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GM Seeks to Save $200 Million by Increasing Resale Values

General Motors Co. (GM), seeking to boost its profit margins, says it can save as much as $200 million annually by improving resale values of its vehicles and further narrowing the gap with competitors who don’t have to spend as much to offer lease deals.

The automaker’s so-called residual values rose to 44 percent last year from 36.5 percent in 2009 when the company went through bankruptcy reorganization, according ALG Inc., the Santa Barbara, California-based company that sets resale values. Higher residuals help automakers offer lower monthly lease payments because the cost is based upon the projected resale value when the contract ends.

GM’s lower resale values relative to rivals mean the automaker spends an additional $150 million to $200 million annually to make its lease payments competitive, Chuck Stevens, chief financial officer for GM North America, told analysts March 27 at a Bank of America Corp. forum in New York.

“The key will be great products and pricing and incentive discipline,” Stevens said. “It’s that simple.”

Chief Executive Officer Dan Akerson is pushing the company to boost operating margins to be more competitive with Ford Motor Co. and Volkswagen AG. (VOW) GM is bringing about 20 new vehicles to the U.S. this year after its models had grown stale following bankruptcy. U.S. market share fell to an 88-year-low last year.

Industry Gains

GM’s increase in residual values compares with a rise in the industry average to 46.5 percent last year from 42.7 percent in 2009. Ford rose to 45 percent from 39.6 percent and Chrysler Group LLC increased to 44 percent from 36.4 percent while Honda Motor Co. (7267)’s Honda, the major auto brand with the best resale value, declined to 51.5 percent from 52.3 percent, ALG said.

Closing the resale value gap is part of GM’s efforts to boost its adjusted earnings before interest and taxes margin in North America to 10 percent from 7.4 percent during the past three years, Stevens said.

“Residual values, at the end of the day, are the ultimate acid test of whether the vehicle has been successful,” Alan Batey, GM’s top U.S. sales executive and interim chief marketing officer, said this week in an interview at the New York auto show. “Was it well received, did it have good quality and is it desirable, did people really want to buy it?”

Building Retention

New vehicles, such as the Chevrolet Cruze, and a strategy to avoid hurting those models with too many discounts and capping sales to rental car companies have helped, Batey said.

“I like leasing,” he said. “You build retention with the customer. If you’ve got really strong residual values and you’re not having to discount heavily to hit certain lease rates, it’s great business.”

GM’s Cadillac luxury brand saw the largest improvement among the company’s four U.S. brands, rising to 45.6 percent from 34.7 percent, according to ALG. The automaker began selling two new sedans last year and this week revealed a redesigned CTS sedan in New York.

The automaker continues the effort with the redesigned Chevrolet Impala, arriving in U.S. showrooms next month.

GM sold few Impalas through lease last year, about 1 percent, Russ Clark, a Chevy marketing director, said. With the new Impala, the company is aiming for as much as 20 percent as the company seeks to increase the rate of sales to retail customers from 30 percent of deliveries to 70 percent, Clark said.

GM also wants to boost sales in Californa and the East Coast, which do more leasing than other parts of the U.S.

To contact the reporter on this story: Tim Higgins in New York at thiggins21@bloomberg.net

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

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