Faster depreciation taints U.S. cars

Many foreign models retain greater value over the years

January 06, 2007|By The Detroit News

DETROIT -- Laurel Mathews pampered the Jeep Cherokee she bought barely used from a dealer in 2003 - stringent maintenance, wax-and-polish cleanings, oil changes every 2,000 miles.

Given the meticulous care - and the SUV's $15,000-plus price tag - the Upstate New Yorker was more than dismayed when she tried to sell her Jeep two years later.

"I couldn't get more than $5,000," she said. "It was in perfect condition. That was my baby. I was horrified."

Mathews' experience is shared by many in the nation's car-buying public and has become a big problem for Detroit's automakers.

When consumers shop for a new car or truck they often bring a laundry list of must-have features, be it leather seats and a sunroof or anti-lock brakes and stability control. They want affordable payments, reasonable insurance rates and confidence that their new vehicle will deliver mile after mile of trouble-free performance.

But something less tangible is increasingly driving demand for vehicles: resale value.

In a survey conducted by J.D. Power and Associates for The Detroit News, nearly two-thirds of consumers who said they avoid U.S. brands pointed to a fear that American vehicles depreciate too fast.

Eight percent of those who avoided domestic brands pegged quick depreciation as the main reason they won't consider buying an American car, the third-biggest factor behind concerns about reliability and quality.

Consumers have reason to be worried. Falling resale values drive up the cost of leases and push down prices when consumers try to sell vehicles on the used-car market.

"People don't buy cars because they have bad resale values, and the cars have bad resale values because people won't buy them - it's a self-fulfilling prophecy," said Jack R. Nerad, executive editorial director and executive market analyst with Kelley Blue Book's kbb.com.

As the gap between Asian and domestic models increases, consumers are paying more attention to resale data. "They're seeing that the difference between a car that depreciates a whole lot and one that doesn't can be a lot of money," Nerad said.

In an annual Kelley Blue Book ranking based on what they're worth after five years, only one domestic vehicle made the top 10 list, the Pontiac Solstice. Four Asian models and five European-made vehicles made the list of 2007 models.

The Big Three's resale value woes stem in large part from years of trying to boost sales, despite declining demand. Rebates and big rental fleets cut into vehicles' value on the resale market.

Quality issues and lackluster design also have contributed to an image among consumers that many American vehicles are cheap. Vehicles made by Detroit's automakers lose about 19 percent more of their value over three years than vehicles made abroad, according to a CNW Marketing Research Inc. study.

General Motors Corp., Ford Motor Co. and Chrysler Group vehicles lose $1,600, $2,200 and $1,100, respectively, more than competing vehicles over three years, according to the report.

GM historically has been the industry's biggest culprit of making moves that erode its vehicles' values. The automaker has long been criticized for having too many brands and too many models that look alike. Consumers have learned to wait for big GM rebates and cheap financing.

As a result, a vehicle like the Chevrolet Uplander minivan only retains about one-quarter of its original value after three years, says the Kelly Blue Book.

Turning the resale dilemma around has become a key focus at GM, as well as at cross-town rivals Ford and Chrysler.Of Detroit's automakers, GM has been the most aggressive and vocal in its efforts to improve residual values.

GM North America's Chairman Robert A. Lutz has been working to revitalize product development and crank out distinctive vehicles consumers will buy without deep discounts.

The automaker in the past year has cut its sales to rental fleets by about 10 percent and has been churning out models equipped with premier sound systems, higher-end design packages and other features such as side-curtain air bags and chrome wheels.

"Why would you buy a vehicle that's going to be worth 35 percent of its original value when you can buy one that's going to be worth 52 or 53 percent of its original value?" Lutz said in a recent interview.

"What we were doing was kind of staying alive in the short term by doing a lot of business, moving the iron, but it was hurting our resale value and our brand value in the long term."

GM sales chief Mark R. LaNeve says GM vehicles are closing in on Asian competitors in the resale market. For example, he said, the 2005 Chevrolet Cobalt kept 30 percent of its value after three years, compared with the 47 percent three-year residual value of the Honda Civic. Two model years later, the 2007 Cobalt is expected to keep 44 percent of its value, compared with the Civic's 47 percent.

Francisco Codina, Ford's group vice president of North American marketing, sales and service, said the company has made strides in increasing the resale values of new models such as the Ford Fusion, Expedition and Edge, and the Lincoln Navigator and MKX.

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