Commentary: Why I Think Chrysler Is Dropping Leasing
As Phil reported on Friday, Chrysler will no longer lease vehicles through its captive finance arm, beginning in August. Truck product-heavy Chrysler claims that they are losing too much money on vehicles as they return from leases, especially in light of the recent market shift away from gas-guzzling trucks and SUV's. I am not buying that reason and I think the real reason is something much more profound and far-reaching than just depressed resale value. Find out what that reason is after the jump.
I believe that Cerberus Capital Management, which is the private equity firm that controls Chrysler, is positioning the company to be sold. Not immediately, but within the next couple of years. Cerberus' modus operandi has been to buy an under-performing company and then cut costs to the bone in order to return it to profitability. Once the company in question is profitable, Cerberus makes the decision as to whether they will hold the company for the long term, or sell it for a quick profit. My feeling is that Cerberus is looking to do the latter with Chrysler.
Chrysler has a lease portfolio made up of undesirable trucks, SUV's and lackluster car offerings, most of which will be worth less than their originating residuals. By suspending leasing now, Chrysler's lease portfolio will be effectively whittled down in two or three years. Without an under-performing lease portfolio, Chrysler is worth that much more to a potential buyer. How much more? According to Automotive News, Ford recently took a $2.1 billion charge due to lease residual shortfalls and Honda expects to lose more than $231 million over the next year due to falling residuals.
So what does this mean for the consumer? Chrysler's future is certainly a big question mark. If, and it is a big if, Cerberus can bring Chrysler back to profitability, they will likely look to sell it off. For someone who buys a Chrysler product today, they could find that the company is under new ownership before the warranty is up. Speaking of warranty, the value of the lifetime powertrain warranty, a real selling point, could be worth less than the paper it is printed on if Chrysler changes hands. Keep this in mind when considering a Chrysler, Dodge or Jeep.
- Posted by
- Lee Scott July 29, 2008, 3:00 AM
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- Leasing
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- Cerberus, Chrysler, Leasing, Residuals
> more profound and far-reaching than
> just depressed resale value.
That’s definitely a part of it. Chrysler products are so undervalued at resale time that leasing doesn’t make sense. That’s pretty simple.
> positioning the company to be sold.
That’s a given. That’s why they bought the company.
> Chrysler has a lease portfolio made up
> of undesirable trucks, SUV's and
> lackluster car offerings,
This is part of Chrysler’s problem. Not that they have undesirable vehicles, but that the media keeps referring to them in that light. I spent the day in a newer Caravan recently and that thing really grew on me. It reeks of practicality. It was comfortable to boot. Even the interior grew on me. Toss in a lifetime warranty and you’ve a pretty attractive offering. It’s just not cool, like the automotive press prefers. The vehicles are no where near as bad as car enthusiasts say they are.
> they could find that the company is under new
>ownership before the warranty is up.
You mean the lifetime warranty? I know the warranty has it’s limitations, but I know people who purchased “extensions” to the warranty to cover most of those limitations.
> could be worth less than the paper it is
> printed on if Chrysler changes hands.
> Keep this in mind when considering a
> Chrysler, Dodge or Jeep.
How? When you buy a company, you buy it’s assets and it’s debits. When you buy Chrysler, you buy the warranty commitment. It doesn’t magically go away. I’m fine with much of your article, but this really bothers me. You’re discouraging people from buying Chrysler, based on your own misunderstanding. Grumble, grumble, grumble.
brn, actually, the life of the lifetime warranty will depend on how Cerberus disposes of Chrysler. It can either sell it off in its entirety, which will include the warranty. Or, it can choose to break it up into its component parts (including manufacturing plants, finance company, engineering facilities, real estate, etc). If it does it this way, you can kiss the warranty goodbye.
Also, it is not a slam dunk that Cerberus will sell Chrysler. There are companies that they have acquired and held on to. Blue Bird bus company and Spyglass Entertainment are just two companies that they have worked to turn around and hold on to.
In addition, there is the possibility that Cerberus will hold onto Chrysler for the long-haul. Cerberus also owns several companies that supply parts to the auto industry, not to mention their controlling share of GMAC.
My point is that with everything that Chrysler has going against it, including lackluster products and an uncertain future, what compelling reason does a consumer have to choose a Chrysler product over the competition. I think consumers would be wise to consider their future vehicle purchase with these factors in mind.
The buyer(s) may choose not to buy the warranty commitment, but then Cerberus is still liable for it.
Contractual commitments (warranty) can't just disappear, except maybe via bankruptcy.
Personally, I'm not drawn toward Chrysler products, but they do serve a purpose and that warranty is very enticing. To suggest that the warranty will vanish if the company is sold, is incorrect.
Lee, while most of your supposition is plausible there is a big flaw in it in my opinion. Chrysler is barely profitable with a very high volume of lease business. If you won't lease a vehicle, you will lose a lot of volume and that will certainly hurt the company. If you have any doubts, please note that Fitch just today downgraded Chrysler to CCC+ with negative outlook. The main reason given is "restricted access" to vehicle financing. To me this is simply Cerberus cutting the biggest bleeder on the balance sheet ahead of a peacmeal chopping up of the company. Not in 2or 3 years but within the next 12 months. I've seen this many times before, being in the restructuring business for many years.
Frankly, I would love to be wrong and see Chrysler stay together and in business...way too much history there to see it go down the drain.
Lee, I'm a car guy too so I do hope that Chrysler survives. I suspect that someone would buy the name to continue the business on a smaller more profitable basis. I am sure that Jeep will survive.