U.S. Car Makers Fail to Improve Resale Values

Detroit's auto makers continue to lag behind Asian and European competitors in car resale value, an important consumer gauge.

Kelley Blue Book, a well-known vehicle appraiser, plans to announce Wednesday its annual ranking of the top 10 brands for projected resale value -- and not a single one will be American. Kelley, which ran its calculations before the big car makers began pushing for government financial help, defines resale value as the amount of a vehicle's sticker price that is retained after five years of ownership. The typical Chrysler car, for example, is expected to retain just 24.2% of its original cost. By comparison, the top-rated Honda brand's vehicles are expected on average to retain 44.5% of their value.

The typical Chrysler car is expected to retain just 24.2% of its original cost. By comparison, the top-rated Honda brand's vehicles are expected on average to retain 44.5% of their value.

The U.S. industry's poor showing bodes poorly for its ability to win back consumers to American brands after years of slipping market share. Resale value, also known as residual value, is a factor consumers consider closely when buying or leasing a new car. Because monthly lease payments cover the difference between a vehicle's sticker price and its expected value at the end of the lease, cars that hold their value better have lower lease payments.

After the Honda brand, made by Honda Motor Co., Kelley Blue Book's top picks include the Toyota brand, made by Toyota Motor Corp.; Volkswagen AG's Volkswagen brand; the Subaru brand by Fuji Heavy Industries Ltd.; and Toyota Motor's luxury Lexus brand. Rounding out the top 10 are BMW AG's BMW brand; Nissan Motor Co.'s Infiniti brand; Honda's Acura brand; Volkswagen's Audi brand; and the Nissan brand.

American vehicles continued to perform poorly, according to Kelley's survey. Chrysler LLC's portfolio of Dodge, Jeep and Chrysler brands retain only 27.8% of their value. General Motors Corp.'s eight brands collectively retain 30.3%. And Ford Motor Co.'s brands, including Ford, Lincoln, Mercury and Volvo, retain 30.7%. The five individual vehicles with the worst residuals were all big cars or trucks with large V-8 engines, including Ford's Lincoln Town Car and GM's GMC Savana van.

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Detroit's auto makers have posted lower resale values over the years because they tended to overbuild vehicles to gain market share. They also paid less attention to building high-quality small cars in favor of larger, fuel-thirsty sport-utility vehicles. Amid tepid demand for their cars, U.S. manufacturers sold many to rental fleets, which further undermined resale value.

In recent months, skyrocketing fuel prices caused resale values on SUVs to plunge. Chrysler, which relied disproportionately on those vehicles, had to abandon all its leasing operations as a result.
Bankruptcy Fallout

The disparity could widen should one of Detroit's auto makers fail. Top executives for the Big Three auto makers appeared before the Senate Banking Committee Tuesday to seek $25 billion in emergency working capital. The executives have argued that bankruptcy isn't a viable option for U.S. car makers because consumers aren't likely to buy cars tainted by the image of a company that just went belly-up.

Chrysler Chief Executive Robert Nardelli said in prepared remarks that already-weak sales would "be impacted materially as a result of declining consumer confidence" if Chrysler went bankrupt, forcing the company "to heavily discount existing inventory to move our product." High discounts tarnish consumers' perception of a vehicle and can hurt its resale value.

Amid tough economic conditions, resale values dropped across the industry, according to Kelley Blue Book. But the Honda brand, a perennial strong performer in the ranking, reclaimed its top spot this year from Volkswagen, which led the rankings for 2008. Kelley expects Hondas overall to retain 44.5% of their value, just ahead of the 40.9% for the Volkswagen brand.

The Honda brand's strong quality reputation was bolstered by a fuel-efficient lineup during a period of high gasoline prices, says Eric Ibara, Kelley's director of market valuation. "That helped keep the value for those models even higher," he says. Volkswagen, he says, still benefits from high-mileage cars but slipped because of some flagging popularity for its Jetta model.
Better Mileage

A Volkswagen spokesman says the manufacturer expects the introduction of clean-diesel Jettas -- which pollute less than regular diesel and get better mileage than gasoline-powered engines -- to boost the brand's overall resale value over the next year.

Washington lawmakers have floated the idea of attaching to any bailout strict conditions that would force Detroit's companies to improve fuel economy. U.S. auto executives say they're already working to comply with federal mileage rules passed in a recent energy bill and are working on more fuel-efficient vehicles as part of their restructuring plans. GM hopes to have an electric plug-in car, the Chevrolet Volt, on the road in 2010.

For buyers, resale value disparities mean it often costs less to own a more-expensive car if it holds its value better over time. Consider the Honda Civic EX automatic sedan, one of America's top-selling small cars and among Kelley's top resale models. According to Kelley, the Civic, which lists for about $20,675, should retain about 55% of its value over five years. Meanwhile, a Chevrolet Cobalt LT automatic sedan, which lists for $17,295, retains only 32% of its value. At the end of five years, the cost of the Civic minus its projected resale value would be about $9,304, while the initially cheaper Cobalt would end up costing about $11,761.

Kelley developed its resale-value projections by analyzing current sales data, market conditions for each vehicle, competition within vehicle segments and future economic expectations. Kelley excludes low-volume models and most vehicles with sticker prices above $60,000.

The Toyota brand, which is expected to retain 42.7% of its value, rose in the resale rankings this year, helped by the inclusion of hybrids like the Prius and subcompacts like the Yaris. Those vehicles' relatively high resale values helped offset lower residuals from Toyota's SUVs.

BMW's Mini brand and Toyota's Scion brand both carry residuals exceeding 50% but weren't ranked by Kelley because they don't offer more than four models in their portfolios. But individual models among both these brands ranked high in the Kelley ratings.

Domestic manufacturers earned some honors from Kelley. Chrysler's Jeep Wrangler ranked as the best SUV resale pick, retaining 42% of its value. GM's Cadillac CTS bested all full-size cars. The Ford Focus, which has surprised even Ford executives with its increased popularity, boosted its resale value five percentage points to 36%, not far behind some Asian and European makes.

But domestic models like the Ford Expedition SUV and the Dodge Durango SUV dominated Kelley's list of worst-performing vehicles in terms of resale value.

The Chrysler brand is among the worst resale bets, according to Kelley, outperforming only the Isuzu brand, made by Isuzu Motors America Inc., which retains just 23% of its value. GM's Pontiac is Detroit's best resale brand, Kelley says, but it only retains 34.1% of its value -- more than 10 percentage points behind Honda.
Chrysler Weakness

A Chrysler spokesman said the auto maker has curtailed sales to rental agencies as part of its restructuring, a move spurred in part to boost resale values. Still, the auto maker's struggles have intensified in recent months, forcing its owner, Cerberus Capital Management LP, a private-equity firm, to explore mergers with other car makers.

Another reason Detroit's vehicles tend to suffer: They've historically had less frequent redesigns than their competitors, which makes them look older to consumers, says Kelley's Mr. Ibara. He pointed to the Chrysler 300 sedan as a vehicle that caught eyes early on but has since fallen out of favor.