Chrysler Works to Improve Resale Values as Part of Turnaround

Chrysler Group LLC is working to raise the resale value of its vehicles, seeking to replicate its effort with the redesigned Jeep Grand Cherokee, to increase revenue from leases and improve the company’s image.

Changes from the previous model and Chrysler’s volume and pricing strategy boosted the residual value of the Grand Cherokee’s four-wheel-drive version to 45 percent in the third quarter from 35 percent a year earlier, according to researcher ALG Inc. Residual values are projected resale values that determine buyers’ monthly lease payments.

Chrysler used testing that simulated three years of use while developing the Grand Cherokee to make it more reliable, and the vehicle’s third-quarter deliveries rose 35 percent, with a higher percentage coming from leases. The automaker is working to repeat that success with 15 other new or refreshed models, most of which begin production late this year.

“Beyond any shadow of a doubt, the leasing factor on the Grand Cherokee is the reason it’s having an outstanding sales rate,” said Dan Frost, a Chrysler dealer in suburban Detroit.

The Grand Cherokee’s percentage of sales from leases climbed to 25 percent in September from 2 percent in the same month last year, according to Edmunds.com.

Chrysler last week reported its best quarter since emerging from bankruptcy and raised its 2010 forecast. The third-quarter net loss narrowed to $84 million, and net revenue rose 5.2 percent from the second quarter to $11 billion, driven by Grand Cherokee sales, Chief Financial Officer Richard Palmer said.

Leases Increase

The percentage of sales from leases on Chrysler’s four brands this year increased to 11 percent from 2.6 percent in 2009, while still trailing the industry’s 21 percent, according to Edmunds. Chrysler’s overall residual values rose to 50 percent in September from 36 percent a year ago, according to CNW Research. The industry average in September was 76 percent.

“We obviously make money leasing vehicles,” Palmer said on a Nov. 8 conference call. “The residual values on our vehicles are improving, especially as we improve, as we introduce the new products. So we expect that to grow.”

The new or refreshed vehicles include the midsize Chrysler 200 sedan, Dodge Durango and Fiat 500.

Resale value predictions haven’t yet been computed for most of Chrysler’s new vehicles, Fernando Ubeda, ALG data analytics manager, said in an e-mail this week.

Chrysler’s residual values had been hurt, in part, by last year’s uncertainty around the company, Jim Morrison, the head of Jeep product marketing, said in an interview in San Antonio in late October. Chrysler emerged from bankruptcy in June 2009 under the control of Fiat SpA. (F)

Reliability Reports

None of Auburn Hills, Michigan-based Chrysler’s vehicles scored above average in Consumer Reports’ annual reliability survey released last month. Twelve of the 20 Chrysler models for which enough data were available for a rating scored below average, the magazine said.

The U.S. automaker spent extra time in the past year trying to improve the Grand Cherokee’s resale value, believing it would help drive sales through better leasing, executives said in interviews last month. As part of its increased testing, the company had 72 Jeeps driven nonstop for 36,000 miles, which represents about three years of use, said Philip Jansen, chief engineer on the Grand Cherokee.

“You start to see any issues,” he said. “It really helped just kind of pull out stuff that historically we would not have found for three or four months into production.”

The automaker met with ALG in March about plans for the vehicle, including specifications and production plans, then returned in May with the new Jeeps, Morrison said.

Better Position

“After getting a chance to drive it, we felt the changes put the Grand Cherokee in a better competitive position,” Ubeda said in an e-mail explaining the Santa Barbara, California-based firm’s higher rating.

Chrysler is making similar efforts to win higher residual value ratings on the new vehicles, Morrison said.

“It’s really just good communications,” Morrison said. “We’ve mirrored it for all of the rest of the brands.”

The new Grand Cherokee began production in May and full volumes started arriving in showrooms during the third quarter, Chrysler officials said.

“I’ve never seen a product have this kind of sort of support from people who are in the business of evaluating vehicles,” Sergio Marchionne, chief executive officer of both Chrysler and Fiat, said on a conference call.

To contact the reporter on this story: Tim Higgins in Southfield, Michigan at thiggins21@bloomberg.net.

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net

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