I spent twelve years in the automotive manufacturing industry, including four years as the Environment Director for the Canada Automotive Parts Manufacturers' Association (www.apma.ca). It is a great industry in which to learn continuous improvement, creativity and how to make car seats with moody robots.
I have commented recently on the demise of Detroit, but today's news really makes me worry more about Detroit than ever before. I want Detroit to survive and thrive, but they have to turn it around very fast!
GM and Chrysler recently announced that they are getting out of the leasing business. Why? Because the after lease residual value of their vehicles have plummeted recently. Why? Because no-one wants to buy a four year old SUV today. Why? Because the price of gas is very high? Why? Because demand is going up on the other side of the Pacific. Why? Because North Americans are buying lots of stuff from the other side of the Pacific. I think that is enough why's.
Automotive leases have been attractive for years because they reduce the cost of use for consumers. Lease payments cost less than loan payments because at the end of four years, you essentially give the vehicle back to the dealer. The trouble is that the lease you signed in 2005 assumed a residual value of $15,000 on a vehicle which is now only worth $11,000 - the car company is left holding the bag.
When I heard the news today I did a less than scientific study of two four year old vehicles - a Prius and a Ford Explorer.
A brand new Prius today costs a Canadian $27k to $30k (yes, I know they are much lower in the U.S.). A quick trip on Autotrader.ca tells me a 2004/2005 will fetch $24k to $28k; that is more than a brand new Prius in the U.S. In other words - if you leased a Prius in 2005, you got great gas mileage and when Toyota gets it back, they are going to make a good margin flipping it again.
Now let's look at a 2005 Explorer. My less than scientific study brings up a cost of about $15k for a four year old Explorer. A new Explorer will set you back $38k to $50k. Do the math...how much is Detroit losing on bringing back after lease SUV's? It has to be in the billions! Ouch!
I promised myself that I am going to start writing about solutions to climate change - useful information, focused on solutions. But...this subject really bothers me (can you tell).
One more thing before I sign off...have you seen the ads on TV and billboards at some vehicle dealers - guaranteed $2.99 per gallon of gas or $1,000 worth of free gas with your vehicle...argh, did you think you would ever see the day that vehicle dealers would do something like that!
To quote one of the greatest philosophers of our time, Forrest Gump, "That's all I have to say about that".
Please Detroit - turn it around, start manufacturing vehicles that will take on the Prius and Civic Hybrid; you will sell a whole bunch of them. Competition is good.
Remember Henry Ford - he built and priced cars that his employees could afford to buy - brilliant. Let's hope, one hundred years later that Detroit continues to manufacture vehicles that North Americans can afford, will want to drive and most importantly, respect the environment.
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