When the car industry collapsed in the recession, automakers pulled back sharply on aggressive leasing deals and other financial incentives that had artificially increased their sales for years.
But now, with carmakers under pressure to maintain last year’s record numbers, they are once again turning to the same tactics that got them into trouble a decade ago.
Automakers are offering increasing discounts on economy cars and luxury models alike, relying more on sales to fleets like rental-car companies and bloating dealers’ inventories. More and more auto loans are being stretched out over longer periods of time.
At the same time, automakers have cranked up leasing to record levels. In March, leasing accounted for 31.3 percent of all new-car transactions, a record that exceeds the prerecession levels, according to Edmunds.com, an auto research website.
But there could be a harsh payback in the future. Automakers that rely heavily on leases end up taking the vehicles back in three or four years and selling them as used — often at big discounts.
“I’ve seen this movie before; it’s not a pretty ending,” said Mike Jackson, chief executive of AutoNation, a chain of 373 new-car franchises. In the mid-2000s, he railed against similar excesses that overheated the auto market, and he’s fretting again.
“Manufacturer incentives are at a dangerous level,” Jackson said. Pumping up sales through profit-eating incentives and high fleet sales, he added, “is nitroglycerin.”
At the top of Jackson’s concerns is leasing, which is a way of renting a new car for a specified period of time, like 24 or 36 months. Customers like leases because they typically make lower monthly payments than if they bought cars with loans. Automakers and dealers like leases because they get more flexibility to structure deals that enable customers to get pricier cars with affordable payments.
Consider the lease secured by Allen Lin, a teacher from Altadena, Calif.
A few weeks ago, he walked into a Lexus dealership and drove out about two hours later with a 2016 RX 350, leased for three years at $408 a month. The small SUV — one of the most popular on the market — had recently been fully overhauled, and redesigned car models typically sell with little or no discounts. But Lin paid no money upfront, did not trade in his old car, and got $5,000 knocked off the car’s list price of $43,779.
“If you can get a deal like this, it’s pretty sweet,” said Lin, 35.
Brian Smith, vice president for marketing at Lexus, said that leasing helped keep customers from straying to other brands but that Lexus did not use it to drive sales volume.
Luxury makers tend to lean on leasing more heavily than more middle-of-the-market brands. For example, more than half of all Lexus, BMW, Mercedes-Benz, Audi, and Acura cars are leased. Still, all automakers use leasing to some extent, and all shapes and sizes can be leased.
But while leases can lift sales, they also pose risks for car companies and their finance arms. They have to borrow billions of dollars to finance leases, and then, after leases expire, they take the cars back and sell them through dealerships or at used-car auctions. Selling gently used cars can be a good business for dealers and can help automakers attract new customers.
But if they lease too many vehicles, or economic conditions sour, the value of used cars can fall and leave car companies with big losses. That’s exactly what happened in 2008, when the market suddenly crashed and automakers and dealers were left a glut of cars coming off lease.
Some analysts worry that the industry could be heading for that kind of situation. Dealers now have 3.8 million new cars in inventory, the most in 10 years, according to WardsAuto. On top of that, Experian reports that 1.8 million cars, moderately used during leases, are expected to enter the used-car market this year, providing lower-cost alternatives to new cars.
This is happening at a time when consumer purchases of new cars are slowing. In the first quarter of the year, sales to individual consumers rose less than 1 percent, compared with the same period a year ago, according to data from J.D. Power and Associates. In March, consumer new-car purchases, known as retail sales, fell 1 percent. But total sales are higher because of a big jump in sales to fleets, such as rental companies.
Car companies are also offering auto loans over longer periods of time. Edmunds.com found that more than 27 percent of all new cars sold in the first quarter went to customers who took out loans lasting 73 to 84 months, up from 23.4 percent in the same period a year ago.
“It feels like a tougher market now,” said Mark Wakefield, a managing partner at AlixPartners, a consulting firm with a large automotive practice. “It’s difficult to see where the growth is going to come from.”