By accessing this website, you acknowledge that Edmunds and its third party business partners may use cookies, pixels, and similar technologies to collect information about you and your interactions with the website as described in our
Privacy Statement, and you agree that your use of the website is subject to our
Visitor Agreement.
Comments
Not sure what that “right” is. IBM (among others) always went the proprietary route. I would think if a company decides to operate in a way that is designed to keep income and clientele to itself, it has the right? Whether the strategy works is another thing.
TagMan
Interesting. That certainly goes a ways toward explaining some of this.
At that price point I never thought DCX was a bad investment, just that TM was a better one. In the market you're only as right (or wrong) as you are on the day you sell or at a point that a company could never get back to the price you bought at. If you hold your paper gains may be a different story in the near or long-term of course. What would scare me about DCX right now is if they don't shed Chrysler the stock could take a 10-15% hit. What would scare me about TM is how high is up, and can they keep poducing this type of growth on the huge base business they have, and on top of that they have the political issues.
Jan 2006 I put down a deposit for a Camry hybrid. This Camry was going to be our family and road travel car . As soon as I got the specs on its miniscule trunk space I cancelled the order.
Instead my wife now is driving a 530xi touring. I think we are the first family in history that cross shopped a Camry hybrid with a BMW 530xi Touring. :surprise:
A Lexus hybrid with a unique body style. The Lexus hybrid being considered would not be a hybrid version of an existing model. It would have its own body style, like Toyota's Prius sedan.
Designing a hybrid Lexus from scratch as a Prius will allow Toyota to focus on fuel efficient performance as a priority for this model. Mayve this Lexus model will be built with lighter and more expensive metals like aluminum.
The next question is which car becomes the benchmark Lexus hybrid: The LS600hL or this new distinct model?
I think with the new hyrbrid cooperation between MB and BMW we will soon be seeing the first hybrid turbodiesels. The potentail for such a hyrbried diesel would be quite impressive when you consider a recent comparision test in which a MB ML SUV diesel got 34MPG compared to a hybrid Lexus RX400h with 24MPG .
link title
If only BMW's problems were strictly related to margins and incentives then BMW would have no problems at all. BMW would at least be able to respond to such problems. The real problem with BMW is more of an existential problem than a financial problem. BMW's existence is based on performance/handling. But what happens when consumers no longer prioritize performance and handling? What happens when consumers prioritize technology, fuel efficiency and environtal friendly cars instead?
Post number 98 in this forum I wrote the following:
BMW's CEO Reithoffer was not being upfront when he mentioned Lexus as BMW's main threat. No luxury auto marque is currently a threat to BMW. The real threat to BMW is not Lexus in particular but Toyota in general.
The real threat to BMW will happen when consumers' priorities shifts away from performance/handling and towards environmentally friendly fuel efficient cars or "High Tech Gizmo features in Cars especially with reliable electronic gizmos that dont malfunction. And there is one and only one car company that can best exploit this change in consumer preferences to their advantage and that car company is called Toyota.
Last year I thought Toyota was a good company but a bad stock to own because of its high valuations. I was wrong. And last year I thought Daimler with Chrysler was a crappy company but a good stock buy because of its valuations. Well at least I was right wrt to DCX.
But today I find both companies not good stock buys at their current prices.
There is little margin of safety in the current valuations of TM. Toyota is priced to perfection at this point of time and yes you are correct DCX is at risk of falling big-time if they cant shed Chrysler.
A Canadian auto supplier called Magna is showing interest in Chrysler. Such a potential acquisition would be a DISASTER. Every Chrysler model with transmission problems has a Magna transmission. :sick:
link title
Perfectly understandable, my man. Cross shopping apples-to-apples is overrated. Some people have a variety of tastes, motives, and can adapt across the spectrum.
Making more and more money-losing deals does not turn a profit in aggregate. That's the reason why third-party banks refuse to use ALG residual numbers nowadays after losing hundreds of millions of dollars using those numbers back in the late 90's. Captive finance arms, such as BMW Financial, MB Financial, GMAC etc., are still in the game because they are not playing with real money: a car MSRP'd at $50k and residual'ed at $35k is exactly the same as a car MSRP'd at $40k and residual'ed at $25k. There is not one iota of difference between the two so long as interest rate is subsidized at below market too; both being $15k real cost over the lease period. With the inflated set of numbers, the manufacturer can boast not only higher MSRP but also higher residual per centage . . . to the faithful anyway. Whether $25k or $35k is the real resale market value, well that shows up in the lease-end turn-in rate (and lease vs. buy rate).
1) The business model of "I know we lose a little on every sale, but we'll make it up in volume" has yet to be shown to work
2) Don't forget that most of these middle managers who set the residuals know that they won't be in the same job in three years when the Piper wants to get paid. They will either be out on the street or elsewhere in the organization. (In fact, given their demographic there is a measureable probability that they won't even be married to the same spouse or living in the same McMansion they bought with a zero down ARM).
That's the fundamental issue of "earning quality." New Century Financial (the #2 subprime lender in the country)had been racking up impressive volume and profit growth for a decade, with expanding new underwriting covering for old deliquency on subprime lending; 2006 was the first year in which it did not grow in underwriting volume, and now it's on the way to bankruptcy court, with stock losing 95% of its value since the beginning of the year and facing delisting.
With regard to the subprime lendors, sure their stock price gets hammered and maybe even they flirt with Chapter 11. But if you can persuade Massachusetts Governor Deval Patrick to call ex-Treasury Secretary Rubin at CitiCorp, as he did last week, as a "character witness" you might get bailed out with CitiCorps help.
Inflated Residual = Residual - Realized Resale Value
If you want to tell me that realized resale values has no relevance at all in the above equation that is fine with me. I just thought it would be helpful for you to know.
2) That's the fundamental issue of "earning quality." New Century Financial (the #2 subprime lender in the country)had been racking up impressive volume and profit growth for a decade, with expanding new underwriting covering for old deliquency on subprime lending; 2006 was the first year in which it did not grow in underwriting volume, and now it's on the way to bankruptcy court, with stock losing 95% of its value since the beginning of the year and facing delisting.
So let me see BMW is New Century Financial in the guise of an auto firm? Gothcha!
Everything you said in all your posts so far are applicable to leases in general. But somehow you have contorted general leasing into a BMW financial accident story just waiting to happen ( in Enron style ).
Yes BMW leases involve inflated residual values. And every auto firm other than BMW offers leases with inflated residuals. .But that does not mean every auto firm is a Chapter 11 bankruptcy case. In fact a auto firm can earn decent profits even with inflated residuals.
This kind of unsubstantiated talk of yours is fine in a virtual forum. There is talk in web forums about Elvis sightings in Mumbai India and there is talk in Edmunds forums about BMW doom and gloom inflated residual horror stories. Fortunately your words have no meaning in the real world.
Since: Inflated Residual = Residual - Realized Resale Value;
Therefore: Residual = Inflated Residual + Realized Resale Value;
Because Inflated Residual can be anything the manufacturer is willing to make it to be, therefore Residual is not determined by Realized Resale Value. QED.
What decides residual in real life, if the company is engaged to the hilt in lease subsidy, is the monthly lease payment number that the manufacturer wants to result in, and work backwards from there. The classic example was 2006 R-class having a $5000 higher residual than 2007 R-class in the same advertisement in Januray 2007; what kind of used car buyer would pay $5000 more for a comparably equipped car with one MY designation older?? The answer for the anomoly was quite simple: 2007 MY MSRP came down by $5000, and the manufacturer wanted the monthly payment for 2006 to be $50 less than 2007 model.
Everything you said in all your posts so far are applicable to leases in general. But somehow you have contorted general leasing into a BMW financial accident story just waiting to happen ( in Enron style ).
What I have said is not only applicable to leases in general, but to vendor financing in general, and to any financial transaction where one party is underwriting a put option (that's what lease residual is). There is nothing unique about Enron. Companies like Lucent and Nortel suffered greatly through vendor financing, just like New Central Financial . . . whenever the back-end risk estimate is not accounted in an honest and conservative fashion, massive write-downs are waiting to happen.
Yes BMW leases involve inflated residual values. And every auto firm other than BMW offers leases with inflated residuals.
Not true at all. Lexus residuals are actually very conservative and often an under-estimate compared to real life resales.
In fact a auto firm can earn decent profits even with inflated residuals.
Isn't that the whole point of book cooking? Racking up paper profits when the back-end risks are assigned a fictitiously low estimate, so that profits can be cooked up in the short term. The day of reckoning eventually will come, just like New Century Financial and Enron; until that day came, both companies racked up huge paper profits by understating back-end risks. Eventually however, the volume stops growing, and there wasn't enough new "sales" to cover the back-end "return" risks.
2013 LX 570 2016 LS 460
It maybe that BMW is pulling a "Lexus" like move when it was first introduced in the early 90s I.E. taking market shares first, then move up market gradually. The only differences are that BMW is already a well known name, and that they are renting out their products.
From what Dewey, LJ and Tag have posted, I think BMW is financially healthy enough to do just that.
There is a fundamental difference between growing market share by keeping price low vs. growing market share and increasing short-term profit at the same time by book cooking. The difference is in earnings quality. For example, if it costs company A $35k to make, market and distribute a car that MSRP's for $40k, the company can afford to cut the price down to $36k and still maintain a $1k profit; slim, but an honest number without further encumbence. If it keeps lease numbers honest and conservative, say, $22k residual like third-party banks would offer and stay on the conservative side of real life resale, there is no problem in the earnings quality. If Company B making a competing car, due to smaller economy of scale, that costs $39k to make, market and distribute. It can turn a slim profit by selling the car at $40k. Now someone at the company gets clever, and decide to raise the price to $50k, and inflate the residual to $32k instead of the real life resale value of $22k. As far as the consumers are concerned, it's still $18k over the lease period; a few fans may even celebrate the new residual of 64% vs. the competition's $55%. Of course, that $10k will have to come back out at lease end as the consumers figure out quickly that the $32k residual is way inflated. The company does well financially as the lease volume increases from 150k units a year to 200k units a year over the three years, which means out of the $2 billion extra bogus "revenue" (bogus because the MSRP simply got marked up by $10k, with expectation of the same $10k coming back out at lease end) in year four, only $1.5 billion will be spent on covering the $10k/car write down on lease returns from year one. That's $500 million extra (fake) profit a year! Bonuses and dividends for all!
If Company A cuts price to $38k to compete, Company B responds by raising residual to $34k, so the consumer expense is $16k, matching the $38k-$22k=$16k depreciation on Company A's car. Now the lease-end write down balloons to $12k per unit. It's still okay on paper if the lease volume have increased from 150k units to 200k units over three years, because the $10k/car booked up front in the new year generate $2 billion extra fake profit, enough to cover $12k x 150k = $1.8 billion. Still a cool 200 million in positive paper cash flow in the current accounting year.
The calamity hits when the lease volume stops growing: the $10k/car extra booked up front is no longer sufficient to defray the $12k/car write-down at the back end, without volume growth! At some point in an economic cycle, volume growth pauses, that's when all the book cookers are exposed for the fraudsters that they are. Until then, men like Enron's Andrew Fastow were gracing the cover of Businessweek for being a financial wiz!
If so, then there will be clear changes to the landscape as we have known it, with totally new competitive models hitting the showrooms in the future. I have no problem with that at all.
BTW, I'm pretty much done with this BMW financial argument, but I'll add that I'm not under the impression that there is a long historical track record of these ultra-heavily-massaged BMW leases. Many posts have been made with the assumption that this aggressive program will continue for many years, and as a result BMW will have serious repercussions.
I doubt that BMW will have serious repercussions from this.
BMW can terminate this program at any time. I'm considering that these ultra-low-payment leases will not last for the many years that some are suggesting here. And because they will return to more typical and balanced numbers in the near future, the entire issue will essentially become a non-event, or certainly a short-lived one, which would have such a minor impact it might as well be considered a non-event.
In the meantime, where do I sign?
TagMan
So far, the only plausible answer that's been put forward is that they're taken offshore en masse & sold for more than they would have been worth in North America.
Hmmmm.
Agree on both counts - enough said and the danger is minimal. The reason for the latter is that I think the subsidy is a US issue. If it existed on evey car they sold globally I'd be more in line with Brightness' thinking. If it was that then we'd have seen a profit issue rather than a profit growth issue. But maybe BMW does this with 20-25% of units sold in selective markets (where they want share gain) on a rotating basis. Don't know and that's why I said there's a bigger issue here that we don't know about.
"But now the gloves are off..."
I was really surprised by this gentlemen's agreement but it finally explains why neither BMW or MB ventured into Porsche territory. They have both been probably dying to go there but honored the vebal handshake.
BTW, subsidy in the UK market is quite heavy too. Hardly anyone buys these cars anymore; almost all "sales" are leases there nowadays.
I've experienced the European handshake firsthand. We had a bunch of lawyers arguing over every detail of a deal once and it was 2am in the morning and I had enough of the fighting. I made a phone call to Europe and talked to our CEO. He called the CEO of the other parent company (also a European CEO) and 15 minutes later lawyers were wondering what the hell happened as also issues immediately disappeared. I saw that repeated a second time on another deal a few years later. The European handshake is firmer than most contracts.
I was told by a car dealer over ten years ago that a lease today has a 75% chance of repeating at lease end. BMW's risk is that they have some customers acquiring BMWs as a style statement, and styles can change quickly.
My question on the BMW thing, I'm not in any way savvy with all this high-thinking, but what is the impact on the resales value of all these leased Beemers?
Does it create a great opportunity for the used-car customer due to the volume or a poor one as BMW strives to protect its reputation by attempting to pass on the high residual to the used car buyer?
As for the trust issue - it exists and is quite strong. Whether or not it's a business thing in the interest of Europe or arose out of the ashes of WWII, I don't know. But it's there and it's as solid as a rock on business matters.
These cars are the CPO cars.
The rest get sold at auction to any interested bidder.
Lease companies take out residual insurance on their vehicles, so in alot of cases the losses don't hurt so much.
Also, BMW Finance charges some pretty high interest rates, and makes sure that their dealers use their rates.
The profit on the finance rates can offset any losses on the lease returns.
The bottom line is that BMW can get away with this because of the demand for their products and the fact that alot of people will pay more for their product than for a competitors product.
May I question that for a moment? Since I am not a tax specialist, I can't help but wonder whether or not there are any write-offs or tax advantages that somehow favor the depreciation component of the monthly payment, or favor the interest component of the monthly payment?
Theoretically, if that were the case then the residual as opposed to the rate would be relevant to such a situation, if one even exists.
So, is it always inconsequential? Or are there any exceptions, even if rare? Just being curious lj... not argumentative.
TagMan
Well, well, my little attempt at some deep sea fishing for even one rare exception has come up without a bite.
Thank you, lj.
TagMan