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Increased new car prices propel used car sales to new heights

This year alone, the used car industry has taken over in terms of profit and sales. And it would be disingenuous to say it isn’t at least partially due to the tariffs imposed by the U.S. on China, Mexico, Canada, and the European Union– with tariffs of 25% on steel and 10% on aluminum. So, while automobile manufacturers and new car dealerships are beginning to take a hit, the used car industry’s growth in sales are predicted to continue in an upward trend.

2018 has been a record-breaking year for used car sales according to CNBC’s, Robert Ferris. This isn’t to say there aren’t legitimate concerns for the automobile industry in general, but with price increases on steel and aluminum, there will be a “trickle-down-effect” where increased manufacturing costs result in increased prices for both new and used vehicles.

While the industry is still doing well in spite of the tariffs, there are anxieties among new car dealerships and manufacturers due to increased manufacturing costs. The new manufacturing costs mean new car dealerships will have to buy and sell vehicles at a higher price. So, even if people are selling their vehicles to used car dealerships at a slightly higher price, the used car industry is making a huge profit as the cheaper option– avoiding the expenses manufacturers and new dealerships have to take on while also selling vehicles at a higher valuation.

According to the International Trade Administration and Washington Post’s, Heather Long, 79% of all steel and 90% of all aluminum are imported to the United States from foreign countries. Even vehicle brands commonly purchased in the U.S. such as Nissan, Honda, and Toyota are typically manufactured in either Canada or Mexico and then shipped into the United States. This means any vehicles imported into the U.S. with the current tariffs cost more in comparison to domestically manufactured vehicles– and domestic companies such as Ford, Jeep, and Chevrolet still use imported materials and parts to construct their cars.

In essence, the tariffs are bad for manufacturers and new car dealerships, but great for used car dealerships. This is due to the increased costs limiting consumer options and forcing them into purchasing specific vehicles or pursuing the used vehicle route. And according to Forbes Magazine’s automotive journalist, Jim Gorzelany, estimated increases on new vehicle costs based on current MSRPs will look something like this:

Even prior to the current tariffs, used car dealerships have been dominating the automobile sales market– with 39 to 40 million used cars sold every year. Most of the technology in used vehicles is the same as in new ones, but offered at a lower price. So, the incentive to consider a used vehicle greatly outweighs the purchase of a new car for most American consumers. According to CNBC’s, Ferris, crossovers and sports utility vehicles are the most popular purchases, and consumers will hold out until a used option is available. So, with tariffs thrown into the fray, manufacturers and new car dealerships must prepare to receive less business because consumers are finding used cars as the more attractive option.

AMT is committed to helping dealerships understand and control used car reconditioning for optimal results. As the market for used vehicles becomes more active, getting your inventory frontline ready with minimal holding costs is crucial for your operation. We can help.

Sources:

https://www.cnbc.com/2018/07/06/tariffs-could-send-american-car-buyers-into-the-used-market.html

https://www.forbes.com/sites/jimgorzelany/2018/07/05/heres-how-much-trump-tariffs-could-boost-prices-on-the-top-selling-models-in-the-u-s/#30ab4c127ec1

https://www.trade.gov/steel/countries/pdfs/imports-us.pdf

https://www.washingtonpost.com/news/wonk/wp/2018/03/01/foreign-suppliers-are-flooding-the-u-s-aluminum-market/?utm_term=.41a5fe3869f2

Over the last few years, there has been a huge push from manufacturers for subscription-based vehicle services. Now, more dealerships have started providing the same services for their customers. The idea that consumers can now pay a monthly fee for access to any vehicle of their choice with the costs of insurance, service, and maintenance included, is becoming a popular choice among drivers. As more news about this service comes to light, more questions about the future of used car dealerships also arise.

In a modern world where convenience is everything, are the years of buying a new car over? Maybe.

Why Consumers are Choosing Subscription Plans

The idea of car subscription services is not new. Many luxury brands have even started to launch subscription services in more urban areas. The process is identical to leasing plans and targets younger drivers favoring function and flexibility over convention. An all-inclusive payment may be more suitable for younger drivers more inclined to rent or lease products compared to committing to a large purchase.

One highlight of the subscription plan is that it is entirely need-based. If someone typically drives a compact car throughout the week for day-to-day errands, they are set for a while. But, if they enjoy going camping or hiking on the weekends and require a larger SUV to pull a boat or carry extra luggage, the subscription service can provide that change. While a subscription service seems like the ideal transportation option to consumers with various wants, a greater point of confusion surrounds what happens to the cars? And how does this service different from any other car leasing service? Well, the answer to the latter is, it doesn’t. Dealerships and manufacturers have simply caught on to the successful business processes set in place by rental companies like Enterprise where anyone can rent any car they want at any time (within reason).

Why is this Important?

As for what happens to the cars, the answer is not so cut and dry. The rules for who holds the title to a car depends on individual state laws. In most cases, the vehicle is typically titled to the driver. With the subscription services, the best option would be for the manufacturer or dealership to keep the title. This method can get even trickier when it comes to insurance.

When there is a crash or damage caused by the driver or someone else, who does insurance cover? Ideally, the point of contact for insurance companies would be with the dealership supplying the subscription vehicle. One thing insurance companies must be doing with these deals is covering individual drivers through a unique plan or understanding of the subscriptions. Any damage or services needed would need to be covered by the manufacturers and dealerships who own the car. Drivers can simply return a damaged car and pick out a new one from the supplied fleet of cars. The dealerships would then be consistently turning out used car after used car. And if that is the case, why would driver no longer simply purchase a used car to be repaired when needed or stick with rental companies who provide a similar service?

How can these Subscription Plans Change Dealership Processes?

More states are beginning to ban subscriptions services due to the possibilities of recalls and overuse. Dealerships and rental companies now are not allowed to lease or sell cars with recalls and it’s doubtful manufacturers or companies with subscriptions plans will be exempt from these laws.

But how can dealerships maintain an idea that switching cars is cool? While the initial sale of the subscriptions is appealing – the flexibility, convenience, potential savings –, consumers are never receiving a new car. There are typically also restrictions applied to how consumers can use the car such as no pets allowed inside or a limit to how far you can drive. Some of the cars swapped out in a fleet can be driven for a few weeks around a small town, or some can be taken on longer, more intense trips. But what can dealerships do with the cars needing repair with a demand for constant swapping? Dealership subscriptions will need a fast way to triage and doctor cars coming into fleets after being swapped out.

One of the best tools for dealerships to cope with an influx of these used cars is with reconditioning management software such as ReconMonitor. ReconMonitor’s state-of-the-art workflow automation changes the game for dealerships when it comes to auto reconditioning. The software can cut reconditioning cycle time down significantly to get those cars back out on the lot faster. This system also helps control vendor costs and execute auto remarketing quickly, tracking tasks and orders to maintain high levels of efficiency. Technicians at a dealership can use the software to scan the VIN number of a freshly swapped, damaged vehicle and begin managing the details of needed service. This is extremely helpful for smaller dealerships just starting out with smaller fleets in need of faster turnaround times to keep up with consumer trade-outs.

The Future of Car Subscription Plans

There are a growing number of well-known carmakers offering some sort of leasing or subscription plan to their customers. Brands including Cadillac, Ford, and Porsche offer these services in locations such as Dallas, New York, and California, but none of the services are offered nationwide. The only carmaker to launch the subscription service nationwide is Volvo. The “Care by Volvo” is available to consumers and will feature the 2019 Volvo XC40. One interesting outlet to watch for subscription services is the number of growing startups launching their own plans. Several startup companies are beginning to offer subscription plans for deals with a number of different car makers, providing a higher level of variety for consumers wishing to try different brands.

While subscription plans appear to be a promising addition to the auto industry, it is going to take time before dealerships start seeing concrete advantages. Currently, subscription services only take up a minuscule percentage in the auto buying and leasing industry. However, the more dealerships and manufacturers offer these types of services, the easier it will be to track consumer behavior and figure out the prime audience. With the knowledge of software like ReconMonitor and understanding of how future generations will use cars, dealerships could see an increase in new revenue streams and find new ways of providing viable transportation options.