![]() Losses from these aggressive residuals may undermine future profitability.Īccording to the Automotive I. In order to stay competitive, car companies are establishing aggressive leases to attract more customers (B1 in “Leases That Fail”), which increases revenues and profits in the short term. losses from aggressive residuals may undermine profitability and put further pressure on the companies to offer aggressive leases (R2). Although these leases Increase revenues and profits In the short term. In order to remain competitive, car companies are establishing aggressive leases to attract more customers (B I ). Over the long term, however, the unintended consequences of the “fix” exacerbate the problem symptom and actually make the situation worse. To alleviate it, a solution is quickly implemented that alleviates the symptom in the short term. In “Fixes That Fail,” a problem symptom cries out for resolution. The struggles around residual values suggest that the car companies are caught in a “Fixes That Fail” structure. This means that car manufacturers and independent lease companies may be facing tremendous losses as their cars come off lease. In addition, according to Business Week, residual values are currently at an all-time high and may be poised to fall. Last year, when the cars began coming off lease, Infinity had to sell them at losses ranging from $5,000 to $7,000 apiece, according to some analysts.” It “set an unrealistically high three-year residual on its Q45 model in the early ’90s. One example cited by Business Week is Nissan Motor Co.’s Infinity luxury brand. Unfortunately, the actual market price is falling short of expectations - which means losses for carmakers when it comes time to sell the previously leased cars. The process itself presents no inherent problems to the carmaker’s bottom line, as long as the actual market value of the car equals its anticipated residual value at the end of the lease. Residual values - the car’s anticipated wholesale value at the end of the lease - are set when a company writes a new lease. One problem facing many car manufacturers concerns the “residual values” of the leased cars. The long-term side-effects of cut-rate leases, however, are slowly beginning to emerge. The most recent trend is to offer cut-rate leases on new cars, which helps in the short term by pumping up unit sales and total revenues. In the highly competitive auto industry, car manufacturers are under continual pressure to create more attractive deals. Moreover, these good-quality used cars may undermine new-car sales, thereby magnifying the downturn ” (“A High-Stakes Spin of the Wheel,” Business Week, December 19, 1995). By 1997, most analysts agree, the ever cyclical auto market will likely head south again - maybe sooner, if the Federal Reserve keeps hiking interest rates…. ![]() That’s an immediate concern, because the aggressive lease deals being written today could undermine profits several years down the road. ![]() Yet some analysts and auto executives worry that the leasing business could make a dramatic U-turn and become a money-loser in two or three years. Ford and some other companies that have pushed (car) leasing hard ‘are making money hand over fist right now,’ says Randall McCathren, whose company, Bank Lease Consultants Inc., tracks industry trends.
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