Search Cars for Sale

Do Automakers Care About Depreciation?

Hello, human readers of Oversteer, and welcome to Ask Doug, your favorite weekly post, wherein you ask Doug a question, and Doug provides some semblance of an answer — along with oblique references to "Gilmore Girls."

If you’d like to participate in Ask Doug, you can! Just send me an email at OversteerDoug@gmail.com, or send me a note on my Facebook page. I promise I will happily read your letter and possibly ignore it, just like Luke does to Taylor, amirite?

Anyway, today’s letter comes to us from a reader I’ve named Willy, who lives in Atlanta. Willy writes:

Hi Doug,

Since you are a prominent automotive journalist and a former industry insider, I wanted to get your thoughts on vehicle depreciation rates from a manufacturer’s perspective. Do they give a crap, and if so, how? On the one hand, high depreciation rates mean higher cost of ownership for new-car buyers. On the other, it seems that highly depreciating vehicles get replaced more often than most Toyotas, Hondas and Land Rovers. Haha, kidding about the last one. Also, vehicles with high depreciation rates typically are less reliable, which means more business for dealers, especially after the warranty period.

Anyway, hope to hear your thoughts on the subject!

Regards,

Willy from Atlanta

Willy has sent an excellent, well-researched, thoughtfully written email, and I believe his brilliance especially peaks in the first sentence, where he calls me a prominent automotive journalist. Yes, Willy, I am a prominent automotive journalist, in the sense that I have a YouTube channel where people routinely tell me my tongue is too large.

Anyway, the answer to your question is that automakers really, really, really, really care about depreciation, but not for the reasons you’ve suggested. It’s all about leasing.

In order to help you understand why, first let me explain how leasing works. When you go to lease a car, you are essentially paying the vehicle’s depreciation over a period of 2 years, 3 years or however long your lease is. In other words, your lease payment directly ties in to the vehicle’s depreciation. A vehicle with low depreciation will have a low lease payment. A vehicle with high depreciation will have a high lease payment.

The result is that the automakers whose cars have low depreciation rates have lower lease payments, and more people lease their vehicles. The automakers with high depreciation have to subsidize their lease payments in order to make them competitive, which is tremendously expensive. This means that if you were a car company, Willy, you would want your depreciation to be as low as possible.

This is the reason why BMW — and other manufacturers — offer free maintenance on their vehicles: If you offer maintenance for free, you can be almost certain people will take you up on it, and then your stock of used cars has always been well-maintained, which improves resale value.

Of course, it isn’t always so simple. If you have a contract with union workers at your factory that says you must employ X number of workers over X period of time to do X amount of work, you would rather have them building a car that you can sell for no profit than be paying them to stand around, trying to find a Snorlax in the machine shop. So you sell thousands of cars to rental-car firms, and you hurt your resale value, but this is probably cheaper than not building these cars at all.

Naturally, I’ve oversimplified this. The truth is that automakers figure all of this out with the help of economists, mathematicians and data experts, nearly all of whom believe that Snorlax is a competitor to Nyquil.

But as you point out, automakers care about depreciation for other reasons. They don’t want to be seen as a brand with a high cost of ownership, because then people will start shopping the competition. And poor resale value is often a sign of low desirability, which means that automakers with resale-value problems should probably be checking their product lineups to see if they’re actually selling anything people want to buy.

But that’s your answer, Willy: It’s all about leasing. Leasing and Snorlax.

MORE FROM OVERSTEER:
The Ferrari F50 Lease Program Was Absolutely Insane
Here Are All the Weird Quirks of My Dodge Viper
I’m Taking My Aston Martin on a 6,000-Mile Road Trip Across the Country

 
Doug Demuro
Doug DeMuro writes articles and makes videos, mainly about cars. Doug was born in Denver, Colorado, and received an economics degree from Emory University in Atlanta. After graduation, Doug spent three years working for Porsche Cars North America. Eventually, he quit his job to become a writer, largely because it meant that he no longer had to wear pants. Doug’s work has been featured in a... Read More about Doug Demuro

Sign up for Autotrader newsletters

The best cars and best deals delivered to your inbox

Email Address 

By subscribing, you agree to our privacy policy

Where You Can Buy

Loading dealers...

13 COMMENTS

  1. Cracked me the hell up with this one…

    …rather have them building a car that you can sell for no profit than be paying them to stand around, trying to find a Snorlax in the machine shop.”

    Thus reaffirming my decision to follow you over from Jalop City. Great stuff Douglas, keep the hits coming and we will keep making sure to shove all your work in front of our friends faces and demand that they read up.
  2. No mention of a product purchased by lessors called “lease-end insurance” at all. 
    This allowed lessors to artificially inflate the residual value sometimes by 1000’s. 

  3. This makes sense but also makes me wonder how Chrysler stays in business. Poor resale, poor reliability and I guess rental companies like the Charger and 200 but they’re killing off the 200 due to poor sales. 

  4. The leasing part I always knew, but now you solved the problem I’ve been having with the fact that Nissan leases are cheaper then a similar Toyota or Honda 99% of the time while in the used market Nissan’s are typically cheaper then them. Thank you! Oh, enjoy your trip!

Leave a Comment

Most Popular Articles

2020 Hyundai Sonata Hybrid: First Look

The 2020 Hyundai Sonata Hybrid jumps to the head of the hybrid class.

Best Truck Deals: July 2021

These are the best deals on trucks for the month of June.

Search By Style

More Articles Like This