Are there car wars in Canada? Especially in the entry level luxury segment. Yes!
Car Wars There are ongoing comments, and opinions from various sources about some sort of car war in Canada. Yes....car wars in Canada!!! We are fortunate, The Colonel (who is this guy) dropped by this morning and is sharing his thoughts, and answering our questions. Lets get right to the point: Q- Colonel are there car wars in Canada?
A- The auto business has always been competitive, call it competition, call it war, its part of the business. Its been like that for years, every one is "nice" and every one wants to win. In addition winning can have beneficial effects towards a bonus, and the upward direction of the career vector for certain individuals.
Q- That was a loaded answer. Seems there's a war among the luxury segment?
A- You guys mean entry level luxury, among a few manufacturers, and the other manufacturer that rises with the tide of competition, but prefers to sound bells of discomfort. Would they all be Teutonic?
Q- Yes...you got it right on the head. Seems some of them might be losing money, or close!
A- Don't be so naïve? Losing money? How will losing money positively vector careers? Start with that!
Q- If they are not losing money, and selling vehicles, and leasing, and applying what seems like high residuals to their leases....what's up?
A- Offer the upwardly mobile Canadian consumer a vehicle with a brand that has a certain cachet, at this point luxury might be indulgent, a vehicle that transcends winter (AWD), a vehicle that evokes a sense of green conservation (diesel), coupled to a lease with reasonably aggressive rates, and an aggressive residual. Presto...you have market success within the parameters of entry level luxury/brands with a cachet. The upwardly mobile Canadian wants to lease, looks at the rate, and residual to put a value on the "deal" since they have little intention of keeping the vehicle at the end of the lease.
The Upwardly Mobile Canadians Prefer to Lease Yes…leasing at a competitive rate with an aggressive residual value is a good deal. The optics of the lease offer are crucial to establish a sense of value for the customer.
Controlling the Variables to Gain an Advantage The manufacturers that control all their variables have a distinct market/competitive advantage. The manufacturers that are grappling with an effective, and aggressive CPO program are conservative.
Car Wars Q- You are saying that the upwardly mobile Canadian prefers to lease.
A- Absolutely, its not a secret, the instant certain manufacturers stopped leasing their higher priced cachet vehicles, they immediately started losing business to the manufacturers that were/are still leasing.
Q- How about all this talk of high residuals to lower monthly lease payments.
A- The manufacturers with the aggressive residuals (you guys can fill in the blanks) are also the manufacturers with aggressive, and successful CPO programs. The manufacturers grappling with their CPO programs have "conservative" residuals. The high residual ads an optic of value to the lease, to the deal, especially that customers do not want to keep the vehicle.
Q- Interesting, how does it work?
A- The conversation might go like this between a manufacturer and a dealer group..."I (the manufacturer) support you to lease the new units, I need your support when these units become lease returns".
Q- That simple?
A- You can fill in some additional blanks, and cover some grey areas...the bottom line is very simple.
Q- That entire segment "entry level luxury" is doing reasonably well.
A- Sure...when you have the major players leading the way, setting the parameters, the others to play in the segment must "sort of follow", to take advantage of the rising tide.
Q- Sort of follow?
A- If you don't have all your variables under control its not easy to play the game. The one's that are not controlling a few variables, instinctively will be more conservative.
Q- This seems to have happened overnight?
A- Guys don't be so naïve! Its been years in the making, plus events have also played in their favor, and they have been shrewd to catch the opportunities. It not one huge instant event, its a myriad of smaller events from years ago that have lined up.
Q- Like a perfect storm that was building up?
A- Exactly....the manufacturers had their variables under control, and other manufacturers for a myriad of reason moved out of the way to make it even easier.
Lack of Competition When the competition stops leasing, and moves out of the way its even easier.
Strategies to Set Residual Values The customer prefers to see a higher than lower residual value on a lease. Manufacturers embellish their leases by showing a higher residual value.
Car Wars Q- Other moved out of the way? Perhaps the leaders in the segment have raised the stakes as a barrier to entry.
A- Finally a glimpse of understanding from you guys! There must be folks that are besides themselves as to why its so easy, or why this or the other manufacturer does not get more aggressive.
Q- Do you have an example?
A- Yes...look at Chrysler, for a while they had to be discreet for whatever reason they had at the time, at the same time Chrysler has a good understanding of the Canadian market, their position, and how to play their game. If in the space of a few months Chrysler shows dramatic increases in a market that is not expanding who is losing business to Chrysler?
Q- Agreed...but Chrysler does not really compete in the "entry level luxury".
A- Basically the same, with the exception that at "entry level luxury" the game is more sophisticated and complex, and you have to put more "skin in the game" to win. The folks that are reluctant or have reservations in putting more skin in the game.....need I say more?
Q-You are saying that the upwardly mobile Canadian when it comes to entry level luxury is responsive to a lease, and to a manufacturer that puts skin in the game.
A-Finally you are catching on. Exactly that…right on guys!
Q-But those high residuals!
A- The Canadian customer wants to see a higher than lower residual to assign a higher value to a lease deal.
Q-Its still high!
A- Raise the rate, and raise the residual, think about that for a moment. You would do a lease at 2.9 with a 48 point residual, do the lease at 3.9 with a 50 point residual.
Q-Got it.You are embellishing the optics of the lease deal.