TORONTO (Reuters) - Leasing incentives for General Motors (GM.N) vehicles will no longer be offered in Canada, finance company GMAC said on Tuesday, a shake-up in strategy that underscores the growing pressure on North American auto sales from tight credit market conditions.
The move, which takes effect on Friday, follows a more sweeping decision last week by Chrysler Financial to end incentives for vehicle leasing in the U.S. market.
Both GMAC and Chrysler Financial are controlled by private equity firm Cerberus Capital Management.
GMAC spokeswoman Gina Proia would not discuss whether the finance company would consider ending incentives on vehicle leases on GM cars and trucks in the U.S. market.
“We have not commented on that,” she said.
About 43 percent of the vehicles GMAC financed in Canada and the United States in the first quarter were through lease deals, a common way for automakers to reduce monthly payments for car shoppers.
Now that GMAC has stopped subsidizing leases in Canada, monthly leasing costs are going to go up for consumers considering a GM vehicle, said Anthony Faria, analyst at the Auto Research Center at the University of Windsor, Ontario.
“They are going to use far, far, far more conservative estimates, much lower value of the vehicle at end of lease, and that obviously has to translate to much higher lease payments,” he said.
More than 40 percent of all vehicles in Canada are leased, compared with 20 to 25 percent of vehicles in the United States, said Carlos Gomes, senior economist at Scotiabank in Toronto.
In a slumping market hit by sharp declines in sales of trucks and SUVs, most auto transactions, including lease deals, have carried an incentive or discount in recent months.
But U.S. automakers and their financing companies have been losing money on leases because of the sharp decline in resale values for trucks and SUVs in the face of record gas prices.
“We’re seeing these vehicles decline in price in the order of about 25 to 30 percent lower than where they were last year,” Gomes said.
The drop in value for those light trucks, which still represent the largest share of sales for U.S. automakers, has also made it harder to finance auto leases through the securitization market.
As companies move away from leasing, they will likely shift to offering better interest rates on the purchase on a vehicle, rather than on leasing, Gomes said.
Michael Smith, business manager at Old Mill Pontiac, Buick, Cadillac dealership in Toronto, agreed. He said that GM was offering subsidized interest rates for up to 72 months to entice consumers to buy, rather than lease.
“Comparatively, the payment is very similar, and in some cases it could even be less,” he said.
Detroit-based GMAC is 51 percent owned by Cerberus, which bought the interest from General Motors Corp in 2006. The automaker owns the remaining 49 percent.
Rocked by the downturn in the U.S. housing market and losses at its ResCap mortgage unit, GMAC has said it might not turn a profit until 2009. The finance company lost $2.3 billion in 2007. It is scheduled to report second-quarter earnings on Thursday.
When Ford Motor Co (F.N) recently announced its $8.7 billion loss for the second quarter, $2.1 billion of that came from lease writedowns.
Reporting by John McCrank in Toronto, Kevin Krolicki in Detroit and Varsha Tickoo in Bangalore