The Car and Truck Fleet and Leasing Management Magazine

Regarding the Rethinking of Residual and Remarketing

November 2002, by Ed Bobit - Also by this author

You can't sit on the lid of progress. If you do, you will blown to pieces. -Henry J Kaiser

 

For most Americans, progress means accepting what is new because it is new, and discarding what is old because it is old. -Lewis Mamford

 

Is it progress if a cannibal uses knife and fork? -Stanislaw J Lec.

 

With nearly all commercial account lessees under contract with an open-end lease, they and their controllers are noticing that the price of doing business for a fleet has increased markedly.

The heavy pounding depleting our substructure (after many years of obtaining high residuals) has been the advent of the egregious incentives showered on both retail and fleet accounts.

Yes, the fleet manages are continuing to boast receiving larger checks to wave in front of the CFO but long after the purchases are made, the company learns it's actually costing them more.

The demon is well identified although not given much respect; depreciation. It feeds off higher incentives, both the obvious ones tabbed as incentives but also the subtler one of the carmaker picking up the tab for the interest which is sort of hidden.

The question remains, why aren't these professional managers giving proper credence to total cost? It is not like they haven't been exposed to the idea. It's not because they're clueless in Seattle.

As an observer, let me mention a few things that may provoke you to re-think your position and posture.

People like Automotive Lease Guide (and other guide book marketers) have come out with a specific "fleet/lease" residual book that carmakers are now paying attention to. Your mouth is liable to drop open to see some of the projected values three years from now. Frankly, it's scary.

GM just announced that they are not encouraging their dealers to sell accessories that do not add substantial value on resale. GM doesn't want more expensive accessories (that are profitable for the factory) melded into the cap cost of the vehicle. When this happens, it is simply widens the depreciation gap. Making that policy took guts.

I've often wondered about the wisdom of a larger commercial lessee account maintaining three lessors. So, one day I asked. I was given the factual evidence that the monthly residual summaries from each lessor were carefully scrutinized. When one was not getting comparable numbers for two months in a row, an ultimatum was issued. Incredibly they were brought into line.

NAFA's latest Used-Vehicles Marketing Study reveals some pretty startling results among the 145 commercial fleets responding. Would you believe that one-fifth of them do not have a formal replacement policy in force?

Figure this one out. A remarkable 61 percent of the fleet offer their used cars to employees (the good news); but only 21 percent are actually sold to employees (the bad news). What's wrong with this picture?

For cars the average replacement still hangs at 36 months or 65,000 miles. Even with 2002 being a difficult economic year for most corporations, only 4.1 percent plan to run the units for more months and 6.9 percent will try to get more miles before replacing.

My friend, Keith Kreps, of ULTEA Leasing has actually worked out some documentation that involves where prime and U.S. Treasuries were three years ago (assuming a fixed, not floating interest rate) vs. today. He tells me he can build a strong case for not extending the life of that three-year old car and why it might be wise to purchase now and lock in the current interest rates for the nest three or four years.

There are many reasons to re-think our position and posture on depreciation and residuals. The boldest notion is one of my pets that I dust off every so often. If the lessors are the experts and the fleet managers refuse to learn remarketing, why not let the lessor take the risk? It's called a closed-end lease; and it is available if anyone wants to consider true and total costs.

What one can learn globally can often apply locally. I urge you to think outside the box, internationally, if you will, as you study the future.

 

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