The Car and Truck Fleet and Leasing Management Magazine

Deep Incentives Are Killing All of Us

December 2002, by Ed Bobit - Also by this author

There might be a shift among smaller companies to vehicles with high retail sales since they retain value better than high fleet sales vehicles.-John H Eager, President, J.H Eager & associates LLC

 

As cash rebates and interest-free loan for new vehicles show signs of losing their allure in the U.S., automakers are starting to rely on another tool: six-year loans.-Automotive News Online (10/31/02)

 

My cars are about three years old with 65,000 miles. The poor (resale) market has trickled down to that level.-Randy Burwell, Fleet Administrator,Valero Energy Corp

 

As I am penning this editorial, it's early November (who knows what will be happening by the time you get this December issue).

You are getting the timeline since we are experiencing so many influences in the automotive market. I'm hesitant to make some calls that might be obvious. The economy as a whole; the possible threat of real war; a "soft" October auto sales month in spite of record incentives and new '03 models; and an election month.

GM, the leader in "zero, zero, zero' financing has just extended this promo until January 2. Nobody wants to "give" money away unless the really have to, so it's a hardball decision. Ford and DCX will reluctantly follow to "stay competitive."

We all know that there is a serious overcapacity of automotive manufacturing facilities in North America. Factory management knows the heavy cost of laying off unionized people, so we are inevitably heading for that place on the chart curve where it makes no sense to keep building and selling vehicles with ridiculous incentives.

J.D. Power reports that GM'S third quarter incentives spending was $3,855 per vehicle and identified as the highest in the industry, although all the factories are crying "ouch" at the costs.

With retail incentives approaching $4,000 on average, fleet buyers are undoubtedly saying that enriched fleet CAP incentives "aren't killing us" in unison.

Don't be so sure.

From first-hand experience we know that the high majority of fleet managers either feign interest or virtually ignore residuals. They know that they're the wisest purchasers in the field. They typically do not hang with the NAFRD wholesalers quaffing a beer and discussing the market. They usually arrange contractually for their fleet management company to dispose of the used stuff through the auctions, but haven't been to an auction themselves since a local NAFA chapter outing years ago. When queried on not focusing on remarketing the invariable answer is "I get the reports" (but do they know how to track the trends or how to get the better results?); or, "I'm so busy now, I can't be expected to be an expert on everything.

My recommendation is to take the time. The record incentives now being doled out are having a devastating effect on residuals. Just talk to an auction manager or wholesaler and the horror stories never end. Find out how many times some cars have to be run back through the lanes; and maybe still don't sell over the floor price established.

Don't delude yourself about how proud you are of buying lower than your boss ever thought possible. Think about why the average replacement for a corporate car has been extended from about 33.6 months to nearly 36 months in the last five years. Why do you read about retail leasing falling out of favor? It's directly related to the residuals tanking and new, realistic depreciations rates making payments so high, even the non-professional (consumer) knows about the sinking residuals.

Hey, initial price for the new ones runs pretty competitively; running costs may vary by pennies; so, where does the genius turn to become a hero? Or heroine? Take heed; don't get caught with your residuals down.

 

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Fleet Incentives

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The term used in some European countries, e.g., Spain, for closed end leases, which ordinarily include the lessor assuming responsibility for maintenance and tire costs in addition to residual value risk.

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