GM concentrates on sales over leases

BLOOMBERG reported that General Motors Corp. is cutting back on auto leasing, a business that has become less profitable as the company trims prices to keep payments low and makes less money selling the cars that customers return.

The largest automaker is pushing rebates and no-interest loans that encourage shoppers to buy. Leases made up just 8 percent of retail sales last month, down from 19 percent in July 1999, and market analysis director Paul Ballew said General Motors plans to keep the level below 20 percent.

Automakers use leases to entice consumers into more-expensive vehicles with low payments. General Motors is cutting back because leases erode profits twice -- up front, when the company pares prices to reduce payments, and at the end of contracts, when cars might be worth less than expected at resale.

"Leasing is very expensive, and as leasing exploded in the last few years, we all found out how expensive that is," Ballew said.

Ford Motor Co. and other rivals still call leasing a good way to attract high-income customers and keep them coming back. DaimlerChrysler AG'sChrysler Group, Toyota Motor Corp. and Honda Motor Co. said they have no plans to change their leasing strategies.

"It's quite profitable, especially when you consider that owner loyalty is much higher for lease customers," said Ford sales analyst George Pipas. "The customer has to come back to the dealership to do something at the end of lease."

Ford is making no concerted effort to cut back on leases, Pipas said. The second-largest automaker leased a quarter of its U.S. vehicles in 2000 and 20 percent last year, when it needed to match General Motors' no-interest loans.

Residual values, or the price a car will command when it's sold at auction after a lease, often have been overestimated by domestic automakers as they set payment rates. When residuals fall more than expected, automakers can lose money on leases. Foreign rivals' used cars often hold their value better.

U.S. automakers "are setting their residuals as if all their vehicles are Toyotas, and they're not," said David Littmann, who studies vehicle affordability as chief economist at Comerica Bank in Detroit.

Leasing a 2002 midsize car might cost General Motors about $2,250 more than Honda, a Delaware dealer said. Jim Ursomarso can lease a $21,000 Pontiac Grand Am for $298 a month for three years and a $20,680 Honda Accord for $292 a month. To get the Pontiac lease price so close to the Honda payment, General Motors gives the customer a $750 rebate, he said.

In addition, the Grand Am will be worth an estimated $10,500 when General Motors resells it in three years -- some $1,500 less than the Accord. Combining the rebate and loss at resale, General Motors spends $2,250 more than Honda, Ursomarso said.

General Motors' goal is to get residual values comparable to Toyota's, Ballew said. Two steps it will take are to keep leases below 20 percent of sales and to sell fewer vehicles to daily rental-car fleets. Both might help bolster used-car prices by reducing a glut of used vehicles, he said.

Higher values areunlikely to happen until U.S. automakers build vehicles with similar quality and life spans as their Japanese competitors, investors and analysts said. Customers will have to see proof that a Chevrolet or a Ford can regularly last for more than 150,000 miles, said Dan Poole, an analyst with National City Corp. It owned 265,760 General Motors shares as of December.