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Money for the Deal - Revisited

Have you noticed the ongoing concern regarding auto loans. Consumers are getting in perhaps precarious situations with auto loans.

Agreed loans have increased appreciably during the past few years in pace with increased auto sales in Canada, accompanied by the increased participation of banks.

The old model was based on ownership and equity. Under these antiquated perspectives auto loans are out of control and are headed for a day of reckoning.

A couple of years ago, and it still resonates we shared our thoughts with Money for the Deal. As we say...we don't follow we lead, we were prescient back then as to where it was headed. While no longer subscribing to the old ownership and equity model.

Lets look at a few relevant points from back in the day:

  • Financial services are an intrinsic part of the auto business. In addition to being lucrative to the providers of these services.
  • Back in the day when these services were provided by "captive" (owned by the manufacturer) serive providers, the model was based on ownerhip and equity.
  • The advent of leasing, especially for luxury cars (to improve the affordability) initiated a change.
  • A myriad of forces constatntly trying to keep Canadian banks out of the mainstream financing upheld the conservative status quo.

The Canadian consumer enabled and empowered by manufacturers, and financial service providers has evolved from owenership to mobility, from equity to cash flow. There is no desire to own a technologically complex vehicle beyond the warranty period. With a limited desire to invest/spend money maintaining a vehicle.

Lets look at a few relevant points from today:

  • Manufacturers subsidise the financial services although money is cheap, its even cheaper for autos loans and leases.
  • Although the finance terms are longer, the trade cycles are a constant, as well as the monthly payments.
  • Negative equity is manageable within the current parameters.
  • There is an uptick in leasing penetration to alleviate the longer finance terms.
  • Monthly manufacturer incentives erode the value of used vehicles.
  • Manufacturers and dealers require recent model trade ins/lease return to uphold their CPO programs.

Until we view the auto business and the financial services from the old perspective of ownership and equity the current model makes little sense and is a recipe for disaster.

Under the current model of mobility and cash flow. The pressure is on the manufacturers to provide relevant financial services that are responsive to consumers. More important to uphold the trade cycle of 36 months.

From our perspective the Canadian consumer is WINNING. While the new model has generated record sales in Canada.

What do you think?




We are fortunate, The Colonel is hanging out with us this morning. As you know he has been around the auto business for a few years. We heard that at one time he was criss crossing Canada to educate dealers on incentive programs, and leasing.

Its from back in the days when vehicles were sold "heads up" (no incentives, no programs), the customer was expected to have equity to do a deal.

Lets get this conversation going...

Q: Colonel, its December, as usual you are in good cheers this morning.

A: Thanks guys, another year almost done, Christmas around the corner, and a record for auto sales. Its a good time to be in the auto business in Canada.

Q: Tell us about selling vehicles "heads up" with no incentives, programs.

A: Simple MSRP, cost, do a deal somewhere in between. Trade ins were rarely upside down, and if it was upside down there was no basis to continue.

Q: The onus was truly on the dealer to sell vehicles and close deals.

A: Precisely....back to the showroom craftsmanship that is lacking today.

Q: We heard that incentives/programs had a negative aspect back in the day.

A: The auto business is product driven to this day. Incentives implied a weak product, an inability to compete heads up. The concern was always what happens when the incentives end?

Q: To digress for a moment, today we all know what happens when incentives end. Or when everyone gets on the incentive vector.

A: On the vector you move a ton of iron...

Q: Could it be that Lee Iacocca, K cars, buy a car get a check, contributed to the negative perception of incentives.

A: Its the classic paradox: Don't go there it can be addictive....Go there it moves iron. In addition to the mentality of "Our product is so good it does not need incentives"

Q: Leasing must have compounded the "fear factor"?

A: Open end (lessee responsible for the residual) leasing was a formidable fear factor at that time.

Q: Back in the day advising a dealer to get on the incentive program, and promote leasing would generate a good amount of push back.

A: Its sure did...the classic case of "We don't do it that way here"

Q: We heard that incentives, leasing, open end leases, arrival of the GST had a dramatic impact on the auto business.

A: Yes...very dramatic...imagine the manufacturers that promoted incentivised open end lease, and now the vehicles are totally upside down with the arrival of the GST.

Q: The customer was "hung out to dry" with an upside down residual.

A: Absolutely...but the manufacturer spent money (incentives) to capture this customer, and leaving him upside down was not productive for business...there was no continuity.

Q: This opened the door to closed end (lessor responsible for the residual value) leasing and planted the seeds for remarketing initiatives.

A: Closed end leases improved the continuity and loyalty. Although it was a scary thought at the time of carrying a massive residual value liability.

Q: Colonel...many points of this conversation resonate with 2014.

A: can connect a lot of dots to 2014.

We will continue...




The Evolving Ownership Model

In Canada we are setting an auto sales record this year that has never been seen. A few months ago we mentioned that free flowing money was powering auto sales. As usual (not to brag) we were ahead of the "pedestrian opinions" in making it clear that money was super charging sales. 

Its interesting to see main street catch up to the fact that money is super charging auto sales. While being fixated on an antiquated ownership model

Think about this for a moment....

A few years back at least 50% of Canadians did not own a vehicle, it was leased. Is it fair to say that in Canada vehicle ownership was never a high priority. 

Canadian banks were not allowed to lease vehicles, while some manufacturers abandoned the leasing segment. Did CMS (Citizen Main Street) have an overnight epiphany, and do an immediate about face from leasing to ownership? What do you think? 

Reflect on this...

The monthly payment for a vehicle persists in the + or - $500 per month range, its almost a constant through the years. Be it a lease or a finance the monthly payment remains constant.

The interest rates are subsidized by manufacturers at close to 0% for the term of the financial product (lease or finance).

The finance terms are getting longer to keep the payments at $500 per month and to roll over deficiencies.

The auto business works best on a 36 month cycle, not an 84 or 96 month cycle. While CMS starts considering a new vehicle in the 24-36 month time frame.

Its obvious that CMS does not have a strong desire to actually own, or have equity in a vehicle.

Consider the following...

Executives, captive finance companies and the mainstream media remain attached to a conventional ownership model, and the notion of equity in a vehicle. Its been a valid model for countless decades. While keeping in mind that we were at 50% leasing penetration a few years ago. The "ownership model" was already strained at the time.

Independent financial service providers understand that manufacturers have little choice than to continue subventing interest rates for the mid term. While facilitating rolling over deficiencies. In addition these providers do not subscribe to an ownership model. They make a credit decision based on risk, and ability to repay on a monthly basis. Until the vehicle, the deficiency fit within the risk parameters its all good.

Ownership inexorably morphing into mobility...

CMS has a strong and enduring appetite for new vehicle mobility (transportation) at $500 per month. CMS has less of an appetite for actual ownership (equity), vehicle maintenance, issues with older vehicles.

Manufacturers, dealers, financial service providers, the auto industry is providing mobility at $500 per month. While being creative and innovative to continue providing mobility for $500 per month.

Did manufacturers ever think that shifting the lease residual risk to CMS while reinforcing an "ownership model" with finance terms. Would migrate into a "mobility model" with CMS empowered by manufacturers to stay mobile at $500 per month.

What do you think?





Walking the Fine Line

As several manufacturers (we will not mention names) explore "premium economy" of the luxury segment, they are walking a fine line.

All the buzz is on the freshly launched or soon to be launched "premium economy" products, the advantageous pricing, how affordable this new product is, the DNA of the manufacturer, the size of the wheels, and so on. We can keep on going, but you get the picture.

In the meantime these manufacturers have a ton and we mean a ton of lease returns (most of the product is leased) that is on a direct collision course with the new "premium economy" product.

From an idealistic perspective one could days that they have "big ones" to disrupt their own very successful business model, and its a case of constructive destruction, creativity, and innovation. Lets not forget seeking a new and refreshed customer base. 

From another perspective, one could say that they are embarking on a perilous course, augmenting their risk factor, and at some point "residual values" and "premium economy" will intersect with a degree of collateral damage.

In the meantime lets enjoy all the new product buzz, the increased sales, "premium economy" morphing into luxury, and luxury morphing into "premium economy". While residual values morph to a higher risk level.

CPO sales (the canary in the coal mine) are already signaling caution.

It will be interesting to see how it all develops when several air bags deploy, and the talcum powder from the air bags settles. 



Money for the Deal

Our first "ebook" of 2013...




Vro0m Ro0m

Good Morning!

For the 5th Friday of OctoberCome in, its that time of year, the leaves are on the ground, the trees are bare, its wet, its raining, its not so cold (interesting), its dark...its fall.

In case you forgot, its the 5th Vroom Room of October, remember the 5 week ends in October? We are also on the cusp of month end, next week will be the sales figures for the month.

Absolutely...the espresso and biscotti are served...enjoy!

This week is the AJAC test fest for the Canadian COTY award, want to know the class winners follow the #AJAC ashtag. 

We started the week with Overdrive celebrating its 50th anniversary, if you are a truck aficionado, perhaps you even had a subscription to Overdrive at one time. Or you simply appreciate truck nostalgia...take a look.

The biggest city in Canada has a new mayor, Rob Ford...fascinating to see all the ink that flowed over the mayoral race in Toronto. Even our town has a new mayor...we had a feeling that it was going to be a new mayor for our town!

A few days ago, The Colonel shared additional thoughts, and timelines on the Canadian leasing landscape. Its fascinating to see how pundits focus on the "moment" omitting to see how actions/events developed to create the moment, and where it will go. If you are interested, and you should be, since the Canadian auto financial service landscape is evolving. The Colonel's thoughts

Last Friday we did a quick tour of the Collector Car Auction and took our usual

Just a thought...are some manufacturers diversifying into the business of recalling vehicles? Is it a case of "If you can't sell them, try recalling them"? (a bit of sarcasm this morning) Its a good way to have customers revisit dealers, call customer centers, basically strengthen ties with the manufacturer and dealer. Is the recall the next CRM?

The Bond 007 Aston Martin sold for over 4M at the Automobiles of London by

This past week if you have been reading that hybrids, plug in hybrids, electric cars are not for everyone. You knew that all along (didn't you?)...the fellow with the horse probably shared the same sentiments towards the motorcar.

From Gartner the top 10 strategic technologies for 2011, the following caught our attention

Social Communications and Collaboration.  Social media can be divided into: (1) Social networking —social profile management products, such as MySpace, Facebook, LinkedIn and Friendster as well as social networking analysis (SNA) technologies that employ algorithms to understand and utilize human relationships for the discovery of people and expertise. (2) Social collaboration —technologies, such as wikis, blogs, instant messaging, collaborative office, and crowdsourcing. (3) Social publishing —technologies that assist communities in pooling individual content into a usable and community accessible content repository such as YouTube and flickr. (4) Social feedback - gaining feedback and opinion from the community on specific items as witnessed on YouTube, flickr, Digg,, and Amazon.  Gartner predicts that by 2016, social technologies will be integrated with most business applications. Companies should bring together their social CRM, internal communications and collaboration, and public social site initiatives into a coordinated strategy. The top 10 are here.

We just got word that Nike is featuring the MV Agusta F4 in its latest NFL ad Speaking of motorcycles, in case you forgot the EICMA show opens in Milan next week on November 2, you can easily follow on Twitter using the #EICMA hastag.

We conclude with our usual "old race cars" this is a 700 photo collection...yes 700...Click





A few weeks ago in our sales report we mentioned that leasing had literally evaporated in the Canadian market from a high of 40% to a low of 7% in 2009. Commenting that this dramatic change in the leasing landscape would affect the way business is conducted in Canada in the coming years.

By now you know that the auto industry abhors a vacuum, its an intrinsic trait of the industry to quickly fill vacuums especially vacuums that can provide a competitive advantage (don't they all).

Obvious that leasing has created a huge vacuum, that some folks are looking to fill. This situation is developing into an interesting school yard squabble of have and have nots.

Lets look at why leasing was so popular in Canada:


  • Remember the low Canadian dollar and high vehicle prices of a few years ago?
  • Leasing was/is the ideal financial instrument to camouflage high prices, into a low monthly payment.
  • Every manufacturer used leasing to camouflage prices.


What happened when the Canadian dollar reached parity with the US dollar?:


  • Every manufacturer being heavily involved in leasing had absolutely no desire to adjust their pricing.
  • Every rationale was being disseminated to uphold the pricing structure (late 2007).
  • Dealers were under intense consumer pressure that prices were too high. (as an aside was this using social media to influence a billion dollar industry).
  • Many dealers were muzzled by their respective manufacturer not to express their opinions (which might have sided with consumers).


How did the impasse/chasm get resolved?:


  • Manufacturers were standing firm and digging a deeper hole for themselves to uphold the pricing, dealers were muzzled, consumers were rebelling, cars were imported into Canada from the US.
  • It was an automotive industry PR disaster (imagine if Twitter was as widespread as today)
  • Strada...lets repeat this...Strada, yes us..were the only one's in Canada, that went on record on a national publication that the popularity of leasing in the previous years, and the ensuing residual risk was motivating manufacturers to uphold their pricing structure.
  • The instant that article was published the tide started to turn in favor of the consumer, with lower prices.
  • We said that Canadians wanted a "fair Canadian price" even the tag line was adopted by a manufacturer; once the prices were adjusted. 
  • We don't usually honk our horns, but at times its required....


What ensued from the lower prices (2008)?:


  • Immediately some manufacturers focused solely on the residual risk, and curbed their leasing activities.
  • Discounts for a cash deal, or lengthy 0% interest loan become the order of the day. 
  • The used vehicle value risk was inexorably transferred to the consumer. 
  • Other manufacturers (luxury) had less options/desire to pull out of leasing, they remained in the leasing arena, while recalibrating their business model (enhanced CPO activities).
  • 2008 was almost a record sales year in lower prices!


What developed with the industry meltdown (2009)?:


  • Widespread leasing in Canada was almost non existent.
  • Credit crisis!!!...while Canadian banks were/are bursting with money?
  • The manufacturers still leasing "cannot believe their luck" (windfall sales).
  • The "remarketing" industry by now well developed, and fine tuned, is seeking additional remarketing opportunities.


What is developing in 2010?:


  • A resurgence of leasing interest from manufacturers that pulled out.
  • Tacit acknowledgement that the manufacturers that remained in leasing, have done well, while capturing lease orphans.
  • The remarketing industry is seeking to replace the mass remarketers (leasing companies) from the previous years.
  • Canadian banks that have been shut out of leasing for countless years, see a golden opportunity come their way.


 Some take aways...


  • Leasing for years was an intrinsic financial instrument in the Canadian market, and remains an intrinsic instrument for certain manufacturers.
  • The Canadian automotive leasing landscape is ripe for independents to gain a bigger share, especially independents supported by the Canadian banking establishment.
  • The argument that banks should stay out of leasing is greatly diluted when leasing has gone from 40% to 7% in the space of 2 years....
  • The Canadian consumer can win by having banks assume the residual risk.
  • The common front of the auto industry vs banks is fragmented on the part of the auto industry.

What do you think? Care to share your thoughts, opinions, leave a comment.





In the auto industry most numbers relating to sales are analysed, dissected, and commented by a myriad of pundits for all sort of reasons. You know, that numbers can be interpreted from several perspectives with varying nuances. Ever hear the term a "numbers game"? In case you did not know, the sales numbers always get a PR spin at the end of the month.

The other day we bumped into the following numbers originating from DesRosiers. Its no secret that we have a keen interest in the financial packages that are offered by manufacturers. As well as the effects the packages have on the various "dynamic pricing" strategies, and tactics deployed by the manufacturers. You may have forgotten, the Colonel took a leadership position on the value of the Canadian dollar, and prices of vehicles; at a time when many where facing a cement wall.

Going back a few years, and taking a look at the financial package mix in Canada for new vehicles.











Some points from The Colonel:

  • For years leasing was a strong component of the financial package in Canada, especially when prices were high, leasing improved afford ability of new vehicles. 
  • Every manufacturer assumed a substantial residual risk in Canada, to improve the value proposition of their product through leasing (incremental sales).
  • For a few years, the low value of the Canadian dollar created a unique export opportunity for used vehicles (lease returns).
  • The Canadian customer/consumer through leasing, was receiving excellent value for the lowly Looney. While manufacturers were assuming the residual risk, by having skin in the game.
  • What happened to leasing in 2008 (a substantial drop from the previous years)? Manufacturers reluctantly adjusted (lowered) their prices in late 2007, and early 2008. 
  • In addition Cerberus who owned GMAC and Chrysler Financial at the time stopped leasing vehicles, needless to say Ford quickly followed.
  • Leasing in Canada being a strong component of the financial package, removing the residual risk from the table immediately bolstered their position.
  • In 2008 many manufacturers started to move away from assuming a residual risk (lease) , while offering 0% financing, and shifting the used vehicle value risk to the customer.
  • This exedus from leasing, and having less skin in the game; has become a tectonic shift in the retail landscape of new vehicles in Canada. Its HUGE!

The Canadian market functioned on the basis that manufacturers through their captive finance companies assumed the residual risk of close to 50% of the new vehicles sold. To a market where the customer assumes the brunt of the used vehicle value risk.

Its a tectonic shift in the Canadian market.

More points:

  • Cash payments have increased through the usage of HELOC (home equity line of credit). Imagine the customer assumes a used vehicle value risk, by using his home line of credit.
  • The ongoing activity/creativity in the "dynamic pricing" of vehicles, and deals will not subside in the near term.
  • Luxury vehicle manufacturers never stopped leasing, their sales have increased appreciably in Canada.
  • The same luxury manufacturers have expanded their CPO (certified pre owned) efforts to diminish the residual risk.
  • Is it fair to say that in the next trade cycle starting in 2011 (36 months from 2008) this tectonic shift will reverberate through all the stakeholders of the industry. 
  • Is it fair to say that the remarketing landscape as we know it today, might/will not work in 2011?
  • Customers might be "disenchanted" (upside down) come 2011?
  • Dealers will be increasingly challenged to close deals?

What do you think? Share your thoughts! Leave a comment.