USED CAR REMARKETING 1 Bora Selcen Duvan Renault / B & LCV Segment Product Manager ?akmak Mah. Balkan Cad. No:49 Umraniye Istanbul 34770 E-mail: firstname.lastname@example.org Dr. D. Selcen ?. Ayka? Ozyegin University / Post-Doc Research Fellow Kusbakisi St. No: 2 Altunizade, Uskudar Istanbul 34662 E-mail: email@example.com ??Abstract ?? Car manufacturers and dealers have tended to exclude used cars from their businesses thinking that the focus of dealers?? sales efforts should be on new cars, which carry higher price tags targeting wealthier buyers. Dealers and original equipment manufacturers (OEMs) have been aiming to push the new car inventory to the market with applicable incentives. However, used cars have started to add more to dealers?? bottom lines than sales of higher-status new cars. Improved quality and reliability of used cars have initiated a devoted customer base. As a result, manufacturers started to consider the crucial role of used vehicle management in improving residual values, new car sales and manufacturer brand equity. This study investigates the used car business, particularly in the United States, Europe and Turkey. The purpose of the study is to uncover the main drives of the used vehicle business and applicable competition means for OEMs (Manufacturers) and dealers. Key Words: Used cars, second hand cars, re-marketing JEL Classification: M31
1. INTRODUCTION 1.1. Background Buying a new car is the end point of a process that, on average, takes six months (Time Inc., 2005) and involves much research and complex decision-making. In the past, the power struggle between
This paper is prepared from Bora Selcen Duvan??s MBA Graduation Project, which is completed in 2008 at the Istanbul Bilgi University under the supervision of Dr. D. Selcen ?. Ayka? as an advisor.
Electronic copy available at: http://ssrn.com/abstract=1435184
customers and dealers generally played out in favor of the latter. The development of the Internet has changed the power struggle between dealers and consumers. Buyers can now potentially gain the upper hand. Customers are increasingly knowledgeable about cars, their quality, residual value, prices applied, finance charges, availability, and, more and more frequently, the exact profit margin that the dealer makes in closing a deal. Dealerships have had to adapt. The most shrewd and dynamic have managed to turn customer intelligence to their advantage, by focusing on what consumers really want namely transparency and
respect. Has the used car market changed in the same way as the new car market? Although in some countries, used car sales represent two or three times the volume of new car sales, there are very few studies that fully explore the used car business. Our research identified a number of key findings that characterize the development of the used car business. The importance of the used car market is growing significantly. In both the U.S. and France, for example, the used-to-new vehicle ratio (which demonstrates the level of used market activity) has increased since 1999 from 2.4 to 2.6 (Datamonitor, 2007), showing a steady growth of used vehicle sales by volume. In addition used vehicle sales in the U.S. are today more than twice as profitable for dealers as new vehicle sales (roughly 2.7% profit margin, compared with 1.2%). Moreover, the used vehicle financing and insurance segment is often the most profitable operational unit of a franchised dealership, posting 11.3% profitability in 2005 in the U.S. The key to growth will be transparency and symmetry of information, as consumers continue to apply the same approach to research and collection of information in their search for used vehicles as they do in the new car buying process. As with new car sales, the relationship between dealer and customer will need to be based on respect and trust, as well as ease of purchase. Such a symmetrical relationship will presume that buyers and sellers possess the same information by which to determine a product??s quality. The Internet is increasingly becoming the information source of choice for used vehicle buyers. Although consumers still use local newspapers and word-of-mouth when researching used car purchases, they are turning to the Web in increasing numbers, highlighting the importance of having a strong Internet strategy for used vehicle programs (J.D. Power and Associates, 2006). Dealers that have focused more attention on multi-channel communication strategies are beginning to reap benefits, with an increasing number saying their Web activities have improved sales and extended their trading range (Capgemini, 2007). The most important success strategy in the used car business may be the development of trustinducing initiatives such as certified used vehicle programs. These programs provide the best protection against channel competition and allow dealers to improve margins significantly while offering an additional source of revenue for OEMs. Franchised dealers are in a strong position to benefit from growth in the used vehicle market, supported by OEM involvement in marketing and certification programs, access to high-quality
Electronic copy available at: http://ssrn.com/abstract=1435184
off-lease vehicles, online inventory pooling and a more professional image in the mind of the consumer. Used and new vehicle sales are interrelated and complementary; both are a function of dealer
excellence. Successful dealerships tend to have strong sales in both the new and used vehicle departments. An American study found that new vehicle sales per dealer correlated positively with used vehicle sales, despite the counter-cyclical nature of the used car business. Management of new car incentives is critical to ensure profitable used and new businesses. With the increase in the quality and image of used vehicles and the popularity of certified programs, late-model used cars are increasingly becoming a substitute for new vehicles and vice versa. As a result, incentives in the new vehicle market act to depress used vehicle prices, lowering residual values and new vehicle sales prices and reinforcing the incentive cycle. This impact is particularly pronounced for late model used vehicles and for more expensive (and image-conscious) market segments. In this respect, this study demonstrates how important is the institutionalization of the used car market while comparing the market in developed countries to the Turkish market. Additionally, touches on the importance of professional used car set up for the manufacturers when thinking that the control of this growing sector is still in the ??galerici??, the so called independent merchants. 1.2. Used Car Market The used car market covers all private and remarketed sales of second hand cars. Private sales are those in which buyer and seller are both private individuals. Remarketing refers to the sale of vehicles by companies that had used them in the course of business or to generate revenue. Remarketing sales include the disposal of used cars by manufacturers, rental and leasing companies, and others (Datamonitor, 2007). Table 1. Used Vehicle vs. New Vehicle Market Sales ?C A National Comparison UK New Car Sales (x1,000) Used Car Sales (x1,000) Used Car / New Car Ratio
Source: Datamonitor, 2004
US 16,995 44,138 2.6
France 2,070 5,400 2.6
Germany 3,320 6,650 2.0
Italy 2,262 4,587 2.0
Canada 1,583 2,300 1.5
Spain 1,517 2,081 1.4
Japan 5,852 5,985 1.0
2,567 7,701 3.0
The used car market is most active in the United States, France and the UK. In these markets, the used car business generates considerable economic income. In contrast, the used car market is weaker in Canada, Japan and Spain (Datamonitor, 2007). Market theory is based on the idea that prices act as indicators of the quality of products bought and sold. In principle, the higher the price of a product the higher its quality is, and vice versa. Classical economic theory also posits that
buyers and sellers possess the same information by which to determine the quality of a product under transaction. This is defined as a symmetrical relationship between buyers and sellers. 1.3. What is a Used Car? As a general rule, the definition of a used car (motor vehicle) is linked to its registration. Any motor vehicle that has previously been registered is a used motor vehicle. For instance, in Belgium the description of what a used car is that ??a used motor vehicle is to be understood as being one which has previously been registered??. In Germany, the German Federal Authority for Automotive Transport (KBA) publishes monthly statistics on the number of registrations of ??new?? and ??used cars?? which is based on the information collected by approximately 460 local authorities for the registration of vehicles (Ilgaz, 2005). In Turkey, ??unregistered cars when subject to private consumption tax are then become registered and counted as used car?? (Turan, 2007). 1.4. Used Cars: A "Lemons Market" Used car market is defined as a lemon market according to Akerlof. Akerlof says that this market shouldn??t exist due to lack of perfect information (asymmetric information among dealers and consumers). There are many markets in which buyers use some market statistic to judge the quality of prospective purchases. In this case there is incentive for sellers to market poor quality merchandise, since the returns for good quality accrue mainly to the entire group whose statistic is affected rather than to the individual seller. As a result there tends to be a reduction in the average quality of goods and also in the size of the market. It should also be perceived that in these markets social and private returns differ, and therefore, in some cases, governmental intervention may increase the welfare of all parties. Or private institutions may arise to take advantage of the potential increases in welfare which can accrue to all parties. By nature, however, these institutions are nonatomistic, and therefore concentrations of power ?ª with ill consequences of their own ?ª can develop. The example of used cars captures the essence of the problem. From time to time one hears either mention of or surprise at the large price difference between new cars and those which have just left the showroom. The usual lunch table justification for this phenomenon is the pure joy of owning a "new" car. We offer a different explanation. Suppose (for the sake of clarity rather than reality) that there are just four kinds of cars. There are new cars and used cars. There are good cars and bad cars (which in America are known as "lemons"). A new car may be a good car or a lemon, and
of course the same is true of used cars. The individuals in this market buy a new automobile without knowing whether the car they buy will be good or a lemon. But they do know that with probability g it is a good car and with probability (l ?ª q) it is a lemon; by assumption,
q is the proportion of good cars produced and (1 ?ªg) is the proportion of lemons. After owning a specific car,, however, for a length of time, the car owner can form a good idea of the quality of this machine.; i.e., the owner assigns a new probability to the event that his car is a lemon. This estimate is more accurate than the original estimate. An asymmetry in available information has developed: for the sellers now has more knowledge about the quality of a car than the buyers. But good cars and bad cars must still sell at the same price ?ª since it is impossible for a buyer to tell the difference between a good car and a bad car. It is apparent that a used car cannot have the same valuation as a new car ?ª if it did have the same valuation, it would clearly be advantageous to trade a lemon at the price of new car, and buy another new car, at a higher probability q of being good and a lower probability of being bad. Thus the owner of a good machine must be locked in. Not only is it true that he cannot receive the true value of his car, but he cannot even obtain the expected value of a new car. Gresham's law has made a modified reappearance. For most cars traded will be the "lemons," and good cars may not be traded at all. The "bad" cars tend to drive out the good (in much the same way that bad money drives out the good). But the analogy with Gresham's law is not quite complete: bad cars drive out the good because they sell at the same price as good cars; similarly, bad money drives out good because the exchange rate is even. But the bad cars sell at the same price as good cars since it is impossible for a buyer to tell the difference between a good and a bad car; only the seller knows. In Gresham's law, however, presumably both buyer and seller can tell the difference between good and bad money. So the analogy is instructive, but not complete. We have been discussing economic models in which "trust" is important. Informal unwritten guarantees are preconditions for trade and production. Where these guarantees are indefinite, business will suffer ?ª as indicated by our generalized Gresham's law. This aspect of uncertainty has been explored by game theorists, as in the Prisoner's Dilemma, but usually it has not been incorporated in the more traditional Arrow-Debreu approach to uncertainty. But the difficulty of distinguishing good quality from bad is inherent in the business world; this may indeed explain many economic institutions and mayin fact be one of the more important aspects of uncertainty (Akerlof, 1970). 1.5. Global Used Car Market The used car market covers all sales of used cars and commercial vehicles (not including motorcycles and heavy trucks over 3.5 metric tons). The market includes sales by private individuals, auction houses and car dealerships. The market value is measured in terms of the retail sales price (RSP) of the vehicle (Datamonitor, 2005). The global used car market reached a value of $819.52 billion in 2003, having grown with a compound annual growth rate (CAGR) of 4.2% in the 1999-2003 period
(Datamonitor, 2005). 1.6. Used Car Market in Europe
The European used car market generated total revenues of $268.3 billion in 2007 this representing a compound annual growth rate (CAGR) of 2% for the period spanning 2003-2007. The private sales segment was the market's most lucrative in 2007, generating total sales volume of 16.3 million units, equivalent to 56.8% of the market's overall volume. The performance of the market is forecast to follow a similar pattern, with an anticipated CAGR of 2.2% for the five-year period 2007-2012 expected to drive the market to a value of $298.5 billion by the end of 2012 (Datamonitor 2007). Table 2. Europe Used Cars Market Volume (Units million) Year Units Million 2003 27.3 2004 27.7 2005 27.8 2006 28.3 2007 (e) 28.7 CAGR, 2003-2007: Source: Datamonitor, 2007 % Growth 1.6 0.3 1.8 1.5 1.3
Figure 1. Europe Used Cars Market Volume: Units million , 2003-2007
Source: Datamonitor, 2007
1.7. Turkish Used Car Market There is no significant data concerning Turkish used car market. But, according to some researches the market is about 1.4 million to 1.5 million in unit per year. Additionally, it is
estimated that more than 50% of the market belongs to independent used car dealers while 40% to Customer to Customer (C2C) and only 10% to manufacturers (Renault - MA S, 2007). The dramatic difference between Turkish market and other countries mainly comes from the bureaucracy during buying and registration processes and relatively higher expenses and tax and notary costs. In Turkey, used car registration expenses change from 350 YTL to 750 YTL according to the specifications of the car (http://www.02.com.tr/?page_id=22, 2008). This high figures lead to the growth of independent car dealers (galeri) who can buy and sell used cars without fully owning them and as a result open auto market share increases up to 50%. Actually, manufacturers?? market share increases as they are more and more involved in the used car market (E.Kuzu, Marketing Manager of Otomax, personal communication, May 20, 2008). 2. USED CAR SUPPLY Based on J.D. Power and Associates survey (2006), Vehicle History Report are the top 10 items consumers look for when shopping online. The reliability and safety information reports (both are included in the AutoCheck Vehicle History Report) are also in the top 10. The following are the top 10 items: Prices of used vehicles, Vehicle Reliability Information, Available on your AutoCheck Vehicle History Report, Trade-In Values, Prices of New Vehicles, Vehicle History Reports - Available on your AutoCheck Vehicle History Report, Safety Information - Available on your AutoCheck Vehicle History Report Dealer Cost/ Invoice Price of New Vehicle, Options/Features available
on Vehicles Performance Information on Vehicles Road Tests/ Articles About Vehicles. 2.1. Who is the Used Car Ultimate Consumer The Turkish used car sales market is still very immature. Many of the deal take place on one-toone basis and often values are not totally exploited (Mark Brunn, Manheim, January 2008). Used car market increased its importance in Turkish automotive industry with its value growth and with its customers?? future behavior. Especially when considering that low income population is rather greater in Turkey compared to whole population, demand of used car is greater than that of new car sales. Monitoring Turkish consumer behavior can verify that customers buy used car because of economical reasons. On the other hand, they have concerns about sales channels which are critical in this market because of ??trust?? problems. Turkish customers are trying to overcome this trust problem buying the used car from the known people such as friends, etc. But they tend to be more careful when buying from independent dealers or open air markets. They are worrying about the insufficient or wrong vehicle history report. Additionally, they do not have conscience regarding certified pre-owned cars offered by manufacturers. Although they think that buying from manufacturers will be much more expensive, they still want to pay more especially when the companies offer guarantee for their used cars.
Figure 2. Who is the Used Car Ultimate Consumer ( 7M Consulting, 2007) Important criteria during buying processes according to the results of surveys conducted in Turkish market: ? ? ? ? An affordable price A satisfactory vehicle history report Original (no accident) Original (unpainted) ? ? ? Vehicle integrity checked Low mileage on the odometer In a good mechanical condition
Some still believe that buying a vehicle is an issue of chance, no matter it??s a new or used car. Frequent vehicle changers (Whimsicals): This type of customers tends to buy used car thinking that new cars will lose more of its value than used cars. If they want to use the vehicle for a long time, then they tend to buy new car. Vehicle as an investment tool (Investors): The explanation is that used car doesn??t loose its value as much as new car, even it??s a kind of investment, it makes money while selling. Business vehicle owners (Misusers): Because of business usage, vehicles depreciate more as a result choosing used car for this purpose would be more efficient. ??Since we misuse vehicles and hardly depreciating them, used car is a good choice???? trade vehicle owners.
It??s concluded that they buy used car because of mostly being modified (adding seats, air condition or even making cabriolet). ??In place of buying a new car and paying more for additional requests, it
is much more economical to buy a used car with additional accessories at market price???? High quality brand buyers (Prestige Seekers): Luxury/premium brand followers can tend to buy second hand of the same brand or model according to their purchasing power. Since ??trust?? covers all criteria when buying a used car, then manufacturers are considered as the most reliable sales channel after ??friend?? channel. But, survey results put forward that manufacturers are not the channel coming in mind when used car buying process is considered. There are two main reasons behind this problem: ? Manufacturers?? used car awareness is low or misinformation: Customer is only aware of manufacturers selling used car as barter for new car. ? Common belief is that vehicles sold by manufacturers are much more expensive than the independent market. As a result, manufacturers need to promote used car business with effective communication strategies. According to quantitative research findings, if used cars are sold in line with market sales conditions, then the demand will be high (believing that manufacturers are more reliable than other sales channels). If the price is increased by 5%, demand will drop dramatically. On the other hand, if used car guarantee is given, still being 5% more expensive, then demand would again increase. As a result, when manufacturers supplies additional services (such as Certified Preowned Cars) unlike other sales channels, customer would be willing to pay 5% more. (HTP Exclusive, 2005). A global consumer survey conducted by Capgemini in 2006 revealed that: ? Cash-back incentives were most likely to be important for German used vehicle customers (50% of German used vehicle buyers considered incentives as an important factor vs. 33% of Americans and 25% of the French). ? The reliability of the brand and price of the vehicle were important for used vehicle customers in all three markets (Canada was not included in the study), with approximately 90% of used buyers rating these factors as important. ? The option for additional warranty coverage or service was more important to Europeans than to Americans: Only 37% of American used buyers rated it as important, compared with 49% of Germans and 53% of the French. This may help account for the higher proportion of French buyers who are planning to buy a certified vehicle (Capgemini, 2007). Major players in the used car distribution channel are C2C, Manufacturer Network, Independent Brokers and Wholesalers. Operational leasers, used car centers of manufacturers, auction companies and web based channels can be cited as the newest sales channels.
Figure 3. Market Share of Different Retail Channels on Used Car (CIRP, 2007) 2.3. C2C The C2C is the preponderant channel, wherever the market is, sales from individual to individual represent the most important market share.
Figure 4. Strengths and weaknesses of C2C (7M Consoulting, 2007) However, the remarketing share is rising, manufacturers in particular implement strategies to make their network offer more attractive and to reinforce their network share in deals.
Figure 5. Remarketing share in Europe (Datamonitor 2003) 3
2.4. Manufacturer Network Channel Manufacturer dealer networks in both Europe and North America have experienced consolidation in recent years, a process that has been historically characteristic of the automotive industry and is likely to continue. In the United States, for example, the number of franchised dealers declined by 22% to 19,311 between 1990 and 2005 (CNW Marketing Research, 2005). To put this into historical perspective, between 1960 and 1975 the number of franchised dealers declined by 35%. In Europe dealers have experienced high rates of consolidation, largely due to the Block Exemption legislation, which came into effect in 2002. Sources indicate that between 2002 and 2004, the number of franchised dealer sales outlets in France declined by about 17%, while the number of German outlets declined by approximately 18%.) (Thomas G. Marx, 1985, pp. 465474).
Figure 6. Strengths and weaknesses of the Manufacturer Network Channel (7M Consulting, 2007) 2.5. Independent Traders Channel The market share of independents is likely to fall in Europe because leasers are more and more looking after others channels to remarket their vehicles such as : auctions (ex: Germany, Holland), dealers, export, re-rental (ex: Italy). Besides, Manufacturers no longer sell to independents in order to improve their control on Used Car prices. However, the development of the Internet as advertising vector and information source on Used Car has fostered the visibility of independent channel face to franchised dealers (Capgemini, 2007).
Figure 7. Strengths and weaknesses of the Independent Traders Channel (7M Consulting, 2007) 2.6. Auctions Used car sales via auctions are mainly developed in the US and in England (and to a smaller degree in Germany and Holland), and are emerging in other countries. However players as Manheim or BCA set up aggressive strategies to expand in Europe. Auctions are more and more regarded by leasers as a remarketing channel at the expense of independents. On line auctions are rising (ex: Carsat, GittiGidiyor.com, E-bay).
Figure 8. Strengths and weaknesses of the Auctions (7M Consulting, 2007) In Turkey, Turkish industry and service group and a U.S.-based provider of used vehicle services have launched a 50/50 joint venture to provide wholesale buyers with Web-based second-hand car sales services. The service launched by Turkish Borusan and U.S.-based Manheim has been named Borusan Manheim. Manheim is the largest second-hand car sales provider in the world with presence in 17 countries
and a sales turnover of 2.8 billion in 2006 (Turkish Daily News, 2008).
Figure 9. Origin of Used Car sold by auctions in Europe (Datamonitor 2002) 2.7. From Operational Leasers to Individuals Leasers are looking after new profitability sources thanks to Used Car, particularly by launching into the resale to Individuals. Operational leasers have extended the scope of their original customers (users) by setting up resale platform to individuals, which aim to make profit, better know ultimate consumer to evaluate purchase more precisely. Examples : ALD (Courbevoie, Coigni??res), Arval (Paris). 3. CONCLUSION The used vehicle market has grown in size and importance in the past decade and is poisitioned to continue to do so in the future. A successful used vehicle strategy on the part of automakers and dealers is becoming essential to their operations and is increasingly recognized as such. Sales of new and used vehicles are strongly interrelated; used sales affect residual values and new vehicle pricing, in addition to relationships with customers and the strength of brands. In short, used car sales have a significant effect on many aspects of an automaker??s sales and cannot be ignored. OEM involvement on the levels of inventory management and used vehicle branding is crucial for enabling dealers to carry out successful remarketing programs. While national used vehicle markets differ in character and structure due to a variety of socioeconomic factors, this study identified six core strategies that are essential for growing dealers?? used vehicle sales: Continually improve the customer experience, from the Internet to the showroom, rationalize customer relationships through CRM, perfect online promotion and merchandising efforts to reach prospects and existing customers, manage inventory and pricing with network-wide IT solutions, maximize high-margin sales opportunities, optimize certified used vehicle programs. 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