There have been several discussions on this board around BMW and MB leasing rates, and in particular around how the German auto manufacturers "subsidize" their leases.

While this is prima facie true, it's a bit misleading because leases are actually a fantastic business for BMW and MB, so I thought I'd share some investor materials which outline the corporate perspective on this stuff.

Leases are very profitable to manufacturers because:
1. Leases give them the ability to capture customer revenue over multiple buying cycles rather than one cycle. With new customer acquisition costs running in the thousands of dollars nowadays, the value of having a customer on lease and knowing exactly when that customer is going to be on the market again is worth thousands to the manufacturer. For BMW (see attached), lease holders are not only more loyal to the brand (partly because BMW knows exactly when their leases are up) but also tend to replace cars more often.

2. Manufacturers have gotten really good at reconditioning and certifying lease returns, which they sell with warranty at a considerable premium to used-car dealers.

So the value captured throughout the customer lifecycle gives them a LOT of profit to play with in terms of subsidizing leases. This is a very intelligent way of looking at the customer, and one that Jaguar has not yet fully explored.

The slides below show how quickly and profitably the lease business has grown for BMW despite (or more accurately, because of) their strategy of offering cheap leases....as you can see they more than recapture the profits on the back end. BMW has gone so far as to start a bank in order to further optimize its financing operations with better interest rates and liquidity management.

Jaguar will eventually come to the same practice and reduce their lease rates....in order to do that they need a better selection of cars (so that there are actually enough models for buyers to stay loyal), and a better level of financial sophistication.

They're just not there quite yet, but the profit opportunities are compelling so I'm pretty sure they'll get there.

Bottom line: yes, the Germans have better lease rates, but no it's not because they are "buying" market share....on the contrary, it's because they are smart enough to realize that they should be lowering lease pricing to encourage greater lease (vs cash) ownership.

 

Also -- at the risk of providing too much info! -- I'll add that it's pretty striking when you compare the investor presentations of Jaguar vs BMW.

I've attached the two most recent ones from both companies. The difference in corporate sophistication is eye-opening.

BMW makes Jaguar look primitive by comparison, but I think this is actually really good news. Despite the lower corporate sophistication, Jaguar is delivering record breaking profits and growth....so this tells me that there is still plenty of opportunity to improve operations at Jaguar, which -- in theory at least -- should drive better value for owners (and investors).

 

It is buying market share - and I could not agree more that it is *exactly* the right model and one that Jaguar needs to follow. BMW and MB make it very easy to get into one of their products and to stay with the brand. Jaguar's issue, I believe, is that they do not have their own in house finance operation. It all runs via Chase and I suspect this makes it harder for Jaguar to provide the incentives and follow the model you describe.

 

I also believe BMW controls inventory and their resale value through their overall strategy. Their 4 year maintenance programs are also part of that strategy. Very informative post.

 

I think the biggest problem Jaguar has is they no longer have their own captive finance company. Jaguar Credit now is Chase. When they were owned by Ford ,Primus which is Ford was Jaguar Credit.