[s-cars] Leasing

Sat Mar 20 15:20:29 PDT 2010

 I have addressed subsidizing, I may suggest you mis/(t)/(s)/ed it?  If Audi pre-sells high residuals, and there are no ARV's yet, that means Audi is giving notice that they will be heavily subsidizing leasing to artificially inflate residuals.  Coming in a press release from the President of AoA himself, that's quite an all-in position to take IMO.  Overly optimistic, more likely.

Take a look at the Kelly Resale values for 2006 and 2008 in the article I referenced.  BMW in fact slipped from the number 1 spot to number 2, Audi moved slightly up (at least in the top 10), but not comfortably as noted in the article I referenced: "Audi benefited from the gains (2006 to 2008) in the S6, Q7 and A3, somewhat offset by a drop in the A8."  That's more likely a new body demand, that will  get corrected back when the  2010 numbers come out.  

Actual Residual Value is what it is, it's the same as used car Actual Cash Value.  The difference between the two is that Residual Value is a predicted result 24-60 months ago, and ARV and ACV is the benchmark (post predicted reality) to that prediction.  

It's a good thing to sit in the top spots for ARV/ACV, because that reflects the value of the real world open market economy.  You can hide behind/prop up artificial residuals only for the actual length of the lease.  Historically, Audi just hasn't done well post-lease, period.  And BMW has, period.  I suggest that's because BMW consistently produces cars with long term value, and Audi doesn't.  That's part of a Corporate Mission Statement/Philosophy that may need addressing on Audis part, now that BMW is taking the AWD route thru the line-up.

S 's' J

-----Original Message-----
From: Taka Mizutani <t44tqtro at gmail.com>
To: qshipq at aol.com
Cc: jc at j2c3.com; joe.pizzimenti at gmail.com; cody at 5000tq.com; s-car-list at audifans.com
Sent: Sat, Mar 20, 2010 4:03 pm
Subject: Re: [s-cars] Leasing

You haven't addressed the fact that companies often subsidize leasing to artificially inflate residuals to have an artificially low payment. Then you take an example of a car that has terrible lease terms (135i) and compare it to a heavily leased and subsidized car like the A4 or the 3 series. If you look at actual wholesale prices of A4s and 3 series prior to the credit crunch putting a big crunch on leasing versus the very first cars to come off lease since the crunch, you'll see that real wholesale prices of the A4 and 3 series have slightly improved in terms of residual value due to the reduction in leasing and subsidized residuals that have killed values on the used market for quite a few years now.

When you're talking about the upper end of the model line, flagship cars tend to have poor resale value on the used market because the target market does not buy these cars used and the secondary used market is unwilling to pay a high price for a car that tends to be very costly in maintenance past the warranty terms. That mentality even carries on to relatively reliable used cars like the Lexus LS, due to the way this tier of the market is bought and sold.

I guess you'll still call me ungentlemanly and an asshole for disagreeing, but once again, you're not really correct.

Taka

On Sat, Mar 20, 2010 at 2:57 PM,  <qshipq at aol.com> wrote:

 Goodread!  I did a Econ paper college about Audo Leasing, how it works, andhow it doesn't.  Juxtaposed to VW and BMW good residuals in 2008, isthe rest of the world.  Years ago, when Honda was to first take FordTaurus in sales, Ford dumped 10's of thousands of units to the RentalCar Lease market, to make the "sales" numbers hit the marque, and theTaurus took the crown.  Fine short term strategy, but 2-5 years downthe line, you live with 'off-lease' sales competing with your new *and*used car sales.  Ford got hit hard for that move.

Looking at BMW and Audi now, the reason Audi sells their comparablecars at such a premium price, partially reflects that poor 'Actual'Residual Value (ARV) Audis never seem to hit.  Contrast that with BMW,which historically hit their residuals well, the win-win is forcorporate and the consumer.  I find it quite interesting that Audi is'selling' high residuals (incl a press release from AoA President?!),as Leasing finance companies face the realities that Audi doesn't. Leasing companies look at historical residuals to predict futureresiduals.  Unfortunately for Audi, the transmission and maintenanceissues of Flagship transmissions and bread and butter turbos of thelast 10 years, massively reflects residual values 2 years from now.

But it's not all bad news for the used car market.  When you go fromlooking at a new car now, to a used car 2-5 years from now, the Audisstarts to look attractive again.  High ARV, means that a 135i is gonnasell at a higher price used, than a comparable Audi 3 series.  Specificto many on this list, without mentioning any names (JNR), the ARV ofthe S8 and S6 makes them very affordable performance cars for thedollar spent.  But, it's also best to know 'what' caused that residualfailure.  That is to say, a savvy used car buyer will make sure the S8Trans has been done, or the S4 turbos have been replaced....

Backing up to the war then, the company that will survive is the onethat makes the 'up' front money on the Lease with a High ARV history,because you tend to have a better list price vs the competition,because you don't have to cover a Low ARV in the price.  Then longerterm, the High ARV helps your Corporate and Certified Used Car Sales onthe back end.  Part of the lease price, is the Residual Value Insurancethat is built into the price.  That's paid for up front, and I suspectAudi historically pays a whole bunch more than BMW for that insurance.

I hope for the day when Audi shows high ARV's, but when a Flagship RS6can be had for less than 30k right now, I'm not holding my breath. Alas, the smartest move then, what the (re-)marriage of Audi and VW. VW has some pretty good high ARV's, but that also creates anotherproblem.  I suspect the reason ARV are high on VW and low on Audi, isbecause the platform and drivelines are interchanged between the two,making the VW a better Audi value for the money.  Will be interestingto see in 2012 if the marriage was successful in ARV to Audi.

Scott J

-----Original Message-----
From: JC <jc at j2c3.com>
To: qshipq at aol.com; joe.pizzimenti at gmail.com; cody at 5000tq.com
Cc: s-car-list at audifans.com
Sent: Sat, Mar 20, 2010 4:30 am
Subject: RE: [s-cars] Truth vs. Joy

Testify to Joe & Scott on the Ultimate Leasing Machine & leasing economics.

Another thing I submit Audi is/was copying from BMW...

It's been years since I couldn't plunk down full cash to buy the car I choose (not that my choices can include Veyron's or R8s etc., but within my modest world at least...) But when we got the B7 Avant few years back we went in ready to buy outright but I reluctantly just had to take the lease option just because of the numbers. At the time, bustin' out my mad Herbert Kornfeld MBA number crunchin' skillz, I peeped that it was just retahded to do anything but take the special lease deals based on the crazy high residual number they were using. It was very very hard to see how the depreciation was going to be less than the sum of our lease payments over the period.  And in fact when turned in, DUH, the 'buy it' price was WAY more than market. Either they were hallucinating on residuals at the time or I'm guessing some exec who's bonus was based on total-leasing numbers but was headed for retirement just gamed the system to move new metal, hit his targets, and screw the long-term consequences (sounds like banking crisis and real estate values).  Probably the leases were packed up into CDO's and sold by Goldman to Icelandic banks or some shit.

Anyway same was true even moreso for the Beemers which were under consideration at the time.  I could have bought even 'more' car from BMW on the lease than Audi in the sense of 'for same payment would have had a car with a higher street price' but the models/optioning/availability didn't work out for me/us.

We loved that car and might easily have bought it but in the corporate-bureaucracy-idiocy-can't-make-it-up, they "couldn't" sell it to us for the reality based price that we all knew it would ultimately sell for. The leasing/receiving dealer had no incentive to sell it below the pre-programmed residual and in fact the guy told me they would be lashed for undercutting the contract buy-out price. They get some nominal feel for processing the car and wouldn't wear any of the eventual pain of depreciation, so they were completely incented to spend Audi's money to inspect, clean-up, collect their fee, ship it to the Audi central scrutinizer where it would go on the internal dealer lease-bid program, and some other dealer would end up getting it shipped to him and finally sold at a sensible price.  All that shipping and cost being wasted vs. just selling me the car but that's how the system works...

I heard that the OEM's took some haircuts on their lease portfolios in the crisis so they might have improved their process such that when they have a 'reality check' mechanism, but would be interested if anybody has some knowledge of current system.  But on the other hand it would be very OEM like to do a calculation that "since 20% of Jane-Doe-soccer-moms who decide to keep the leased car will just pay the contract price without checking market value, we make more money fleecing those people than the wasted shipping turnover for the other cars costs us, so we keep the system"... if you can follow that.

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