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Chrysler Customers Swamp Dealerships As Leasing Nears End
July 31, 2008

DETROIT -(Dow Jones)- Chrysler LLC's decision to suspend leasing is unintentionally serving as the best end-of-month sales incentive the auto maker could have implemented to help clear dealer lots of inventory.

Chrysler dealers say showroom traffic and sales have soared in recent days, with nearly 100% of transactions done with leases. Dealerships are flooding local newspapers with advertisements and some are staying open until midnight as they try and squeeze in as many lease deals as possible. They are also pondering what business will be like come Friday without one of the key tools in their financing toolkit.

Chrysler announced last Friday it would no longer offer leases as of Aug. 1, a dramatic move made necessary by the steep declines in residual values of pickup trucks and sport-utility vehicles in recent months as fuel prices soared and consumer confidence waned. Ford Motor Co. (F) and General Motors Corp. (GM), which have also suffered big losses from leases, are taking steps to tighten their leasing practices, though they will continue to offer leases.

Chrysler dealerships in the Michigan and New York markets, where leasing typically generates 50% to 75% of dealers' sales volumes, are the biggest beneficiaries of the late-month surge.

Golling Chrysler Jeep Dodge Inc., located in Bloomfield Hills, Mich., more than tripled its business, selling 112 vehicles on Monday and 96 on Tuesday, said owner Bill Golling. The majority of sales were through leasing.

"We would like to retain the lease program, but the economic realities means it's just not possible," said Golling, who is keeping his dealership open to midnight and serving hot dogs and hamburgers to customers.

"Leasing was a great advantage when you could get more car for less money at a better term, but that doesn't exist anymore," he said, adding that he hopes Chrysler will respond with some strong and new incentives on Friday. Chrysler has said that it plans to plow more financial resources into its sales incentives.

Could Bring Sales Forward

The end-of-month surge in sales at Chrysler could help spruce up the company's July sales numbers, which are predicted to show another double-digit decline when the figures are released Friday. Through the first six months of 2008, Chrysler's U.S. sales were down 22%, the biggest drop of any major manufacturer, as the company relies more than its peers on sales of trucks and SUVs.

The jump in sales also likely indicates that many buyers are buying sooner than they otherwise would have, indicating that sales in coming months could suffer as a result. For auto dealers struggling with bloated inventories of trucks and SUVs, however, their first priority is moving the 2008 models off the lot before new models hit the showroom floor and before the current batch lose even more value.

"I have got to get rid of this inventory and move out the 2008s and then we can figure out something for August sales," said Paul Steel, who runs three dealerships in Michigan, including Southfield Chrysler Jeep.

Steel said he has to sell about 500 vehicles alone at the Southfield location before so he can start accepting Chrysler's 2009 models.

"It has been a frenzy," Steel said. "Everyone is trying to get in now on a three-year lease hoping that Chrysler Financial will get back in the game by the time their lease is done."

Steel has kept his dealerships open until midnight every night since Monday, and he expects his staff will be working until at least 2 a.m. Friday morning to process all the orders.

"We are seeing many people either keep the same vehicle they have or go up a vehicle," Steel said.

Tough Time To Lose Leasing

For dealers and auto makers, the scaling back or elimination of leasing makes their job tougher at a time when U.S. auto sales are already at their lowest levels in 15 years. Adding to the problem is that foreign auto makers such as Toyota Motor Corp. (TM) and Honda Motor Co. (HMC) aren't in the position of having to eliminate leases, as residual values on their car-heavy portfolios have held steady or risen in some cases.

Auto makers will attempt to compensate for the lack of leasing as an option by ramping up incentives, including longer-term loans at lower rates. That's a move that comes with risks, as it cuts into profit margins and creates expectations among consumers that bargain-basement deals will always be available. Auto makers and dealers have in recent years tried to reduce their reliance on incentives, but the steep decline in sales has backed them into a corner.

For years, leases have made it possible for consumers to drive newer, more- expensive cars than their budgets might otherwise allow. In a lease deal, the vehicle is owned by a bank or a finance unit like Chrysler Financial, and the customer merely rents it, usually for two or three years. Auto makers benefit from leases because they facilitate the sale of higher-priced vehicles, which generate more profit.

But leases are becoming a liability amid tanking resale values, especially of used pickups and SUVs. In most cases, when a lease is up, the customer returns the vehicle to the auto maker, which then resells the car or truck. The problem for auto makers lately is that the values at which they are able to sell those off-lease vehicles are far lower than they had assumed they would be when lease contracts were written.

Ford Motor Credit announced last week that it took a $2.1 billion write-down in the second quarter associated with its leasing business. GM affiliate GMAC Financial Services said Thursday it wrote down $716 million related to leases, a figure that would have been more than three times higher if it weren't for various arrangements with GM. Both Ford and GMAC are taking steps to make leases more expensive, pushing consumers to enter into loan agreements to purchase instead.

Chrysler, which is owned by investment firm Cerberus Capital Management, hasn't disclosed how much it has lost as a result of leases gone bad.

LINK:Chrysler Customers Swamp Dealerships As Leasing Nears End
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