Check Your Mirrors

Odds and ends about cars and the car business

By Brendan Moore

TOYOTA has started offering subvented leases on many of its models in an effort to keep sales numbers up during the recall crisis. The most common methodology used in a subvented lease is when the lessor, in this case, Toyota Financial, Toyota’s captive finance unit, assigns a higher residual to the vehicle than it actually has, in order to drive the lease payment downward. When lessors subvent a lease, they typically artificially bump up the residual value of the vehicle leased, or, lower the lease finance rates, or, lower the FICO credit scores needed in order to be approved for the lease. Faced with increasing amounts of unsold inventory, Toyota appears to be employing all three methods of subvention simultaneously on their captive (through Toyota Financial) leases, making a lease on a new 2010 Toyota very inexpensive. If you are in the market for a Toyota product, and also want to lease, this is very much a magic moment in time. Just as a general FYI, this sort of thing happens with the captive lease companies with regularity, no matter which brand you’re shopping, but particularly with the high-line brands. The luxury brands would much rather offer you a subvented lease where you can’t see all the discounting that takes place as opposed to giving you a $5000 rebate.

Rebates on cars tend to diminish the value of the car in the eyes of the public since they (the public) assume you must be selling distressed merchandise if you have to pay someone to buy it. Car makers don’t want to devalue their brands if they can help it. Look at all the damage it’s done to the domestic brands over the years. It’s a lot better to offer a subvented lease, which, even though the discount may add up to the same $5000, the discounting is invisible to the consumer. When the consumer asks, “Why is this payment so low?” the salesman can say, “Well, leases work off of residuals. The higher the residual, the lower the lease payment. Our cars retain such an astounding amount of their residual value after three years that it makes the lease payments really low.” And the customer says, “Oh, okay. That makes sense. I’m glad I’m getting a car that holds its value so well”. Toyota is in this same situation right now.

HUMMER has two new bidders already, according to reports published in various media outlets. If you recall, the same thing happened after Koenigsegg went MIA on their deal to purchase Saab, with Dutch supercar maker Spyker stepping up to the plate and successfully carrying off a frenetic hurry-up drill to buy the Swedish car company. The same thing could happen here after Tengzhong threw in the towel on buying Hummer, but the odds are much longer. Hummer is not considered anywhere near as valuable a brand as Saab, and their sales have tumbled precipitously in the last 14 months. Hummer had its best year in 2006, when U.S. sales soared to 71,524. The decline came quickly, though, as demand plummeted when the cost of gasoline spiked to more than $4 per gallon in 2008. Sales last year plunged to 9,046. However, the 2010 sales pace was even more miserable – the brand sold only 265 units nationwide in the month of January. GM states that it is open to offers for Hummer as it continues to wind down the brand in orderly fashion.

2011 Nissan Leaf

UK government Department of Transport authorities announced that the government will give up to £5000 ($7,668 USD) to anyone that buys a vehicle that qualifies as an “ultra-low carbon” car starting in January, 2011. The program has been funded with 230 million pounds, so will cease accordingly after the all the funding is allocated. The Plug-in Car Grant gives the private or commercial buyer 25% toward the purchase price with a ceiling of 5,000 pounds. EV cars and plug-in hybrids with CO2 emissions of less than 75 grams per kilometer and hydrogen fuel cell cars will be eligible for the government incentive. The electric vehicles must have a range of at least 70 miles (113km) while hybrids must be able to run for a minimum of 10 miles without using fuel, and all vehicles must be able to go faster than 60 miles per hour. So, real cars, in other words. By the time the subsidy kicks in, European buyers should have a fair amount of eligible vehicles to choose from – the Think city car, the Toyota Prius, the Nissan Leaf, the Opel/Vauxhall Ampera, the Honda CR-Z, and the Mitsubishi i-MiEV, among others. France currently offers a similar program to people who buy electric cars (excludes hybrids), offering those buyers a 5000 euro ($6,775) subsidy. It all points to a more attractive market for low-emissions or zero-emissions cars in Europe, albeit as a result of government intervention.

GEELY, the buyer of Volvo, has announced that they are buying a small Chinese competitor named Zhejiang Zhongyu Automobile Co. Zhongyu Auto has capacity for around 25,000 vehicles per year and makes various specialty iterations of the Mercedes-Benz Sprinter. Geely plans to expand its product lineup by purchasing Zhongyu and said it would use Zhongyu Auto’s existing facilities and technology to develop its own premium passenger cars, multi-purpose vehicles and special-purpose vehicles.

TATA states that a rise in margins and sales at JLR (Jaguar Land Rover) is evidence that the global recovery has started with vigor. JLR has been dragging down overall results at Tata Motors Ltd since the day Tata purchased the British luxury vehicle manufacturer for $2.3 billion USD in 2008, with the crunch of the global recession occurring almost at the same time. Jaguar Land Rover finally turned a profit in the last quarter of 2009 with a net profit of 4.17 billion rupees ($90.3 million). Demand in JLR’s segments has started to tick up and sales of JLR brands in the December quarter rose 28 percent to 56,700 units from the September quarter, with the increases in volumes coming mainly from key markets North America, Europe and China, the company said. “In the last four months or so we have seen a strong recovery. Cost reductions are happening, and that is reflecting in the bottom line,” Tata Vice Chairman Ravi Kant stated. “It’s a big turnaround we are witnessing, and we hope to continue in this path in the future.” The strong results are a welcome rejoinder to the critics that opined that Tata had bitten off more than they could chew with the JLR acquisition.

PROTON has developed an urban minicar concept as part of a project it is in with Italdesign Giugiaro and Lotus Engineering. Lotus Engineering is the automotive consultancy division of Lotus Cars Ltd., which is owned by Proton, the Malaysian automaker. The concept will debut at Geneva next week. The design brief at work here is to provide the always-struggling Proton with a vehicle that they can sell outside of their traditional Asian market. Although unknown to most people in the Americas, Proton has sold over 3 million vehicles in its history, with almost all of those sales coming within a narrowly-defined Asian geographic area. Attempts to expand into India and the Middle East have not shown much in the way of results so far. The concept certainly has the potential to be sold in other markets, but Proton is mum on their future production plans. It is not unusual for Proton to appear to embark on a plan of action, send out press releases about same, and then, simply stop those efforts a short time later, with no public explanation. That said, the concept is attractive from both a technical and aesthetic standpoint – hopefully Proton will do something with it.

Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at

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