ANALYSIS AND PROSPECTS OF USED VEHICLE MARKET
SYED ALAMDAR ALI
Hailey College of Banking & Finance Lahore
Oct 20 - 26, 2008
Until recently, car manufacturers and dealers have tended to focus on their new vehicle business to the exclusion of used cars, often viewing the used vehicle trade as an unwanted byproduct of new car sales and a necessary cost of doing business. It seemed obvious that new cars, with their higher sticker prices and wealthier buyers, should be the focus of dealers' sales efforts. Over time, however, competition in the new car market has resulted in a surprising new state of affairs: used cars have begun to add more to dealers' bottom lines than sales of higher-status new cars. Moreover, as the quality and reliability of used cars have grown, consumer attitudes have also evolved. As a result, manufacturers have begun paying greater attention to the crucial role used vehicle management plays in improving residual values, new car sales and the building of manufacturers' brands all over the world. This attention is likely to continue to grow; indeed, investing in used car management is increasingly becoming a necessity in a market characterized by relentless competition, slimming margins and ever more demanding consumers. The following are a number of factors that are altering the used vehicle business in all the markets around the world:
IMPROVED NEW VEHICLE QUALITY AND DURABILITY
The longer lives of vehicles have resulted in a growing used vehicle market, in addition to reducing the potential for service revenue during the first several years of a vehicle's life (during which customers are more likely to go to dealers for service).
AVAILABILITY OF INFORMATION ON THE INTERNET
Customers in all markets now have greater access to research material than ever before, from dealer invoice prices to vehicle history reports, thanks to the Internet, and they are more than willing to take advantage of it. The posting of used vehicle prices for visitors of third-party websites likely has a similar impact on used vehicle buyers, who are becoming more knowledgeable and better able to assess the value of a used vehicle and to shop around for an acceptable price in a competitive auto market.
DECLINING NEW VEHICLE MARGINS
Global overproduction of vehicles increased competition among brands and ever more demanding consumers have led to increasingly high levels of discounts. Used vehicles, which provide dealers with an additional source of revenue and often higher gross margins, are therefore required to maintain a level of profitability that is no longer easily achievable through new vehicle sales and service businesses. This requirement to sell used vehicles to compensate for declining sales and service revenue from new vehicles is becoming even stronger in the present scenario!
INCREASING CHANNEL COMPETITION
Third-party listing websites, complete with multiple photos, detailed descriptions and vehicle history reports to reassure used vehicle shoppers, have made it easier for consumers to sell vehicles of all ages in the private market.
IMPACT ON NEW CAR MANUFACTURERS
A dealership's used vehicle business impacts manufacturers on three major levels:
LOYALTY: Satisfied buyers are more likely to buy their next new vehicle from the same manufacturer and to provide positive word-of-mouth. This principle works the opposite way as well, as a used vehicle sale may either build or erode loyalty.
PROFITABILITY: Relatively new, high quality vehicles traded in at the dealership not only provide significant margins, but also act as a source of profitable financing, insurance and service revenues.
PRICING POWER: Residual values impact the attractiveness of trade-ins and new vehicle purchases, restricting the ability of manufacturers to price new vehicles and determining how much they must rely on incentives to stimulate demand. Strong used vehicle sales and inventory control can lead to stronger new vehicle sales and higher profitability for manufacturers and their dealer networks.
Besides above, in all markets, the dealers and manufacturers with successful used car operations make strategic investments in technology to improve customer experiences and build the trust that forms the basis of their ability to compete with lower-priced independent dealers and private sellers.
Creating positive encounters with customers and building long-term relationships based on trust is ultimately rooted in transparency. The information available to consumers online has greatly reduced information asymmetry in an irreversible way, thereby changing the rules of the game. The obfuscation and stereo-typical sales orientation, which characterized the market in the past, are no longer possible in a competitive market where consumers not only have higher expectations of the used car transaction, but are able to have their expectations fulfilled at forward-thinking dealerships.
Consumer attitudes to used vehicles have become more sophisticated as vehicles themselves have improved in quality and reliability. The tools used by consumers have also evolved, resulting in the need for dealers and manufacturers to fundamentally change their approach to the sale of used vehicles. While these changes involve significant financial investments, they hold the potential for great returns and are, in fact, necessary in today's market. Dealers and manufacturers face a rapidly evolving car market; they must evolve with it if they do not wish to be left behind.