FINANCE & INSURANCE: Residual guide rips BMW 7 series
Firm says redesigned car is overpriced
By Jim Henry
Automotive News / April 22, 2002
Add Automotive Lease Guide to the list of critics of the redesigned BMW 7 series. The influential guide to residual values says the new BMW flagship is too pricey.
The redesigned car went on sale in the United States in January at $72,495, including $645 freight, for the 745Li model.
In its March-April report, the company gives the 7 series a residual value only 1 percentage or 2 percentage points higher than the outgoing generation, depending on the model and lease length. For example, the residual on the 745Li is 48 percent of sticker price on a 36-month lease, compared with 47 percent for the model it replaced.
That means that Automotive Lease Guide believes the 745Li will be worth only $34,798 after three years.
In contrast, when archrival Mercedes introduced the latest-generation S class in 2000, the company raised the residuals as much as 9 percentage points over the outgoing generation. The S430, for example, was given a residual of 63 percent of MSRP on a 36-month lease, compared with 54 percent for the S420.
Over the entire S-class range, the increase was 5 percentage points.
Automotive Lease Guide's residuals on the 7 series remain significantly lower than those of the S class, and lower in some cases than the Lexus LS 430, another rival (see table).
Automotive Lease Guide, of Santa Barbara, Calif., is a widely used benchmark for predicting residual values on leases. A lower residual means higher monthly payments for the lessee because the customer, in effect, borrows the difference between the transaction price and the predicted residual value.
But lenders are free to set their own residual values. For instance, BMW Financial Services has set a 61 percent residual on the 745 for a 36-month lease, indicating it expects the car to fetch at least $44,223 after three years.
That means that a 745 lease based on Automotive Lease Guide's residuals would cost the customer an additional $9,424.
Not worried
Publicly at least, BMW executives are sanguine about Automotive Lease Guide's residuals.
"ALG is an independent business," BMW CEO-elect Helmut Panke said in a March 27 interview at the New York auto show.
"We can talk to them and explain our views. But, at the end of the day, they have to set residuals the way they determine them."
The redesigned 7 series has been widely criticized for its styling and for the complexity of its i-Drive control system. The system is built around an electronic shift lever and a controller mounted between the front seats that replaces many of the traditional buttons and knobs on the dash.
So unusual is the i-Drive system that BMW puts a pad of pre-printed instruction notes in the glove box of every 7 series so owners can stick one on the steering wheel when giving the car to valet parking attendants. The notes explain how to start the car and put it in gear.
BMW points out that 7-series sales in the first quarter of 2002 are up 64 percent over a year earlier, to 4,554.
Price is the issue
ALG President Raj Sundaram said that styling and complexity aside, BMW's pricing on the new 7 is mostly to blame for the lukewarm increase in residuals.
"One of biggest reasons Mercedes got a huge pop and BMW didn't was that Mercedes actually lowered prices," he said.
"They had a new generation, new features, new everything, and they lowered prices compared with the old S class."
In contrast, he said, BMW increased the price of the new 7 series.
"If you look at how we expect people to equip these cars, the 745i is up about $6,000 over the old one and the long-wheelbase Li is up about $5,900 over the old 740iL," he said.
"They've gone the other direction on price. It's not going to be easy, competing in that segment."
The risk to BMW Financial is that cars coming off lease in three years will generate a loss when they are resold if they are worth less than the captive had estimated.
The generosity of BMW's in-house residuals relative to Automotive Lease Guide's already are driving nearly all BMW lease business to the captive, magnifying the potential residual risk. BMW Financial Services finances around 95 percent of BMW leases, said John Christman, regional manager for the Americas.
But Wolfgang Stofer, director of treasury, accounting and taxes for parent BMW AG, said the automaker is conservative in its accounting for profits from lease transactions.
"We are careful about the value of the lease portfolio," he said. "That is, if the sky doesn't fall, we are absolutely on the safe side."
ALG Rips 7 series Lease Residuals
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