In the automotive industry, 2011 will be remembered for a remarkable series of events. The Detroit Three climbed back from the brink. A massive earthquake and tsunami struck Japan, killing thousands and disrupting Honda’s and Toyota’s supply lines. General Motors reclaimed its crown as the world’s No. 1 manufacturer. TrueCar went from partner to pariah. It was a hell of a year.
But the dealers, executives, experts and analysts who gathered in Las Vegas for the 2012 NADA Convention & Expo weren’t distracted by the headlines. From the educational sessions to the press briefings, they described a market dominated by a scarcity of used cars and the resurgence of subprime financing.
Manheim: ‘An Inadequate Supply’
When Tom Webb, Manheim’s chief economist, began his annual used-car report at Manheim’s Feb. 4 press briefing, he noted that many of his PowerPoint slides were unchanged from last year’s presentation. He said that “significant reductions” in off-fleet, off-lease and trade-in units continue to hamper dealers’ efforts to maintain an ideal inventory of quality used cars.
“There was an inadequate supply to meet dealers’ needs last year,” Webb said, noting that the long-awaited return of three key channels has yet to materialize:
• Off-rental units declined even as their fleets grew, indicating longer hold times industrywide.
• Lease originations grew to 2.1 million units in 2011, a 17 percent increase over the prior year. That’s a million-unit improvement since 2009, when leasing bottomed out at 1.1 million units. The resultant wave of off-lease units, however, won’t arrive until 2014.
• In the same two-year span,
repossessions dropped from a peak of 1.9 million units in 2009 to 1.3 million in 2011, a decrease of 32 percent. That trend will likely be the first to reverse as the economic recovery rolls on and creditors continue to relax underwriting standards.
Despite the short supply, demand for quality, late-model used cars remains steady. Webb reported that in 2011, total U.S. used-car sales reached a four-year high of 38.8 million units. Private-party sales accounted for 11.2 million sales last year, while franchised and independent dealers each delivered 13.8 million used vehicles — representing an 8 and 6 percent increase, respectively. Factory sales of certified pre-owned units hit a new record of 1.7 million units.
Webb said dealers deserve credit for helping to rebuild the economy, saying that a renewed focus on “good old-fashioned customer service” was helping to drive sales. Manheim’s president Sandy Schwartz agreed. He and Joe George, the company’s group vice president for digital, were on hand to present the official debut of Simulcast Everywhere, the company’s new online auction tool.
The new solution was designed to allow dealers to buy and sell inventory without having to haul vehicles back and forth to a physical auction. Instead, Simulcast Everywhere expands on the existing Simulcast and OVE.com platforms by offering a fully transparent, real-time auction, complete with live auctioneer.
Schwartz said the platform was built based on dealer feedback and designed to help reduce transportation costs and keep used vehicles moving while inventory remains scarce. “We re-engineered our business … not just to cut costs, but to invest in the future,” he told the press. “We still believe cars will go through the lanes.”[PAGEBREAK]
J.D. Power: 2009 Models Best Yet
On the heels of the convention came J.D. Power and Associates’ 2012 U.S. Vehicle Dependability Study. The annual report is designed to measure initial quality by contacting the original owners of three-year-old vehicles and asking whether they’ve experienced any mechanical problems.
Each vehicle is assigned a score representing the likelihood of a need for repair: If a vehicle experiences one problem per owner, it receives a score of 100 PP (“problems per”). The lower the score, the higher the quality, as J.D. Power sees it. One might expect the index to dip for vehicles manufactured during one of the most turbulent times in the industry’s history, but the opposite was the case.
“Despite facing immense challenges in 2009, automakers placed a keen focus on delivering outstanding levels of quality, which they understood would be essential to their long-term success,” said David Sargent, J.D. Powers’ vice president of global automotive. “Three years later, owners of these models are enjoying unprecedented levels of vehicle dependability.”
The agency’s industrywide score reached an all-time high of 132 PP100. That’s a full 13 percent improvement from the 151 PP100 average of a year ago. Six brands declined and one remained stable, but the remaining 25 marques all improved. Detroit Three factories performed especially well, narrowing their “dependability gap” with import brands by 5 PP100, and Cadillac appeared alongside Lexus, Porsche, Toyota and Scion at the top of the rankings.
“This is good news both for owners — who are holding onto their vehicles for longer than ever — and manufacturers, since perception of quality and dependability is a critical factor in vehicle purchase decisions,” Sargent said.
Check Your Mailbox
Another key for dealers this year is marketing and lead generation, especially in the subprime segment. Just ask Jack Lintol, COO of Auburn Hills, Mich.-based Auto Credit Express — a company that offers services ranging from subprime financing and direct-mail campaigns to inventory-management tools. Lintol says his dance card was full at this year’s show, and dealers are getting back into special finance in a big way.
Better yet, he believes the used-car inventory crisis could soon be in retreat. “It has settled down, although it was unbelievable for a span,” Lintol told F&I and Showroom. “But the fact remains, you have to get creative, especially in subprime.”
Lintol says the company is adding new dealer clients “at a pretty heavy clip,” but his most successful partners are those who stuck with it through the downturn. “In 2009, people were unsure whether they were going to lose their franchise or be in business,” he said. “This caused them to tighten up and not take the normal risks entrepreneurial car dealers take. Those who stayed and continued to invest in special finance are going to capitalize.”
Jim Landy, president and CEO of CarFinance Capital LLC in Irvine, Calif., is banking on it. As part of the executive team that helped build the once-mighty Triad Financial Corp., Landy has seen captive and noncaptive lenders rise, fall and retrench through several downturns and recoveries.
“You’ll see more active captive participation in the new-car market,” Landy told the magazine. “The banks and the independents will start looking more toward the used side.”
The company launched its direct lending site, CarFinance.com, in January, and Landy reports that keyword-search traffic for “auto finance” and “auto loan” are flooding the site with ready-to-buy customers. CarFinance’s underwriters run the customer’s credit, approve the loan amount and clear the stips, but Landy says he has no intention of leaving their dealers out of the loop.
“Everything’s done, so now we have a cash customer,” he says. “We say, ‘Here are some of our preferred dealers in your area,’ and the program is a mirror image of our indirect program.” That creates what Landy calls a “profit-neutral” transaction for dealers — no discount, no reserve — plus up to $2,000 in back-end financing to cover service contracts and other products.[PAGEBREAK]
Nice Work, Genius
The dealer group’s 2012 conference also marked the debut of Auction Genius, an inventory sourcing product developed by the Longmont, Colo., company of the same name. But Auction Genius wasn’t created in a vacuum. Four years ago, the company’s president, Todd Kinzle, and his team of software developers set out to capitalize on the growing used-car market. Figuring there’s no substitute for experience, they obtained a dealer license and opened a lot.
“Our goal was to build a used-car operation and find problems,” Kinzle told the magazine. “Buying cars was our greatest challenge. We asked ourselves, ‘How do you buy the best possible car for your inventory?’”
Kinzle and his team went to work on a system that would allow dealers to spot units selling below book value by combining listings from online auction providers — including Manheim and its OVE.com, ADESA, SmartAuction and more — with pricing information from each of the major guidebooks. After three years on the lot and an additional year spent brokering partnerships and testing the software, Auction Genius was ready to launch.
Robert Bassam, founder and owner of Washington D.C.’s Easterns Automotive Group, was one of the first dealers to try the system. “It’s a competitive edge,” Bassam says. “When you’re bidding online, you can tell who has it and who doesn’t. We’re now considering new vehicles we wouldn’t have before, simply because the price is so advantageous on the book side.”
Confident in the product’s value, Kinzle says he is signing dealers to month-to-month agreements following a 30-day free trial. One hundred fifty dealers joined Auction Genius in the months leading up to the show, and Kinzle said he expects to add about 100 more based on commitments from dealers on the show floor.