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August 25, 2008

Earlier this month, Greg Dolson, general sales manager at Steele Chrysler in Halifax, did something that for him happens even more infrequently than his city's twice-a-month garbage collection. He leased a vehicle.

In this case, it was a Dodge Ram 1500 SXT quad cab pickup truck with a V8 Hemi engine. The customer was a business looking for the tax advantage that leasing offers, Mr. Dolson said.

Until this past July, the dealership was processing about seven lease deals a week. Now it does almost none.

"Sixty-two percent of our business was lease and that business overnight has evaporated," Mr. Dolson said in an interview on Friday. "We've really had to rethink what we're doing and how we're doing it."

Like Steele Chrysler, hundreds of Canada's automobile dealers are undergoing a profound change in how they're selling cars and trucks. It all stems from a decision in July by the financing arms of Chrysler LLC and General Motors Corp. in particular to pull back on the subsidized lease rates they've been offering for years. Credit-market pressures and declining residual values for vehicles have made leasing less economical. So Chrysler and GM are telling their dealers to steer customers to financing or cash transactions instead.

Statistics pulled from auto retailers shows just how much things have changed.

According to the latest data from J. D. Power & Associates' Power Information Network [PIN], the amount of leasing being done by all new vehicle dealerships in Canada is now less than half of what it was only four months ago. As of Aug. 17, leases represented 19% of new-vehicle transactions at dealerships nationwide, down from 41.9% in April.

More people are now paying cash when they buy a new car. And more people are financing their cars for longer terms. GM and Chrysler are offering deals of 0% interest for 72 months on their vehicles.

The shift has happened fast.

In June, leases still represented about 33% of GM's new-vehicle sales transactions in Canada. As of Aug. 17, they represented just 2%, according to the PIN data. Chrysler's lease activity has fallen from 41% of deals to 9% over the same time.

Leasing has also declined to a lesser extent at Ford Motor Co. of Canada Ltd. and Honda Canada Inc. But their respective high-end brands, Lincoln and Acura, are still selling over 40% of their vehicles as leases, suggesting the leasing pullback is mostly affecting sales of non-luxury vehicles.

Toyota Motor Manufacturing Canada Inc., Nissan Canada Inc. and Volkswagen AG have generally maintained their lease activity in Canada over the past four months, the PIN data shows. Those brands may gain sales if GM and Chrysler dealers can't woo consumers looking for a lease.

Geoff Helby, an analyst with J. D. Power, said he believes the reason Chrysler saw its streak of 23 consecutive months of year-over-year sales growth snap in July was because it stopped subsidizing leases.

"This is a huge adjustment" for dealers, Mr. Helby said. "Leasing has been their saviour for so long. It gets that customer into a higher-end vehicle, which obviously has a fatter gross profit to it. It keeps the customer tied to the dealership because they know at the end they have to return [the car] to them. And typically, it puts them in a shorter buying cycle."

The challenge for dealers is to convince their customers that a long financing term is just as attractive as a lease, said Mr. Helby said.

"It's getting them to understand that they're benefitting from ownership once again -the fact that they have an asset, even though it's a depreciating one."
LINK:New-car leasing vaporizes in Canada
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