The battle between the Chevy Silverado from General Motors Company (NYSE:GM) and the Ford Motor Company (NYSE:F) F-150 has been heating up lately, with General Motors Company (NYSE:GM) trying to challenge Ford Motor Company (NYSE:F)’s long dominance atop the best-selling vehicle list. But despite some concerns about the Silverado launch, General Motors Company (NYSE:GM) recently got some good news that could help give it an edge against Ford Motor Company (NYSE:F) and its other competitors.
Research company ALG made its forecast for projected residual values for full-sized pickup truck lines earlier this month, and its figures for GM’s biggest truck lines were unexpectedly strong. ALG projects that 2014 Silverados will retain 55% of their value after 36 months, compared to just 47% for the 2013 model. That forecast also puts the Silverado ahead of its most important rivals in the segment, including the F-150. ALG found that only Toyota Motor Corporation (ADR) (NYSE:TM)‘s Tundra weighed in with slightly better residual values.
To understand why the boost in residual value represents an important edge, you need to understand the basics of vehicle leasing. In essence, higher residual values give GM a lot more flexibility in offering attractive deals for customers who want to take home a Silverado as inexpensively as possible.
Vehicle leasing 101
From the customer’s perspective, leasing rather than buying can be an attractive way to drive a new vehicle every few years. With a typical lease, you’ll pay a fixed monthly payment as well as some upfront costs. After the lease term expires, you typically have the option either to purchase the leased vehicle or to return it in favor of buying or leasing a newer car or truck.
But from the automaker’s perspective, the economics of the lease are much different. In deciding where to set monthly lease rates, automakers have to look at two things: the value of the brand-new car on the lot and the amount of money they’ll be able to get for that car at the end of the lease term, when the dealer sells it as a used car. The greater the difference between full retail price and the residual value at the lease’s end, the more an automaker has to charge on lease payments in order to recoup the loss in value and make a profit. Conversely, greater residual value boosts profit margins on leases, giving an automaker the latitude to offer more attractive lease terms.