When I talk about the pandemic I’m usually focused on the sudden increase in car prices due to the shortage of chips and other supply-related disruptions. A secondary outcome of limited supply and decreased incentives was a move away from leases, both proportionally and overall. Because leases mature at a three-year delay, the industry is about to fly off this lease renewal cliff Thelma & Louise-style.
Why do you care? If you’re a car dealer, it matters because you’re about to lose potential returning customers. If you’re an automaker, it means a potential decrease in sales. If you’re a customer about to return a lease, you’re suddenly in an excellent position. If you’re a used car buyer, it’s probably not great news.
The Morning Dump today is all about looking at both sides.
Is Volkswagen’s “Scout” sub-brand really a sub-brand, or a different, unrelated company? That’ll be important for dealers. Is the Honda Prologue competitive with the Chevy Equinox EV or the Chevy Blazer EV? That’ll matter, too. And, finally, are Honda and Nissan going to work because they’re too similar or not work because they’re too different?
I know we’re in the immediate post-holiday season, and I hope you and/or your family are having a wonderful time together. And if some of your family is being a pain-in-the-boot, I hope you’re able to sneak out and read/debate this TMD.
The Lease Renewal Cliff Cometh
Leasing is a key part of the car-buying ecosystem that often gets overlooked. When you finance a car, especially now, you’re more likely to get a long loan, and there’s no guarantee you’re going to return it to a dealer when you’re done. As a customer, other than for service, your car is out of the ecosystem for as long as seven years (typically the max financing term). Leases, though, generate both repeat customers and relatively nice cars for dealers to sell as nicer “certified pre-owned” cars.
The availability of leases fluctuates as buying becomes more attractive and inventory expands/contracts. That’s normal. What’s abnormal is what happened during the pandemic. As seen in the graphic above from Cox Automotive, leases as a total share of car sales dropped from around 30% to less than 20%. This was an even bigger deal than usual.
Why? There were fewer cars produced due to, mostly, chip shortages. A lower percentage of lower production gets you a way smaller number.
How did this happen? A few reasons. Car dealers and companies can use attractive leases and discounts in order to move cars that there are too many of or wouldn’t sell at regular prices. They do this via incentive spend. There was a net increase in lease pricing during 2019-2022 due to a lack of help from automakers. High prices and low interest rates meant that many consumers were faced with the choice of either spending a lot of money on a lease or spending the same (or less) to outright own a car.
According to S&P Global Mobility, this will result in the market losing nearly a million lease returns in just the first half of 2025! That’s a lot of cars. This will impact premium automakers like BMW and Audi the most:
The premium market will take the hardest hit, with an expected 46% drop in lease returns. We expect mainstream segments to experience a decline of 39%. Most major vehicle brands will see decreases, but the range is wide—from a modest 11% drop to a staggering 81% reduction in lease returns for some major players.
S&P didn’t single out a specific automaker for worst hit. If I had to put all the candy in my Christmas stocking on the line, I’d put those DOTS on Maserati.
This is not great for dealers and car companies. There are potentially a million customers and their cars not coming back in the first six months of the year. Used car inventory is flat at the end of the year, per Cox Automotive, so that situation isn’t going to get better any time soon. With new car inventory remaining high for many brands, the incentive spigot is going to have to stay on at least through the summer.
For people who do have leases to return or are looking for a new lease, this is more good news. Assuming you qualify for competitive financing, there are going to be great deals to be had. Via Reddit, there’s a BMW dealer in Spokane trying to make that year-end quota by offering three months of free lease payments. More of this is coming. If you are sitting on a maturing lease, definitely shop around and see what kind of deal you can get. Hell, if you want an EV they might just give it to you.
If you are a person who normally stalks the CPO/used car market for recently returned, highly-depreciated luxury leases it’s going to be tougher. In general, I think the used car market is going to be rough in 2025 due to the inventory restrictions and higher incentives for new cars.
It’ll be something I’ll watch as the year begins.
Is Scout A VW Brand Or Not?
Tesla pushed hard in its formative years to allow direct-to-consumer sales over the loud complaints of dealers and dealership lobbying groups. The resulting detente, for most of the country, is that companies can sell cars directly to consumers if they aren’t competing with their own dealers.
These franchise laws get some negative attention, but today is all about seeing both sides, so let’s see both sides. Starting almost any business requires a ton of capital to build the buildings, hire the people, et cetera. If a person buys a franchise to a car dealership, a burger chain, or whatever, they should have some protection for their investment, which is to say nothing of protecting their employees.
Carmakers are the odd-man-out here, as they cannot sell directly to consumers and have had to find new ways to reach customers (car subscriptions, Hyundai’s deal with Amazon, et cetera). Volkswagen’s latest plan was to launch Scout without dealers.
Volkswag — aherm, Scout — said during its presentation last week: “If an OEM could start over again, what would they do?” One answer apparently involves selling cars directly to consumers using an app as well as brick-and-mortar locations spread around the country. These locations will not be dealerships, but rather studios and workshops, meant to display vehicles and allow for service. The actual purchase of the vehicle is to be done entirely digitally and is meant to be as easy as “ordering a T-Shirt on Amazon.”
You know who doesn’t like this? Volkswagen dealers. They’re threatening to sue, again, and the issue in California comes down to whether or not Scout is a Volkswagen company or not because of a recently passed amendment to the law according to Automotive News:
The amendment, approved by the California’s legislature and signed into law, took affect Jan. 1 2024. It bars Scout, or any new brand from an automaker with an existing dealership network in California, from direct to consumer sales. However, VW could sell Scout vehicles in California if the automaker decided to retail them through an existing VW brand, Audi, Porsche, Bentley or Lamborghini dealership.
Under the amendment, VW Group could also create a new franchise network for Scout if the automaker wanted to keep the new brand distinct from other VW Group brand dealerships.
Scout, for its part, claims to not be a part of Volkswagen:
Scout Motors, in a statement, said it has sole oversight for engineering, design, and manufacturing of Scout brand vehicles.
“The proprietary vehicle design and first-of-its-kind electric platform created for Scout vehicles have never been utilized in any other vehicle nor sold by any other automotive brand,” the company said Dec. 23. “Just as utilizing franchised dealers may be appropriate for some brands and their customers, utilizing a direct sales model best supports our customers and our strategic customer-first vision.”
California is probably the key market for Scout, so my guess is either Volkswagen is going to sue for peace or this is going to the courts.
Is The Honda Prologue Going To Outsell The Equinox EV In Q4?
I know I keep harping on this, and I’ll probably be able to answer this question in like two weeks, but I am very curious to see if the best-selling Ultium platformed vehicle in Q4 is going to be the Equinox EV or the Prologue EV. This is important! Maybe.
Based on registrations in October, Chevy sold 12 more Equinox EVs than Honda sold Prologues, with the Ioniq 5 (which is built on an unrelated platform) just ahead of them both in sales. That was with S&P’s October data. According to Cox Automotive/KBB’s November data, Honda shot ahead of both of them last month:
In November, new EV sales reached 116,072 units, marking a 10.0% increase month over month and a 13.6% increase year over year. This was the second-highest volume for the month this year, achieving an 8.5% market share. The Tesla Model Y and Model 3 held the top spots for volume, with the Honda Prologue coming in at number three. Incentives continue to help drive sales, reaching a year-high of 14.9% of the average transaction price.
Where’s the debate here? The Equinox EV, Prologue, and Blazer EV are closely related cars in that all share the same 85 kWh Ultium battery pack. Technically, the more expensive Prologue and Blazer EV are supposed to be directly competitive, with the Equinox EV representing a cheaper entry point. If you accept that, then the Blazer EV and Prologue are directly competitive and therefore the Honda is spanking the Chevy.
However, the cars are so similar that perhaps it’s better to compare the Equinox EV and Prologue? I leave this question with you and look forward to every car news writer using the same “The best-selling GM electric car was a Honda” posts in a couple of weeks.
Are Honda/Nissan Too Similar Or Just Similar Enough?
I am not going to write about it every time Carlos Ghosn talks trash about the Honda-Nissan deal. That’s a promise. Well, not a promise, but an ideal I aspire to. Is “ideal” too strong? It’s an idea I had, briefly, and am now regretting. I take it back. I’m going to write about it every time ex-Nissan boss Carlos Ghosn talks about the deal because he’s funny and had to escape Japan in a box, meaning he has an axe the size and strength of a GT-R to grind with his ex-bosses.
Ghosn spoke with the Foreign Correspondents’ Club of Japan this week (remotely, for obvious reasons) and Hans Greimel was there to share many entertaining moments from this chat, including:
“I can tell you, the Patrol of Nissan is a great car. I’m still using it,” Ghosn said during a December 23 online news conference hosted by the Foreign Correspondents’ Club of Japan.
When asked what cars he might recommend today, Ghosn added the backhanded compliment: “By the way, you can have a great product without having a great company.”
He’s talking about the car we call the Armada/QX80 over here and the “I’m still using it” line is great because Nissan gave Ghosn a bunch of stuff he refuses to give back to the company.
It seems like Ghosn’s main issue with the Honda-Nissan-Mitsubishi deal is that there are too many similarities between the companies so, while it’s convenient for the Japanese government to prevent Foxconn from getting ahold of one of its automakers, this won’t likely result in a good deal:
“They are strong in the same fields. They are weak in the same fields,” Ghosn said. “There is duplication everywhere. So industrially, for me, it does not make sense.”
[…]
Honda, for starters, has no track record of working well with capital partners, Ghosn noted. Nissan management, he continued, doesn’t have the talent to fix things themselves.
“They are surrendering in a certain way, in panic mode, by saying, ‘Please help us,’” Ghosn said.
He’s not wrong, I suppose, but companies with similar footprints try to merge all the time (see Kroger/Albertsons). This might be a bad deal for both companies, but it’s impossible to say. At this point, assuming the merger does go through, it’s possible the two organizations actually work well together and build something that’s stronger and more competitive.
What I’m Listening To While Writing TMD
I love the stripped-down nature of the NPR Music Tiny Desk series, especially when the series features someone who isn’t normally an acoustic act. The video above is pop breakout Sabrina Carpenter doing the songs with strings and, most notably, a British guy playing a pedal steel guitar. It sounds way more country than pop. More Dolly Parton than Madonna. I dig it.
The Big Question
What’s the best thing you got (or got yourself) this holiday?
The best thing I got this Christmas was the assurance that the Jatco Xtronic CVT is still the best transmission put in any automobile.
Ghosn is a jerk and his opinion on cars is irreverent. I’m hoping that HnM will get massive economies of scale and not just stay alive but prosper. If I could a n mt 2 cents worth I would love for them to buy Citroen and bring Saab back from the grave. A 21st century DS either Japanese know how is a great fantasy. I’ll take the convertible in orange
I got myself the Porsche 911 and BTTF Delorean LEGO sets. I’m excited for them!
I’m on VW’s side on this one. If they think they can make out better doing an end run around their dealers this way, that’s their choice. But at the end of the day, sales are VERY expensive, and resellers offload a huge amount of that cost from the vendor. There is a reason that Apple, the undisputed KING of direct-sales be they online at Apple.com or in their “in-house dealerships”, aka Apple Stores, still also sell through every channel from VARs Amazon to BestBuy. Market penetration matters, and a big part of that is removing friction from the sales and service of the goods. Doing it themselves means very few sales and service outlets, relatively speaking.
Really, cars should be no different than high-end computer gear. You can buy a $100K Dell server directly from Dell, or you can buy it from my company, which is effectively a “Dell Dealership”. There are pluses and minuses to each (though you will rarely get an overall better deal directly from Dell), and we both compete and cooperate with each other. Sometimes Dell steals sales from us by taking a client “direct”, just as often they hand sales over to us for various reasons. Big one being my end of things – our professional services to integrate the gear is roughly 1000X better than their own, and that makes for much happier clients who don’t buy not-Dell next time. But I also get that a car dealership is a HELL of a lot larger investment than becoming a “value-added-reseller” of even enterprise computer gear.