility and that the finance arm faces higher interest costs.
But he said it wouldn't affect the business. "As is customary for many auto finance companies, this renewal process takes place every year. We will continue to offer competitive financing and lease options for our customers and dealers," Nardelli told employees in an e-mail Monday.
On Friday, things shifted.
Thomas Gilman, executive vice chairman of Chrysler Financial, said the company expects to complete the renewal process in early August. "What we're seeing is not necessarily a capacity issue, it's more an issue of risk pricing by the banks," he said.
Banks want more to take on the risk that resale values of vehicles will decline further than expected.
Dealers still will be able to turn to banks to finance leases for customers, though experts say it can be more expensive and harder for some with lower credit scores.
Some dealers worried that the move would make them less competitive by removing one of the tools they have to close deals.
"It's painful because those customers that lease are all captive. I've got some that have leased for 30 years from me, just going from one deal to another. Where, if they buy, they kind of get away from you some," Alan Helfman, vice president of Helfman River Oaks Chrysler Jeep in Houston, said after learning the news.
"I was blown away," he added.
Earl Hesterberg, chairman of Group 1 Automotive Inc., which owns eight large Chrysler dealerships, told the Automotive News: "I really don't see how they can be competitive at all in the marketplace with this kind of action."
Chrysler executives say they will remain competitive. To help in the transition, Chrysler will begin offering zero-percent financing for 72 months on more vehicles, executives said.
"A customer who had an advantage of lower payments" under leasing "can now buy the car on a 72-month contract and have as good or better payments than they did ... on a lease, a 36-month lease," Press said. "But at the end of the contract, they own the car. ... In this economic environment, the fact of the matter is, it's better off to have the asset."
Press said Chrysler could continue to do leasing, but it would take resources away from retail, and it would be more expensive, especially as the lease payments grow to cover the falling residual values of the leased vehicles.
Chrysler isn't alone in feeling the pain brought on by its lease business. On Thursday, Ford Credit took a pretax charge of $2.1 billion because of the declining resale value of vehicles, especially pickups and SUVs, being returned after leases.
"The residuals on large SUVs and large pickups as well as midsize SUVs are plummeting. There's a lot of risk," said Tom Libby, senior director of industry analysis at the Power Information Network, a subsidiary of J.D. Power and Associates. "Chrysler is just trying to minimize risk," he added.
The prices of used large pickups dropped 12.5% in May and June of this year compared with last year, Libby said.
Although some experts believe other automakers may look to eliminate leasing as a way of cutting risk, Jesse Toprak, executive director of industry analysis at Edmunds.com, said the move seemed unusual to him. "If they don't believe in the value of the cars, they don't want to take the risk, essentially, why would the customers?"
Some dealers were optimistic about the change. Jim Arrigo, owner of Arrigo Dodge-Chrysler-Jeep in Palm Beach, Fla., said he was confident he'd be able to sell vehicles if Chrysler can come through with incentives. "All I want is the incentive money. I will deal with how to put people in the car," he said.
For others, it could be more noticeable. More than 90% of the deals reached at Southfield Chrysler Jeep are through leases, co-owner Dan Frost said.
But he is confident that he can continue to offer competitive lease rates for customers using subsidies that Chrysler will now offer dealers directly to offset higher lease payments through banks, he said.
For customers who previously would've qualified for a lease under Chrysler Financial but will no longer qualify for a lease through banks, Frost said he believes Chrysler Financial will be more willing to help customers get loans.
"It will be easier to get them financed on an installment loan, whereas before if you had B credit, you had to pay a larger amount on the lease payment," Frost said.