How is GM Managing Residual Values?

Back in 2007, when General Motors had eight brands, the economy was rolling along and GM was in a dead heat with Toyota for the most auto sales in the world, then-fleet head Brian McVeigh and Brent Dewar hatched the Residual Value Management (RVM) process. Why the need, in those halcyon days? "We wanted to sell vehicles to our commercial clients but one of the problems was our assets depreciated too quickly," says Leo Burns, who manages RVM and total cost of ownership at GM today.

"Our product, metal to metal, has been equal to or better than our competitive sets, yet the forecast from the guidebooks didn't reflect that," Burns says.

At that time, GM priced and incentivized its products to meet sales targets under a different capital structure, along with a mix that skewed to high toward rental sales . Those sales demands created volatility, which created risk-and forced the guidebooks to forecast conservatively. "You can bring the best product to market and still have poor residuals," Burns says.

The RVM team set about to create best practices from a product, sales, incentives and marketing standpoint and sought to gain input from the top guide books, Kelley Blue Book, RVI, Black Book and Automotive Lease Guide.

So what's changed at GM? You can look at the RVM team's management of microeconomic forces within the company, as well as forces at play in the industry as a whole.

GM has much less overlap today in product within its four "swim lanes" (brands), Burns says. Each model's build combinations have been reduced and GM has created "intelligent VINs" that have content identification to make sure it is recognized in the auction lanes.

A key goal has been to minimize the MSRP to average transaction price (ATP) gap. This works in a few ways: reducing the spread in MSRP by trim level, which holds the values of the higher contented vehicles, and by reducing cash incentives, the biggest influencer of that secondary resale evaluation. Incentives should be a balanced mix of cash, interest rate adjustments and leasing, "but we don't let our pricing get ahead of us," Burns says.

On the other side, GM is reworking its Certified Used Vehicles program into branded channels. Before, the Certified Used program fell under the GM banner. This worked when we were trying to simplify the marketing of eight brands, but now, the goal is to carry over market differentiation between the remaining four brands into the secondary market. "You're carrying the perception of Chevrolet in the retail mind from the new to the certified pre-owned side," Burns says.

Certainly, macroeconomic shocks will affect values and can't be planned for, such as the spike in fuel prices in 2008 and the economic collapse of 2009. But those events can sometimes create an unexpected bounce in the right direction.

Bankruptcy brought "a new executive leadership team to GM, a new balance sheet and a new operating flexibility," Burns says.

It's now easier to adjust production schedules to meet market demand, based on near- and long-term sales outlooks. Now, there isn't a dramatic need to incentivize to push volume for quarter-end sales or financial periods because the company is now aligning production to meet demand more effectively.

In that vein, "Our rental penetration is moving to a competitive benchmark level," Burns says. "No longer do we use rental for market share gains or production coverage."

GM fleet customers who stuck with the company through the dark days are realizing some unexpected benefits now. Back then, ALG had GM at nearly an eight-point residual value spread to competitive vehicles at the time. Since bankruptcy, Burns says GM has closed the residual gap by three to four points.

In real dollars, three points on a $30,000 car equals a $900 improvement to a commercial client holding that asset for 36 months. This is what McVeigh and Dewar were talking about in the first place.

At the same time during the switch to the new GM, leasing through GMAC slid to a virtual standstill. That lack of off-lease supply is working its way through the used car market now. The tight used car market is driving up prices.

"If you're sitting on GM assets, take a look at the Manheim Index or the RVI index," Burns said. "It's as high as it's been in a decade, and we're going to continue to retain or improve our wholesale pricing."

So what do you think about GM's residual value management strategy?

Originally posted on Business Fleet