GMAC's Leasing Woes Spur Auto Finance Losses; GM On The Hook
GM's former finance arm said bad leases generated
The leasing-related losses, brought on largely by sinking values of pickups
and sport-utility vehicles, were the main reason GMAC's auto finance business
GMAC said Thursday it plans to cut its leasing business in the U.S. by 50%
this year, and maybe more, to help mitigate losses. Earlier this week it
announced it would eliminate subsidized leasing in
GMAC, with its ability to consistently deliver big profits, used to be a bright spot for GM, up until around the time the auto maker sold 51% of the company to Cerberus Capital Management in 2007.
Even after the nation's housing market meltdown drove GMAC's ResCap mortgage
lending unit deep into the red, the auto finance business was still turning a
healthy profit. In 2007, GMAC made
Now, only insurance is a profitable business for GMAC, delivering a
GM shares were flat at
GM Earnings Come Friday
The full extent of GM's exposure to GMAC and the leasing market will become clear on Friday when the auto maker is expected to report a substantial quarterly loss.
The same economic conditions weighing on GMAC - plunging home values, shaky consumer confidence, a credit crunch and sinking U.S. auto sales - will weigh on GM's financial results. A strike at a major supplier, moves to trim U.S. truck capacity and blue-collar jobs and a new Canadian labor contract also will cost the auto maker.
The deterioration of the leasing market is the latest crisis to hit Detroit's beleaguered auto makers. Sales of trucks and SUVs - the cornerstones of U.S. auto makers' product portfolios, providing the bulk of sales and highest margins - have tanked in recent months amid record-high fuel prices and waning consumer confidence.
Big losses on leases - which have long been a popular choice for consumers and helped auto makers move more-expensive, high-margin vehicles - have forced auto finance companies to make dramatic changes to their leasing practices.
Chrysler LLC last week announced it would suspend its leasing in the U.S.,
At GMAC, in addition to offering fewer leases, it will offer incentives to
encourage customers to keep leased vehicles longer. GM's lease portfolio
Lease contracts typically run 24 to 36 months, and consumers usually turn in their vehicles at the end of the term. That leaves the auto maker on the hook to sell vehicles that may have declined significantly in value compared to assumptions made at the time the original lease was signed.
GM, Ford and Chrysler have suffered more than their foreign rivals this year owing to their reliance on trucks and SUVs. The residual values of large vehicles have declined significantly, while values of fuel-efficient cars have gained.
A report released this week by Automotive Lease Guide showed that four of the five vehicles showing the biggest decline in residual value over the past year are made by GM. For example, according to ALG, a Chevrolet Tahoe is now expected to be worth 31.8% of its original sticker price after three years, versus 42.2% a year ago.
While the Detroit Three are taking steps to reduce their reliance on trucks and SUVs, it will take several years before cars make up a significantly larger portion of their product portfolios. Meantime, foreign auto makers are reaping the benefits of their car-centered portfolios.
(Stephen Wisnefski contributed to this report.)
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