Filed under: Toyota, Earnings/Financials
Industry in trouble when Toyota writes down leases
Due to a miserable U.S. car market, Detroit automakers are losing billions from lower than expected residuals on leased vehicles. Since the residuals on Motown metal are traditionally below that of the Japanese competition, many industry insiders thought that Toyotas in this country world were immune to the trend. It appears that's not the case. Toyota announced it had to "set aside major reserves for its first quarter to cover losses from vehicle leases in the U.S." The problem is predictably bad with trucks and SUVs, but other products aren't selling off lease as well as they have in the past. With residuals dropping, used cars are dirt cheap. That gives prospective buyers an affordable alternative to buying a new car. That's bad news for Toyota, but it may even be worse news for everyone else.
Toyota has been making money and gaining market share during these tough times, but even the automotive juggernaut is struggling in today's difficult economic conditions. Including Lexus, Toyota's Daily Sales Rate is down for seven straight months versus prior year numbers, with July missing the mark by 18.7%. This news proves that even Toyota has its share of problems, but what it really shows is that Chrysler may have been on to something when it stopped offering leases.
[Source: BloggingStocks]
Reader Comments (Page 1 of 2)
Tricky dicky 10:05AM (8/07/2008)
all too common,yeah toyota may be bad but everyone is worse... lol...
looks good on them.
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Shipey 10:25AM (8/07/2008)
20% sales dives don't look good on anyone.
No one is immune to high energy costs and inflation.
nagmashot 11:24AM (8/07/2008)
Volkswagen (all brands) are currently growing pretty fast and that since years...
first half 2008 was the best ever in company history...
they reached a plus of 5.8% more cars sold as in record first half of 2007. Currently Volkswagen runs from one production, sale win record to the next.. and they belive that they can finish the year even better as they had planed at the end of 2007.
brent 2:41PM (8/07/2008)
...and, whereas GM's perceived horrible reliability and durability are hurting them, VW's reliability and durability -- both perceived and real -- and very poor these days, and still that company grows.
Kumar 10:13AM (8/07/2008)
Not really a Toyota fan, but this isn't anything more than stating the obvious: People aren't buying as many cars, but they're still buying more Toyotas than Chryslers.
So...they're setting aside reserves ahead of time instead of waiting for the bad news? Not so sure what that means.
Regardless, I think the overall number of years between new car purchases/leases will increase, which is a factor that you can be sure the big 3 aren't accounting for.
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geo.stewart 10:43AM (8/07/2008)
as with everything else, the auto industry is cyclical. It will return and leases will return with a new catch or spin to them.
none of them have been in business 50 or 100 years without living through the good times and the bad.
chryslers only problem was that it was foolish enough to merge with MB for a few years.
why not the LS2LS7? 11:33AM (8/07/2008)
Why's that Kumar?
What makes you think that the Big 3 isn't accounting for this? They're not smart enough to notice their sales are down due to people not buying new vehicles as rapidly as before?
Melvin Kangas 10:14AM (8/07/2008)
Acccording to Automotive News release Toyota posted a
39% drop in profits during the 1st. Quarter. That to me is more telling news which no other source so far hasn't
picked up on
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Tricky dicky 10:30AM (8/07/2008)
No why would they, the golden boy in the press can't have bad things happen to them (unless as here, there is a preamble about how the others are worse)..
lol..
Matt 11:53AM (8/07/2008)
Here's the link to the story, but I'll bet a subscription is required:
http://www.autonews.com/article/20080807/COPY01/622718029/1186
It's funny how Autoblog editorializes 'news' stories without properly citing source content. Bloggingstocks? Really? A blog quoting another blog? Utterly ridiculous.
Tricky dicky 12:47PM (8/07/2008)
matt,
I am a member at autonews and that article mentions a 39% drop in profit which doesn't seem to be mentioned in the autoblog article. Odd..
JT 10:18AM (8/07/2008)
TOYOTA SUCKS!
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Avinash machado 10:21AM (8/07/2008)
well Toyota is a company like anyone else. They are not perfect as some import lovers might like to believe. As the saying goes "Nobody's perfect".
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cheezwiz 10:33AM (8/07/2008)
Pulling all leases is not the solution. They just need to reassess the valuation. It's a financial proposition of payments vs. lump sum. There's always a profitable level - you just need to find it.
I wonder if Berkshire Hathaway or another large insurer isn't available to insure leases in the future for these manufacturers. This would allow companies to set a minimum resale value they expect when the car gets returned and they would pay the insurance for the risk. I can't imagine this would make leases more than ~15% more expensive, and there wouldn't be any earnings surprises on wall street.
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brmacrae 10:55AM (8/07/2008)
Toyota is in to take a beating on leases, just like everyone else.
I've got an '06 Tundra 4WD DoubleCab that has 11 months left on the lease, through TFS. Residual value is an astonishingly high $19,980 or something like that. Right now it's worth about 15-Grand.........in 11 months, wanna guess what Toyota might get for it at auction when I turn it in? 12-Grand? They won't negotiate the residual, either, so they're going to take that 8-grand hit right where it hurts, I guess!
AZMike 11:53AM (8/07/2008)
you're right, pulling all leases is not the solution; the real solution is to write leases with realistic residuals.
the real downside to this is when realistic residuals are added, no one will lease anything. this is hitting all manufacturers, not just domestics. even highline off-lease German cars are selling at auction for $5K-$10K below residual value. no company can continue to "take it in the shorts" with numbers like this, and continue to offer cheap, subsidized leases. Nissan did this in the late 90's (remember the $69 per month Sentra lease?) and it almost bankrupted Nissan Motor Acceptance Corp. (NMAC). these cheap subsidized leases moved units, but came pack to roost in a very short time. ditto for any lease for a $45,000 car that costs $339 per month.
Toyota made the decision to match the Big 3 model for model, and now they are experiencing the same thing their Detroit counterparts are.
I have absolutely no doubt that the market will turn around again, as the US has repeatedly shown that once fuel prices stabilize, they will extract themselves from teeny cars, and buy what they really want.
AZMike
why not the LS2LS7? 12:50PM (8/07/2008)
I don't think insurance is the solution. The actuaries at insurance companies will do the same math the car companies are doing and realize they'll be left holding the bag, then charge a premium that'll recoup that for them, plus profit.
In essence, you'll just end up paying the subsidy to a different location.
AZMike is right on, the only solution is to rejigger the leases so that they aren't revenue negative. Or else just eat the loss.
Greg 11:01AM (8/07/2008)
I have the solution to all of Toyota's financial issues:
A week ago Autoblog ran an article that used Priuses cost more than new Priuses, so all Toyota needs to do is buy each Pruis it makes and then sell it as a used car and make more money!
I am a genius.
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MoonRover 11:15AM (8/07/2008)
Hee Hee, I thought the same thing when I read that, just sell the used ones, to heck with building new ones.
David Ederer 12:00PM (8/07/2008)
It might be tough on toyota, but I fell worse for the people that own the vehicles and want to trade them in. I would bet that they are taking a worse loss than any of the car makers.
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