BMW to Reduce Leases From 60% of Its U.S. Sales

BMW AG is trying to reduce the 60% of its U.S. sales that come from leases as automakers balk at the contracts’ rising costs. To encourage purchases rather than leases, BMW several weeks ago began offering buyers 0.9 percent loans of as long as five years, said Jan Ehlen, a spokesman for its U.S. unit in Woodcliff Lake, New Jersey. The company also raised its lease prices an average of 3 percent on May 1.

“We are offering a broader variety of purchasing options,” Ehlen said today in an interview. “One of the intentions is to have a more balanced relation between financing and leasing,” he said, adding that Munich-based BMW doesn’t have a target figure.

BMW’s changes reflect the effect of rising lease costs on luxury-vehicle sellers. The company’s push began after it booked first-quarter costs of 236 million euros ($373 million) because of bad debts and lower values of vehicles in the U.S. when leases end. Other automakers and some banks are dropping or reducing leases, and Ford Motor Co. last week took a $2.1 billion pretax writedown on the value of such contracts for its trucks.

Group 1 Automotive Inc. Chief Executive Officer Earl Hesterberg said yesterday in an interview that BMW’s incentive program was designed to wean customers from leasing and that he expected other makers of luxury vehicles to take similar action. Group 1, the fourth-largest U.S. auto retailer, owned 11 BMW franchises at the end of 2007.

Higher Lease Percentages

Makers of luxury vehicles typically get a higher percentage of sales from leases. About 20 percent of U.S. new-vehicle sales were leases this year through July 20, according to J.D. Power & Associates. The market-research firm’s Power Information Network said such contracts were 55 percent of sales at Daimler AG’s Mercedes-Benz, 43 percent at Toyota Motor Corp.’s Lexus and 42 percent at General Motors Corp.’s Cadillac.

Automakers, banks and finance companies are seeing declining values when vehicles, particularly large pickup trucks and sport- utility vehicles, are returned when leases end. Manheim Consulting, a provider of data on used cars and trucks, said on July 8 that the value of U.S. used vehicles fell 6.2 percent in June, the eighth straight month of decline.

Banks, struggling with losses from the sub-prime mortgage crisis, also are charging higher interest rates for leases because they are riskier than auto purchase loans.

Chrysler, GMAC

Chrysler LLC said on July 25 that its finance arm will stop offering vehicle leases Aug. 1. JPMorgan Chase & Co. said yesterday that it no longer will provide leases on Chrysler vehicles starting the same day.

GMAC LLC, 49 percent owned by GM, will stop offering leases with incentives in Canada on Aug. 1, while continuing them in the U.S. GMAC spokeswoman Gina Proia said the auto-finance unit hasn’t announced any changes in U.S. programs for leases with incentives.

Ford told some U.S. dealers this week that it will boost prices on leases for large pickups and SUVs.

Toyota’s Lexus hasn’t changed its position on leasing and has no effort similar to BMW’s, spokesman Greg Thome said.

Daimler’s lending unit, Daimler Financial, hasn’t altered its stance on leasing in the U.S., spokesman Jack Ferry said. Of Mercedes-Benz sales the unit handles, three-quarters are leases.

Volkswagen AG’s VW Credit hasn’t pulled back on leasing, spokesman Christian Bokich said in an interview.

source: bloomberg