Chip shortages now sit in the driver's seat. Affecting the automotive industry one car at a time by decreasing vehicle production everywhere. Now lessees are evaluating their end-of-lease options in a new light.
Scot Hall, executive vice president of Swapalease, shares his 20-plus years of automotive industry knowledge, offering greater insight into lease options within the unprecedented car market.
Leasing New Cars
As many have already experienced, the chip shortage created a new automotive marketplace in ways never experienced before. Because of the chip shortage, vehicle production has tanked, and with fewer cars on the market, inflation is inevitable.
“Manufacturers have shifted their production to more expensive and more profitable vehicles, because they only have x number of microchips to use. And very often, those more expensive and more profitable vehicles are the ones being leased. Luxury vehicles typically have a higher lease penetration rate than their lower end counterparts during normal markets and this appears to be holding true during abnormal markets, as well,” Hall says.
This pools the new car market into a luxury vehicle market, and instead of people buying the car directly off the lot, leasing has become an increasingly viable option. Hall adds, “With fewer cars being produced, you’re seeing fewer incentives, rebates, and similar offerings within that nature from the factory. This generally leads to leasing making more economic sense for automotive consumers.”
In the past, banks performed most leasing obligations. Now it has completely changed to manufacturers creating the majority of leases. Because of the current gap between supply and demand, manufacturers are offering fewer incentives, affecting the leasing market by minimizing the offers being made. With fewer vehicles available, manufacturers do not need to offer as many incentives on vehicles to move vehicles—the demand is that high.
Used Car Leases
As a result, the used car market value has significantly increased, and people can easily end their leases; often feeling little financial pain and sometimes in a positive equity position.
“Dealers are taking advantage of this inflated used car market. For lessees still bound to leases, dealerships are reaching out to see if they are interested in selling the car outright or to share what might be available if they were to trade in their vehicles,” Hall says.
According to Hall, dealerships employ this strategy to keep their inventories balanced and to have as many vehicles as possible to sell. Consumers must return leased cars in quality condition and the vehicles must pass an evaluation test, which typically increases the owner’s level of care for the car. Leasing portfolios are becoming an attractive option for dealers because new vehicles are few and these leased vehicles are almost brand new.
But with less inventory, manufacturers are becoming more selective in their lease buyouts. Manufacturers’ captive financing arms are sometimes only permitting their own make dealerships to buy out their leases. This is another way for dealerships to keep inventory as full as possible and provide a competitive framework for their own dealership networks.
“For example, Hyundai financials only let Hyundai dealerships buy out those leases, or it has to go through that Hyundai dealership at least initially. This is an effective way for them to keep used car inventories up, but this also can lock you out of buying certain cars or leasing certain vehicles,” Hall adds.
Though this may pose a challenge for some lessees, there has been an increase in lease extensions that are more flexible than in years past.
“Because of the lack of vehicles, this is becoming a more viable option until more vehicles become available. Each leasing company’s goal should be to keep the clients happy, so they lease from them again. This is a fantastic way to do it,” Hall explains.
Potential Future Impact
When will the chip shortage end? And when will the automotive market return to normal?
According to Hall, the industry is moving in the right direction. “Things are opening up a bit. By no means are we out of this problem. But I think that the microchips shortage will be addressed by the end of the year,” Hall says.
Supply and demand challenges could carry over into 2023, he warns, although some current dealership changes may carry over into the next lifetime.
“Instead of dealers filling up their lots with tons of merchandise and having inventory available for clients to choose from and drive off the lot that day, we’re hearing more dealerships talk about a potentially better business model,” Hall says.
This specific business model includes holding less inventory and ordering more cars. Instead of being able to drive off the lot same-day, drivers might need to wait a few weeks to receive their vehicles, saving dealerships inventory and overhead costs. Vehicle prices, however, may stay at a higher market value than in the past, he says.
“We will see cars being sold at higher prices than what we’re accustomed to. We expect a fair amount of negative equity moving forward for all the vehicles sold during this period,” Hall states.
The significant increases in negative equity and financial contracts include both the installment loans and leases alike.
“At the end of the day, leasing is an alternative form of financing. Many people make it into something more than it really is or make it more complicated than it needs to be. But whether a manufacturer throws out 0% financing for 60 months or runs a special lease on a particular vehicle, you know that set of money is coming from the same place,” concludes Hall.
Ronnie Wendt is an editor at F&I and Showroom.