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Toyota gambles on future with low lease offers
Terms could haunt firm later, analyst says
BY JERRY HIRSCH
LOS ANGELES TIMES
It's an enticing offer: Lease a well-equipped Toyota Corolla for just $189 a month for three years.
For Toyota, the deal could be a financial disaster. To keep customers coming to its showrooms amid a series of embarrassing recalls, Toyota has been offering some of its best leasing terms in years.
But the generous come-on could "haunt them three years from now," depending on how the market turns, said B. Craig Hutson, an analyst with research firm Gimme Credit.
By offering such low monthly payments, Hutson said, Toyota is essentially betting that the vehicles will have superior resale value when they are returned after their leases end. If their value is less than expected, it could cost the Japanese automaker's finance arm hundreds of millions of dollars.
To make the numbers work, Toyota has been setting a vehicle's so-called residual value at about 60% of its sale price new. That can be up to several thousand dollars higher than the estimates of independent analysts, depending on the model.
Although it's hard to project what the market will look like in three years, current data show that prices for used Toyotas aren't holding up as well as the prices of other makes.
According to auto-pricing data company Edmunds.com, the average transaction price of a used Toyota fell 1% in June to $15,073 compared with an industry average gain of 9%.
Toyota is one of the more aggressive companies in setting residuals for its vehicles, but the strategy was less important in previous years, when leases accounted for only 21% of its new car sales and the brand had strong resale value.
But leases now account for 30% of Toyota's business, the automaker said. The numbers don't include the automaker's Lexus and Scion brands.
And now it's offering leases to customers who are greater credit risks. CNW Research noted in a report that one Toyota program requires a credit score of "only 660 to qualify." That's seen as the dividing line between good and poor credit.
"Toyota was in a corner. They had the recalls, and their inventory was climbing," said Matt Traylen, chief economist for Automotive Lease Group, or ALG, which analyzesresidual and depreciation data.
That si the key;that mnay do not quify now for financing to buy. Leases have always been a great deal for manufacturers.Look at the Zero finacing going on bu all kinds of manufacturers 'some ven as long as 72 months.GM is trying like heck to get their own financing bacl going.They all now just what they are doing.
The news story makes this sound more dramatic than it actually is. Toyota can afford to subsidize these leases, they're not exactly gambling their future.
Toyota ruined their future when they sold me a Corolla 10 years ago that just won't stop going, is superior in design to the new model and won't even burn oil after 150K miles on it. Why in the world would I pay money for a new one?
The article overdramatizes the situation, but the underlying point is very valid. Strong/affordable leasing options is a great tool for manufacturers. Their ability to offer these rates is tied directly to the residual value of the vehicles involved. If the cars don't hold their value, than the manufacturer is essentially subsidizing leases. This is one of the areas that got GM in a lot of trouble in the early 2000's. They were offering strong lease terms on cars, especially Cadillacs, that couldn't hold their value well enough. The result was that those cars got dumped back on GM and they had to take the losses.
In Toyota's case, this isn't going to be the death knell of the company, but it is an area they need to be competitve in and can't afford to lose money. Companies like Ford, Mazda, Subaru and Honda that compete directly with Toyota models and also enjoy high residuals can make their cars a much better value play on a lease and still make money.
The news story makes this sound more dramatic than it actually is. Toyota can afford to subsidize these leases, they're not exactly gambling their future.
GM thought they could, too.
It's a pretty big gamble if the market doesn't support it.
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