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Best Buy? The car that depreciates the least

Jeremy Cato
Globe and Mail Update
Published on Wednesday, May. 12, 2010

Your biggest vehicle expense? Depreciation, of course. Over a four- to six-year ownership cycle, depreciation – how much value your car loses over time – is your single largest ownership expense.

Yes, some of you will argue that depreciation and financing are not legitimate, across-the-board costs. True enough, for those who plan to keep their cars and trucks until they are hauled away to the scrap heap, depreciation doesn’t really matter. And not everyone pays to borrow the money for a new vehicle.

But the great majority of Canadians either lease or finance a new-vehicle acquisition, so in a broad sense, depreciation is a cost.

Of course depreciation is affected by a multitude of variables, including a new-vehicle marketplace riddled with discounts that complicate valuations. And of course new-car values differ from region to region, making it difficult to assess the actual net worth of a car after three or four years.

So this is where the experts enter to sort through the numbers and clear up the picture. One is Automotive Lease Guide (ALG), which recently released its second annual Canadian Residual Value Awards. ALG is one of the companies car companies and finance outfits use to determine resale values after three and four years – for the purposes of leasing, in particular.

This year, ALG’s awards are based on 2010 model year vehicles. ALG says the conclusions come from “careful study of segment competition, historical vehicle performance and industry trends, and are based on analysis using only Canada-specific data.”

And the winners? Subaru has taken top spot among mainstream brands, with ALG projecting that after four years your Subaru will have retained 41.9 per cent of its original value. The top luxury brand is Nissan’s Infiniti, with Infiniti vehicles holding onto nearly half (47.2 per cent) of their original value after three years.

“Subaru has blazed its own trail since arriving in the Canadian market,” said Matt Traylen, ALG’s chief economist. “Subaru’s signature boxer engines and standard all-wheel-drive, as well as its solid reputation for quality, give the brand an image of ruggedness and independence and contribute to remarkable owner loyalty. The recent redesign of its three core models and restrained incentives also helped Subaru jump to the top of the rankings.”

So buy a Subaru or an Infiniti and you’ll spend less money on depreciation. Of the two, perhaps the greater surprise in this year’s report is Infiniti. A relatively small luxury player in Canada, Infiniti has maintained pricing discipline by limiting discounting.

Keeping a lid on overly generous sales sweeteners has helped Infiniti on the residual front, but it has also held sales increases in check. Indeed, Infiniti sales are up 21.9 per cent on the year, which sounds and is impressive. Yet rivals such as Audi, BMW, and Mercedes-Benz are up 52.9, 33 and 28.3 respectively so far this year.

“With generally more powerful engines and lower pricing than its European rivals, Infiniti has pursued the kind of value strategy that helps to give its brand a strong long-term foundation,” says Traylen. “By augmenting its lineup with all-wheel drive vehicles, it’s expanded its presence across the luxury market.”

Another interesting case is Toyota and its Lexus luxury brand. The Toyota brand ranks fourth in ALG’s report, with residuals at 39.4 per cent. Lexus is fifth in the luxury category at 44.4 per cent. So far ALG has not seen a decline in Toyota values, despite the worldwide recall of more than eight million vehicles.

But there are troubling signs. In ALG’s Spring 2010 Perceived Quality Survey, Toyota declined from first to sixth among the mainstream brands in the United States. The survey asks consumers about their beliefs regarding the quality of the vehicles associated with various brands. ALG suspects the decline in Toyota’s perceived quality may have an impact on resale values at some point, though when and how great that impact will be remains unclear.

ALG rival Canadian Black Book (CBB) has found that Toyota’s recent troubles have so far had little impact on residual values. In fact, in CBB’s most recent retained value awards released in March, Toyota’s performance was “exceptional.” Six Toyota vehicles finished first in their segments, while one Lexus model won its category.

“Given Toyota's recent media attention, this outcome may be a surprise to some,” says Larry Shred, CBB executive vice-president. “So far their values remain stable and that is a strong indicator of the public's trust in Toyota the brand.”

Muddying the picture for Toyota’s future value performance are two major factors:

Toyota’s response to this crisis. It remains to be seen how effectively Toyota is dealing with both its real and perceived problems.
A large number of recalls from other auto makers in recent months has taken the heat off of Toyota to some degree.
For instance, since February, Honda has recalled hundreds of thousands of vehicles, including more than 167,000 Acura TSX sedans and more than 440,000 Honda Accord sedans, Odyssey minivans and CR-V compact SUVs. Porsche, meanwhile, is recalling more than 11,000 Panamera saloons; GM’s Hummer brand is recalling more than 126,000 H3 SUVs; and Nissan is recalling more than half a million Titan pickups, QX56 SUVs and Quest minivans.

As the number of recalls rises among Toyota rivals, analysts believe the impact on Toyota lessens.

Indeed, auto makers that steer clear of perceived and real quality problems are likely to benefit on the residual value front in the coming year. Strong brands with a clean quality and safety slate will only get stronger in the coming year – and that’s money in the pocket for owners of vehicles from those brands.

“We firmly believe that residual value is the most comprehensive and reliable measure of the overall strength of an automotive brand,” says Traylen.

Top Seven 2010 ALG Canadian Residual Value Awards
Mainstream Brands Four-year residual percentage

Subaru 41.9%
Mazda 39.5%
Toyota 39.4%
Nissan 39.2%
Volkswagen 37.4%
Suzuki 34.9%
Luxury BrandsThree-year residual

BMW 46.4%
Acura 46.1%
Audi 44.9%
Lexus 44.4%
Land Rover 43.6%
Mercedes-Benz 41.7%


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