used car business

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Untapped potential in a significantly transformed market.

USED CARS

FROM OUTSIDER TO

MARKET DRIVER.

A study initiated by In cooperation with


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August 2009

CARFAX Europe GmbH, Lindwurmstrae 124, 80337 Munich

Musiol Munzinger Sasserath Gesellschaft fr umsetzungsorientierte Markenberatung

und Markenentwicklung mbH, Rosenstrae 18, 10178 Berlin

F.A.Z.-Institut fr Management-, Markt- und Medieninformationen GmbH

Mainzer Landstrae 199, 60326 Frankfurt am Main

We would like to express our thanks to A.T. Kearnyfor the friendly support they provided the CARFAXstudy. We would also like to extend our special gratitude to Vocatusfor its research support.

Eric Czotscherrheingold Institut fr qualitative Markt- und Medienanalysen GmbH und Co. KG; Vocatus AG

Eric Czotscher, Thorsten Wrschinger

Christine Lambert

BAGGEN DESIGN GmbH

F.A.Z.-Institut fr Management-, Markt- und Medieninformationen GmbH

Boschen Offsetdruck GmbH, Frankfurt am Main

The information provided in this publication has been carefully researched and compiled. But the

authors and publishers take no responsibility for the correctness and completeness of the publication

as well as any changes that may have occurred after publication. All rights are reserved, including

those pertaining to photo-mechanical reproduction and storage in electronic media.

978-3-89981-733-1

IMPRINT

Publisher:

Author:Customer surveys:

Expert Interviews:

Layout & composition:

Cover page:

Translation:

Printing & finishing:

Disclaimer:

ISBN:

2 |

USED CARS | FROM OUTSIDER TO MARKET DRIVER.

Foreword 3

Executive summary 4

Automakers: more focus on need in Europe 6

Customers want future-proof cars 10

The car business must be completely redesigned 13

The customer sets the price 14

Growth market: used cars 16

Transparency + brand = trust 19

Market potential of140 billion and more 27

An action plan for the automotive industry 29

The experts 30

TABLE OF CONTENTS

Chapter 1

Chapter 2

Chapter 3

Chapter 4

Chapter 5

Chapter 6

Chapter 7


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In the European Union, more than 50 million vehicles are registered each year. The ratio between title transfers

and new registrations is roughly 3:1. Used cars generate a significant share of European car sales. In Germany,

they total 40 percent. While the new-car market is increasingly being shaped by commercial customers, moreand more private customers are tapping into the used-car market. Overall, used cars are newer and have better

technology today than they did in the 1980s. In terms of quality, young used cars, which once belonged to

car-rental agencies or served as company cars or demonstration vehicles, are very difficult to distinguish from

new cars. But they can be purchased at just a fraction of the sticker price. The overcapacities among manufac-

turers in Europe in recent years have flooded the commercial and private markets with discounted new cars.

However, as manufacturers plan their production targets, they fail to adequately factor in these overcapacities

as future used cars.

Automakers have not fully modified their production programs, their business processes and their sales and mar-

keting policies to meet the new market conditions. As a result, advertising aimed at private customers focuses on

new cars, while the used-car business often remains neglected or is seen as a selling tool for new cars. This must

change in the years ahead even if cash-for-clunker incentives in certain countries allow some breathing room

for the new-car business. But in 2010, the German automotive research organization, the German Institute for the

Automotive Industry (Institut fr Automobilwirtschaft) is predicting a dramatic drop in new-car sales.

Car dealers who have been under pressure for years from manufacturers demanding that they sell new cars

according to increasingly stricter guidelines, but at continuously shrinking margins are using the new-car busi-

ness as an interesting entrepreneurial playing field. Thanks to the Internet, todays car buyers are better informed

about market dynamics and prices, and they place high demands on quality and service also and particularly

for the used-car business. The image of used-car dealers as shady characters does not reflect the state of

todays business because the competition never sleeps. A host of best-practice examples demonstrates how

companies have successfully boosted their used-car sales even during the crisis. As our study shows, sales and

profitability in the used-car business can increase significantly when processes are improved and a few key fac-tors for success are considered. These factors can be translated into the formula: Transparency + brand = trust.

Altogether, the used-car market boasts an economic potential of up to 140 billion.

Our discussions with managers and experts from the European automotive industry as well as our market

research conducted with new- and used-car sellers have identified a range of ways to optimize the European

used-car business. Our study also reveals that there is a strong interest for information about the used-car

market. We hope to address this need with our study. Above all, the CARFAXstudy seeks to provide insights

into the future of the automotive market and offer a specific course of action.

We hope you enjoy this study.

CARFAX Europe

Musiol Munzinger Sasserath

F.A.Z.-Institut

| 3


Foreword


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1| The trend in residual value for used cars isunsatisfactory. Three factors primarily con-tribute to this: high rebates for new cars, the subsidiza-

tion of commercial leasing contracts and the overpro-

duction of relatively new used cars in the form of sin-

gle-day registrations by dealers, demonstration vehi-

cles, rental cars, company cars for employees and

managers as well as company cars generally sold to

automotive industry workers for one year and at special

rates. As a result of their overcapacities, automakers

have to introduce vehicle volumes into the market for

which insufficient demand exists in Europe at least

none at the official sticker price. Dealers are promoting

their new-car business by offering overvalued trade-ins

and robbing their used-car business of profitability in

the process. Higher residual values would serve as a

much more effective support for the new-car business

and would also eliminate the need for high rebates.Conversely, higher net prices for new cars would

strengthen both residual values and the used-car

business.

The commercial-car business will continue to grow.

Most new-car registrations in many countries are done

today by fleet managers and businesses. For this rea-

son, automakers must direct their primary attention to

companies as their target customers. In the process,

though, they cannot neglect the future marketing of

returned vehicles. It is here that the differing needs of

private customers must be considered. This approach

includes a wider range of offerings to address individ-

ual requirements.

2 | In their production, automakers must moreintensely focus on customer desires. Today,customers are demanding partly due to EU regula-

tions environmentally friendly cars that are more fuel

efficient and generate fewer emissions. Ideally, they

should operate without any fossil fuels at all. Auto-

makers are working at full speed to develop alterna-

tive drive systems, with experts and drivers noting

that electric motors and hybrid drive trains offer the

best opportunities. The cars will not be available on the

market in sufficient numbers until several years from

now. By then, though, demand could have changed.

This is why automakers should integrate customers into

product development from the start. The used-car

market is not flexible. That is, the used cars on sale in

the market are a reflection of new-car sales with a lag

time of one year to two years.

3 | The volume pressure being exerted by manu-facturers has left its mark on European carsales. The margins in particularhave sharply declined

in recent years, even dipping into the red at times. Car

dealers are increasingly trying their luck in the used-

car business, where the margins are good and the sell-

ers have more freedom to conduct operations as theysee fit.

4 | The high rebates for new cars in recent yearsand the destruction of residual value by rela-tively new used cars have destabilized the taxonomy

of car sales. The gross sticker price means little, and

the actual retail price no longer reflects the value of the

car. Through the limitation of supply and improved ori-

entation of production on demand, cost and value

could once again converge because supply and

demand would be brought into balance. The Internet

has significantly increased transparency in this respect.

5 | Used cars represent an interesting, high-potential future market for car dealers. As aresult of the high technical quality of todays vehicles

and the large supply of relatively new used cars from a

growing commercial business across Europe with the

exception of the current economic slump pre-owned

cars are becoming a real alternative to new cars for pri-

vate customers. But dealers are not exploiting their

opportunities to the greatest extent possible. More-

4 |


Executive summary

The used-car market in Europe offers tremendous potential for manufacturers and dealerswho exploit their opportunities more effectively and more efficiently. The greatest obstacles,

which simultaneously represent opportunities, are consumer wariness about the used-car marketand the negative direction of residual value. Trust can be restored by increasing transparencyand adding the support of strong brands.


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over, they are neglecting the potentially lucrative seg-

ment of three- to eight-year-old used cars.

6 | The greatest obstacle for used-car sales is cus-tomers lack of trust in used-car dealers and inthe condition of individual cars. This can be remedied

only through increased transparency and the supportof strong brands.

Thanks to the Internet, transparency for used-car prices

has been largely achieved. But, in terms of the vehicles

history and condition, the buyer is dependent upon

the sellers information.

If this information is supplemented by an objective

report on the vehicles quality and history, a major

step could be taken in the direction of transparency

and trust. As a result of their strong brands, the used-

car programs developed by car manufacturers promote

greater trust and, as a result, increased customer will-

ingness to pay. A European initiative with manufactur-

er standards for used-car sales, like the certified pre-

owned (CPO) industry standards in the United States,

could add greater support to this. Various types ofwar-

ranties also improve customers inclination to buy as

long as costs remain reasonable. In many European

countries the mandatory two-year liability for defects

has increased the market share for professional dealers

against private sellers.

7 | With more than 40 million title transfers annu-ally, the European used-car market has apotential of340 billion. The reason: A seller can earn

an additional 31,000 with each car as a result of cus-

tomers who are willing to pay more for vehicles in

which they can place their trust, of more efficiently

managed used-car dealerships and of demand- and

value-focused production and sales policies among

automakers. This potential increases to the extent that

dealers can win over parts of the private market. Fur-

thermore, dealers can take advantage of cross-selling

potential forvalue-added services like insurance poli-

cies particularly those linked to the use of the dealers

service departments leasing and car loans. |

| 5


Market research methodology

Because information about the European used-car market is incomplete and because this study strives to be a pioneering

examination of the subject, the publishers developed a complex research design, consisting of desk research, personal inter-

views with automotive experts and managers across Europe as well as three end-consumer surveys in the most important

national markets. The results of this market research form the basis of the CARFAXstudy Used Cars From Outsider to Mar-ket Driver.

The study covers all of Europe. Individual analyses focus on the five production countries of Germany, France, Italy, Swe-

den and Spain. Along with the UK and the Netherlands, these five countries form the heart of the European automotive and

used-car market. The UK occupies a unique position (right-hand-drive cars). As a result, it was not examined further. The

Netherlands is primarily important in its capacity as automotive suppliers.

Between April and July 2009, 32 experts and managers from the automotive sectors in Belgium, Germany, France, Austria,

Romania, Sweden and Spain were interviewed in person about their perspectives on the market. The interviewed experts

cover the entire range of the industry: from associations, manufacturers and car-rental agencies through independent and

authorized car dealers to Internet marketplaces, Web and print media and consulting firms. A list of the interviewed experts

is on pages 30 and 31.

As part of a baseline survey, the market-research institute rheingoldcarried out group discussions and deep-psychologicalanalyses of individuals interested in buying a used car, actual buyers as well as automotive dealers in Cologne, Ljubljana, Milanand Stockholm (Study 1).

Two quantitative market studies conducted jointly with the market research and consulting firm Vocatusfollowed. The firstwas carried out in early 2009 in Germany, Italy, Spain, Sweden and the Netherlands, using the method of computer-assisted

Web interviews (CAWI) of around 200 people in each country. A total of 991 consumers who have purchased used cars with-

in the past two years were surveyed (Study 2).

The second quantitative study was completed in June 2009. Encompassing Germany, France, Italy, Sweden and Spain, the

survey included interviews of around 500 people from each respective country who had purchased a new or used car in the

past two years. Altogether, 2,675 customers were surveyed using the CAWI method (Study 3).

The opinions of automotive experts were compared with the needs and opinions of automotive customers to gain a per-

spective on the automotive market for the future and, from that perspective, to identify specific courses of action.


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6 |


The economic crisis has worsened the situation and

turned it into a headline-making story. But the problem

has actually been simmering for years: Automakers

have too much capacity in Europe. For this reason, they

are attempting to sell more vehicles than the market

needs. Production no longer meets customer require-

ments both in terms of quantity and quality. As a result,

capacity has climbed an estimated 20 percent above

European demand even without the impact of the cri-

sis. The real momentum in demand has shifted to the

BRIC countries.

In the wake of the current economic downturn, the

issue of overcapacities has taken on added significance.

One of the countries being hit hardest is Spain. Car

purchases there have plunged about 50 percent. Sales

difficulties have indeed been offset by cash-for-

clunker programs in some countries. But new-car sales

are expected to plummet once these programs expire

in 2010.

The European fleet business has also suffered. Fleet

managers are keeping their vehicles in service for

longer periods of time or are selecting smaller models.

In 2012 at the latest, commercial sales are expected to

markedly increase, experts forecast. One reason is the

large pent-up demand in southern Europe. For now,

dealers hopes rest on the used-car market, which

offers excellent mid- and long-range opportunities.

Years before the economic downturn, automakers

pressed their overstock into the market by offering

targeted purchasing incentives. For private customers,

they offered a range of rebates and low-interest loans

handed out by their own auto banks. The commercial

business received even more intensive support: special

leasing rates with high guaranteed residual values and

subsidized rental vehicles.

The steep increase in the fleet business was encouragedby tax incentives in many countries. At one time, com-

pany cars were provided only to top executives and

members of the sales force. Now, they are used as an

incentive for mid-level managers. Dataforce informa-tion shows that in 2008 about 60 percent of new-car

registrations were commercial. According to DeutscheBank, the B2B share is 86 percent in the premium seg-ment.

At the same time, automakers are flooding their own

companies with business cars for executives and

employees. Dealers are supporting the sales offensive

with an inflationary use of demo cars and single-day

registrations that enable them to sell vehicles with large

rebates after the registration expires.

Out of sight, out of mind? The use of commercial reg-

istrations does enable a home to be found for large

numbers of passenger cars. A short time later, though,

the vehicles return to the market as relatively unused

pre-owned cars. In terms of their engineering, there is

little difference between such vehicles and new cars.

1 |Automakers: more focus on need in Europe

Automakers overcapacities in Europe tend to result in volume-oriented sales strategies.The industry fuels the new-car business by offering targeted, short-term buying incentives but

often forgets that the vehicles will one day return to the market as used cars. Rebates andoversupply have eaten away at residual value.

Sales have gone way overboard.(a trade association spokesperson)

Normal demand for new cars in Sweden isaround 180,000 vehicles. In 2008, however,230,000 were dumped on the market.

(a dealer)

We are in the middle of the crisis.Production capacities are much too high.The goal is to secure liquidity.

(a trade association spokesperson)

Leasing will bleed a little more. (an importer)

Automakers must carefully reduce theircapacities without damaging their brands and

without touching off a political firestorm.At the same time, they must remain flexibleso that they can respond to market changes.

(an automotive journalist)


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But they are sold at up to 40 percent below the gross

sticker price.

Real residual-value destruction is occurring particularly

in the premium segment, experts stressed in the sur-

vey. For private customers, it makes little sense to buy

a new car unless the new-car rebate is really high.

Who then can be surprised when the trend increasing-

ly shifts from private customers to used cars? The Ger-

man Institute for the Automotive Industry has deter-mined that sales of used cars less than one year old

have risen 17 percent since 2004. At the same time,

the number of newly registered private cars fell by the

same amount.

Compared with the 1980s, a significant shift has

occurred in the car business: The key new-car cus-

tomers are now commercial customers, not private

individuals. New cars for private individuals have thus

become a niche market. But automakers sales struc-

tures and marketing efforts are still directed at private

individuals who buy new cars an outdated practice of

the 1980s. The private customer who comes into the

showroom, pays cash for a new car and drives home is

a species of consumer facing extinction. He or she will

either select a form of financing and profit from a big

rebate or select a (new) pre-owned vehicle. The steep

price trend makes it difficult for cash-paying private

customers to afford a new car at least in terms of the

gross sticker price. Our market research (Study 3)

shows that 46 percent of European new- and used-car

customers perceive a clear trend towards auto-financ-

| 7


Destruction of residual value

Propelled by government tax breaks for company cars and attractive automaker leasing offers, the new-car business has

increasingly focused on business customers in recent years. In the survey, experts pointed out that the residual values listed

in the leasing contracts were excessive, particularly in the premium segment. After all, big new-car rebates simultaneously

exert pressure on residual values. In the market, deeply discounted demo cars or other relatively new used cars are sometimes

less expensive than three-year-old leasing returns, at least when the calculated rest value is considered.This discrepancy is not the result of the economic crisis. But the plunge in demand has accelerated the destruction of resid-

ual value. In Sweden, the real residual value of leasing vehicles has fallen about 20 percent from the contractually set level. In

Germany, experts speak of a depreciation need of11,500 to 12,500 per vehicle. Experts report similar levels in other nation-

al markets. In the next one to two years, other depreciations will be required because many leasing vehicles with contracts

that have overly generous conditions remain on the roads. The residual-value trend is more stable in the inexpensive segment

as the example ofDaciashows. The rebates are much lower here. But here the strict fixed-price policy ofDaciais a contribu-ting factor.

Automakers do indeed want to adjust their leasing conditions upward but given the market situation and low interest

rates, it is difficult to push such an increase through. Providers should also think more about the later marketing of their leas-

ing and rental vehicles as used cars. This includes a broader differentiation of models in order to offset the risks in the used-

car market and to be able to react better to shifts in demand. One of the surveyed automakers now has a rule under which

rental revenue should not exceed the private-customer business. The aim is to prevent return vehicles from competing against

demo cars and single-day registrations.

Today, it is the fleet manager, not the privatecustomer, who is deciding what new car to buy.


Residual value of used cars more stable

(residual value trends of leased vehicles)

1) Relatively new used cars (12 months old).

Sources: European marketing data from VB Leasing; CARFAX.

Single-day registrationpremium

Trade-in bonus

Residual value support

Discount

Residual value

Gross list price

New cars Used cars1100

Passage of time in months

Vehicle value in %

80

60

40

20

00 12 24 36 48 60

75

65

62

48

48

37

37

29

29

25

25

21

100


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8 |


ing also involving loans and leasing. But auto experts

have identified a shift in the trend for new-car prices.

Prices have stabilized or are even falling.

If automakers fail to adjust their structures to market

conditions and fail to focus more closely on the cus-

tomer, their problems will worsen, even if the economy

does recover. Political leaders are supporting the auto-

motive industry because they want to protect jobs and

preserve tax revenue. These concerns are reflected in

the support programs introduced by many govern-

ments during the crisis. Automakers should use this

time of relative stability to reorient themselves and

exploit opportunities in the marketplace.

The tasks facing automakers are: increased focus on the

customer during production planning, refinement of

pricing systems (taxonomy) and restructuring of the

organization and communications in terms of the

altered market situation. The key points of this effort

are: Commercial buyers are the main customers in the

new-car business. Used-car production as a by-prod-

uct of the new-car business must be systematically

managed. And used cars for private customers should

be intensively monitored. Residual values can be sup-

ported by volume reductions.

Instead of coming up with new vehicles and then

drumming up demand by conducting expensive mar-

keting campaigns, automakers should think more

intensely about their customers and dealers during

product development. Our market research (Study 3)

shows that 28 percent of new- and used-car buyers in

Europe are dissatisfied because automakers fail to give

enough consideration to their needs when they design

their line of car models. And even the new head of

Toyota, Akio Toyoda, recently had this to say in aninterview with the German newsmagazine Stern: We

Jointly stimulating the new-car and used-car business

The new- and used-car businesses are closely interconnected. For many brands, 25 percent and more of registered new cars

(rentals, company cars, demo vehicles) enter the used-car market after six months of use. The high penetration of the leas-

ing business with vehicle returns after two to three years adds further remarketing volume. When the used-car market over-

flows, i.e., during weak outflow of returned vehicles or unfavorable return planning, residual values and used-car prices come

under pressure. This, in turn, negatively impacts new-car prices.

Professional used-car management facilitates a stable outflow of returned vehicles and stabilizes residual values in the

process. Higher residual values then support new-car prices because fewer rebates and less support in other areas are provid-

ed, including less support in leasing since depreciation during the contract term is lower because of higher residual values. As

a result, the new- and used-car business forms an integrated unit to be jointly managed. Undesirable developments in one or

several areas create an interaction that can quickly result in a downward spiral (lower residual value higher new-car rebates

needed lower residual values).

Sources: Booz & Company; iStockphoto.

Volume of trade-ins, returned vehicles

Impact on residual values

Margins,new cars

Volume,new cars

Volume,used cars

Prices,used cars

Prices,new cars

New-car Used-car

business business

Impact onprices

Impact on

volume

Impact onmargins

Higher residual values make lowerrebates necessary and strengthen

new-car prices in the process A professional used-car businessstabilizes prices and bolsters

residual value

A professional used-car businesscan absorb a rising volume of returned

vehicles


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| 9


have to ask ourselves whether we are making the cars

that customers really want.

Internet communities like Motor Talk offer a way forautomakers to gain an understanding of their cus-

tomers, though Managing Director Tom Kedor urges

the automotive industry to find a middle ground

between customer desires and their own developmen-

tal work. Without such developments, there can be no

innovations. Automakers should search for solutions to

typical customer requirements and initiate a discussion

with customers about their innovations. Given the

automotive industrys relatively long developmental

times, it will always lag somewhat behind demand. By

using adaptable modular design, though, automakers

can noticeably increase their flexibility. |

Are the cars on sale really the ones that customers

want to buy? Automakers are going through anidentity crisis because their vehicles do not meetcustomer needs. A sea change is in the making.Todays (auto) mobility concepts no longer cut it.


The automaker decides what I have to buy.(an automotive journalist)

Thanks to Web 2.0, the customer has gaineda voice. (an automotive journalist)

Residual value management: balancing supply and demand

An effective form of used-car management must create a balance between used-car supply and demand. Automakers can

focus on both levels: in the production of used cars (through the rental and in-house company-car business) and in

demand. Various tools can be used in this work:

Have a positive impact on a vehicles residual value as early as the launch of new models by communicating with residual-

value agencies and leasing companies.

Schedule returned vehicles throughout the year. Consolidate volume in all channels, employ integrated management.

Apply an optimized return-vehicle process; adjust return periods (including for rental cars) to cover peak periods.

Ensure transparency in used-car flows, supply and demand. Create increased demand centricity by avoiding wholesale

steps. Employ active sales in various channels (a companys own sales organization, auction houses, professional used-

car dealers).

Create a strong used-car brand by using a program that creates trust and stabilizes residual value in the process because

customers will pay more for certified used cars. Complete a detailed analysis of customer needs in advance.

Improve the used-car skills of dealers by utilizing a used-car program with process standards support dealers through

used-car sales force.

Implement a management model that integrates the new-car, used-car, service and financing businesses.

Source: Booz & Company.

Supply

Residual value management Strengthen residual value Optimize residual value factors

Supply management/returned-vehicle management Manage returned-vehicle

volume Seasonally smooth out volume

Supply consolidation Control the used-car

wholesale business

Trade-in process Optimize the process Modify fleet contracts

Creation of a balance between-supply and demand Have transparency about

supply and demand volume Distribute volume across

countries and sales channels

Price managementin wholesale Conduct customer-needs

analysis Minimize dealer steps

Active sales

Optimize the customer mix Reduce dependency on majorcustomers

Used-car brand program Strengthen used-car prices Offer product packages

Customer segments Conduct customer-needs

analysis

Professionalization of dealers Optimize dealer performance Coach dealers

Resale/B2B Demand (private customers)

Improvement of the comprehensive management process


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The structural changes in the car business are prompt-

ing people to raise fundamental questions about the

role of the automobile in the future. For instance, cli-

mate change and the traffic problems of major metro-

politan areas will require automakers and drivers to

come up with new answers to the question of mobili-

ty. In interviews, a majority of the experts said they

thought that the car did not play the same role today

that it played in the 1980s. Having a car is no longer

such an important status symbol. Today, young people

in Stockholm and Paris think that not getting a drivers

license is the cool thing to do. Not owning a car gen-

erates much more attention for a Swede than owning

a vehicle does. Our market research (Study 3) also

shows that only 18 percent of respondents view a car

as a status symbol. Half of respondents said they

viewed an automobile as a commodity. The situation is

somewhat different in southern and southeastern

Europe: A premium vehicle does indeed provide the

driver with a high amount of prestige. Unlike the gen-eral trend, one of the surveyed experts anticipates that

the car could actually become a bigger status symbol

in the future, but from a different perspective: as a

green premium that represents a particular environ-

mental consciousness.

The market experts think car ownership in Europe will

lose its standing in the years ahead. Instead, drivers will

view a car as a means of transportation that will be

complemented by other mobility solutions. In general

terms, individual mobility needs are rather likely to rise

for instance, because employees are expected to be

more flexible in geographic terms when they search for

jobs. The automotive industry will indeed continue to

make a significant contribution to European economies

in the future, but to a reduced extent.

Today, demand for low-emission and small vehicles is

growing among private and commercial customers.

The EUs decision to severely cut CO2 emissions for new

cars beginning in 2012, high fuel prices and emission-

linked vehicle taxes are the driving forces behind this

trend. Passenger vehicles are indeed responsible for

just about 12 percent of CO2 emissions in the EU, but

have come under the scrutiny of environmental politi-

cians. Our market research (Study 3) confirms that driv-

ers understand their part in climate change. Thirty-

eight percent of new- and used-car buyers in Europe

said that the car was significantly contributing to glob-

al warming. But most of the respondents (82 percent)

rejected the idea of giving up their drivers licenses as a

result.

Automakers are fervently searching for new technical

solutions: more fuel-efficient internal combustion

engines and new drive technologies. Climate change

has given new life to innovative activities the age-old

technology of the internal combustion engine is being

intensely scrutinized. Experts remain unsure about

what will be the drive system of the future. After all, the

range of possibilities is broad: from renewable fuels for

internal combustion engines through hybrid and elec-

tric drive systems to fuel cells, compressed-air engines

and magnet motors.

The market experts consider the gradual electrification

of the automobile to be the most probable scenario

carried out in cooperation with energy companies. By

2011, a line of series electric vehicles will be introduced

to the European market, various automakers have

announced. But it will take decades for such vehicles to

10 |


2 | Customers want future-proof cars

No one doubts that the car has a future. But experts do expect significant improvements to bemade in the technical design and the use of passenger cars. Alternative drive systems, particular-

ly electric motors, are becoming increasingly popular. Over the long term, new mobility conceptsare expected to be worked out in cooperation with non-industry providers.

The car is no longer a member of the familyand is no longer a symbol of freedomand independence. (an automotive journalist)

We have to keep our R&D spending highand create a green premium.


None of the new drive technologies will be nearserial production in the foreseeable future.

(a consultant)


11/32

make their presence felt among all cars, according to a

new study by Deutsche Bank. The study adds that in 10years, 90 percent of newly registered passenger vehi-

cles will still use fossil fuels. But relatively new used carslike demo vehicles or rental cars could be systematical-

ly utilized to accelerate structural change. Matthias

Gleichmann ofTV Nordexpects that the electric carwill establish itself at an earlier point, at least if renew-

able electricity production can be assured. Right now,

though, the problem regarding higher energy-storage

costs must be solved. One of the surveyed automakers

said the required replacement of the battery packs after

seven years of service would cost about 115,000.

Even if technical developments will still require a little

more time todays customers want to buy future-

proof cars. Consumers apparently expect bigger

changes than the automotive industry does, according

to the new survey BEST CARS 2009 conducted by

the magazine auto motor und sport. Thirty-nine percentof readers said they expected electric drive systems to

establish themselves. In the survey conducted a year

earlier, the total was only 13 percent. In our market

research (Study 3), hybrid engines lead as possible

alternative drive systems just like in the research done

by auto motor und sport. They are followed by LPG and

natural gas. In Italy, LPG clearly ranks first as an alterna-tive to gasoline and diesel.

A key factor in a purchasing decision is the expected

residual value of vehicles with traditional drive technol-

ogy if the new systems establish themselves or regula-

tors toughen emission standards. With its CO2 regula-

tions, the EU did indeed create more planning security.

Now, however, automakers are being called on to cre-

ate greater trust in their products among customers.

| 11


The customer wants to buy a future-proof car.Many potential buyers are taking a wait-and-seeapproach right now. (an automotive journalist)

Climate change is having no direct effect on theused-car market. But its structures are similar

to those of the new-car market with a lag timeof two to four years.

(a key player in an online marketplace)

Electric cars will not be a big storyin the next 15 years. (an automaker)

Drivers think the electric-car trend is gaining speed

(car technologies that will become established;

in % of respondents1)

1) More than 90,000 readers of auto motor und sport responded at thebeginning of 2009 and in 2008 (survey has been conducted since 1991).

Source: BEST CARS 2009 (auto motor und sport).

Hybrid drivesystems

Electric drivesystems

Clean diesel Biofuels

52

43

39

13

23

31

10

19

2008 2009

A preference for owning a vehicle

(agreement with statements; in % of surveyed buyers of new and used cars 1)

1) A total of 2,675 people from Germany, France, Italy, Sweden and Spain who bought a new or used car within the past two years; remainder of responses toreach a total of 100%: undecided.

Source: CARFAX(June 2009).

My mobility would be severely restricted if I did not have my own car

I cant imagine life without a car

I try to avoid using the car for short trips

I think a car is a commodity

I will do without my own car only when I can no longer afford it

A cars main job is transportation; its appearance is secondary

The car is an important status symbol

Mobility concepts are an equally appealing alternative to the automobile

39

31

16

18

73

57

50

49

8

15

17

15

22

29

40

46

Disagree Agree


12/32

On the other hand, automakers are working on com-

pletely new mobility concepts, as our interviews

showed. The reason: Some European cities are facing

total gridlock. In Belgium, traffic is expected to increase

30 percent by 2013 the Brussels-Antwerp autobahn is

already practically impassable during rush hour. For

this reason, public transportation is to be expanded.

Additional regulatory restrictions on city traffic like

the environmental sticker in Germany or the conges-

tion charge in London are possible. Paris, for

instance, is considering a city toll. The problem of

affordable parking spaces is another particularly acuteproblem in the French capital. Virtually no parking

places are now being approved for new commercial

real estate, one of the French experts noted.

The surveyed specialists disagree on whether car shar-

ing and forms of renting have a future or whether

automakers will offer combinations of various vehicles

an electric car for the city and an SUV for a vacation

trip. The search for sensible mobility solutions with sus-

tainable business models will probably take some time.

As a realistic possibility, various concepts could exist

side by side just as drive systems do, the market experts

said. In designing such concepts, automakers are open

to partnerships with non-industry mobility providers.

But it will take some years, if not decades, to imple-

ment such changes.

The new mobility concepts cannot be developed with-

out vehicle ownership, our market research (Study 3)shows. Seventy-three percent of surveyed new- and

used-car buyers (in Germany 88 percent) said that giv-

ing up their own car would curb their own mobility,

and 57 percent said they could not imagine life with-

out a car. In designing mobility and future vehicles,

automakers should not lose sight of the actual needs of

customers in spite of ambitious environmental protec-

tion goals. |

12 |


The car will remain extremely important.(a trade association spokesperson)

We are no longer in a battle between the car andpublic transportation. The network must work!


Partnerships are essential for electric vehicles.(a dealer)

Outside metropolitan areas, there is noalternative to the car. (an automaker)

Germany

Largest new- and used-car market in

continental Europe. Higher share of

relatively new pre-owned vehicles

(up to one year old) for retail

sale. Strong use of online market-places. In 2009, market distortion

created by the governments

cash-for-clunkers program: large

increase in private new-car sales.

Registrations of new cars in 2008: 3.09 million

Car-title transfers in 2008: 6.42 million

Three years old or less: 27 percent

Older than nine years: 43 percent

Number of passenger cars in 2008: 41.32 million

Source: R. L. Polk & Co.

France

Third-largest European

used-car market.

Relatively high share

of used-car sales in car

business (ratio to new cars:2.6:1). Increase of new-car

sales as a result of a

cash-for-clunker program.








13/32

| 13


Automakers rely on dealers when their new-car volume

has to be added to the market. But the relatively rigid

and costly sales requirements and facility standards

give many dealers little leeway to carry out their own

sales initiatives. Highlighting this situation, some of the

surveyed experts noted that the dealers business inter-

ests are ignored. Since the 1980s, margins have consid-

erably fallen and are frequently negative today. A

return on sales of 2 percent to 3 percent should be

common, Christof Gerhard of CGP noted. But Euro-pean dealers can only dream of such numbers except

the Daciadealers in Romania, where 3 percent is stillcommon. Given their restricted liquidity coverage,

dealers cannot afford to make mistakes. They earn their

money only in aftersales and with additional services

or in the used-car business, as long as it is professional-

ly operated.

Local authorized dealers once were highly respected by

customers and residents of the areas where they did

business. Today, their standing in the community and

security are threatened. A contract termination can

turn up at any point. For this reason, dealers do not put

much effort into the new-car business, one of the sur-

veyed car dealers noted. The dealers are discouraged

and avoid taking risks. This is triggering rigidity in the

market. In family-owned companies, the upcoming

generation has little interest in taking over their par-

ents businesses. In difficult times, though, it is family-

owned businesses that stabilize the dealer network,

one importer from Belgium said.

The economic crisis has eaten away at the thin layer of

reserves maintained by many auto dealers. The Euro-

pean companies are fighting for their lives and not

just in Spain, where the situation is considered to be

extremely critical. The destruction of residual value is

creating an extra burden on the sector. The German

car expert Willi Diez expects that about 5,000 of the

11,000 auto dealerships in Germany will have closed

their doors by 2015. Because automakers are depend-

ent on their dealers, some of them are now expressing

a willingness to inject liquidity directly into the net-

work.

The auto-sales business model should be reworked and

the responsibilities of dealers and manufacturers should

be redefined, the surveyed market specialists said. An

amendment to the EU Commissions Block-Exemption

Regulation that expires in 2010 and may be extended

for three years could act as a catalyst for this change. In

the future, dealers could gain more influence over the

car business and automakers by taking such steps as

forming multibrand dealership groups. In contrast, oneof the surveyed automakers suggested that a two-tier

sales network with middlemen be created. In any case,

experts said dealers should professionalize their man-

agement, particularly in the promising used-car seg-

ment. After all, the continued thinning and consolida-

tion of the sales networks is inevitable.

The human aspects that have gotten lost in the new-

car business remain a vital part of the used-car busi-

ness. Here, the focus is on the relationship between

customer and dealer. In business terms, used cars are

much more appealing to many dealers than new cars

are. In the used-car business, dealers can put their cre-

ative sales skills to work and take advantage of oppor-

tunities. This is the future of auto dealers. |

3 | The car business must be completely redesigned

The volume pressure being exerted by automakers has left its mark on European car dealers.As a result, margins have fallen considerably in recent years and even slipped into the red.

Dealers are increasingly shifting their focus to the used-car business because it offers goodmargins and more entrepreneurial freedom.

With their rebates, automakers are

driving dealers into the ground. (a dealer)

Something is wrong with the system.The business model for auto dealershipsmust be overhauled. (an automaker)

The automakers are applying increasingpressure to us in the new-car business.Used cars, on the other hand, represententrepreneurial freedom to us. (a dealer)


14/32

14 |


There is an urgent need to change car pricing. The tax-

onomy of the auto business has gotten out of balance.

In recent years, the gap between a cars value and its

price has expanded further. While manufacturers gross

sticker prices went in only one direction up compli-

cated systems of rebates have continuously driven

down the price paid by the end customer. The sticker

price has degenerated into nothing more than a dubi-

ous marketing instrument.

A simple visit to the showroom can result in a 20 per-

cent rebate for the potential customer, test sales show.

Rebates are given by automakers and dealers alike.

There are rebates for particular customer groups as well

as flexible rebates for skillful negotiators. The practice

becomes even more complicated when rebates for var-

ious groups of relatively new used cars and nearly new

vehicles are considered: single-day registrations, demo

cars, manufacturer rental vehicles, employee cars,

company cars for executives and former rental carscome with a range of price cuts. In the end, customers

know little about the criteria used to grant a rebate and

whether they could have gotten an even better deal.

This creates uncertainty and dissatisfaction, erodes cus-

tomer loyalty and hurts auto sales.

Our market research (Study 3) clearly shows just how

dissatisfied customers are with the current taxonomy.

Eighty-three percent of surveyed new- and used-car

buyers in Europe stated that a new car loses its value

too quickly. On the other hand, 54 percent of respon-

dents said they had a stronger negotiating position

when purchasing a new car. The question about

whether high new-car rebates made the purchase of a

used car unappealing elicited similar levels of respons-

es. Thirty-two percent agreed with the statement, and28 percent disagreed. Agreement was more prevalent

in Italy, and disagreement in Spain. Dealers are dissat-

isfied as well: The customer keeps haggling even when

the sales representative has given him or her a break on

the trade-in. For this reason, trade-ins should always be

realistic, i.e., calculated in a market-focused manner.

None of the surveyed market specialists expects that

the rebate clock can be turned back. Only a significant

reduction in capacities could stabilize prices and value

equity. Daciahas now demonstrated that fixed pricescan indeed be achieved at least in the lower price

segment.

The conditions in the used-car market are more clear.

Here, online marketplaces for used cars create high

price transparency. But this does not mean that prices

for comparable models settle at a certain level. A range

4 | The customer sets the price

The new-car rebates given in recent years and the residual-value destruction among relativelynew used cars have upset the balance in the taxonomy of the auto business. The gross sticker

price is obsolete. The sales price does not reflect the true value of the vehicle. Through demand-focused production and limitations on supply, the balance could be restored.

The current taxonomy does not reflectthe real value. (a dealer)

Rebates really hurt in the premium segment.(an automaker)

The Internet has changed buyer behavior.The customers comparison shop.The buyer determines the price.


Internet creates price transparency

(information sources for used-car prices;

in % of surveyed used-car buyers1)

1) A total of 1,363 people from Germany, France, Italy, Sweden and Spainwho bought a used car within the past two years; multiple responsespossible.


Price comparison using online marketplaces

Price comparison at dealers

Recommendations of someone who knows a lot about it

Institutional offers

Research in specialist magazines

Self-directed research: sticker price minus a certain percentage

Own expertise

23

23

15

60

51

38

28


15/32

| 15


of 15 percent above and below the average price is

typical. Apparently, buyers can be found throughout

the price range.

The market survey (Study 3) showed that 60 percent of

the surveyed buyers of used cars identified the Internet

as their most important source of information, followedby 51 percent who cited their personal price compar-

isons at dealerships. The Internet was even more pop-

ular among Swedish and German used-car customers.

In terms of general car prices (new and used cars),

price shopping at dealerships was rated ahead of the

Internet (60 percent of surveyed buyers of new and

used cars vs. 52 percent, respectively).

The most transparent form of price setting that brings

supply and demand into balance is the Internet auc-

tion. But these auctions have not established them-

selves among new or used cars. Because the financial

strength of automakers is significantly weakened at the

moment, auctions create a cost-efficient sales channel,

one of the surveyed financial service providers noted.The successful Swedish model KVD demonstrates that agood auction concept can generate profitable growth

even during the crisis. |

Best practice:customer trust ensures sales of used company vehicles at KVD

The Internet auction house KVD-Kvarndammen Bilauktioner AB is a leading sales platform for used company vehicles in Swe-den. The firm is producing double-digit growth even during the crisis. Transparency, neutrality and efficient processes have

turned KVD into one of the most successful companies in Sweden. At KVD, end customers bid on used cars that they usuallyhave not seen before in person. The platform describes the vehicles in great detail, provides compelling pictures, delivers

proactive research on the vehicles history and has earned a solid reputation.

KVD generally auctions relatively new used cars from leasing companies, banks, fleet operators bankruptcy administrators,insurance companies and government agencies. Dealers and private sellers are not permitted to provide vehicles. They are

the most important customers.

Acting as a middleman, KVD works with two customer groups: the sellers and the providers of used vehicles. Or as HansJohnson, an accredited appraiser at KVD, says: We are one of the most important vehicle sources and one of the strongest

competitors on the used-car market. The company is particularly interested in maintaining its independence from auto deal-ers and manufacturers. In addition to the auction portal bilauktioner.se, KVD operates an online price search engine that hasbecome the main source of information for used-car valuations in Sweden: bilpriser.se.

In 2008, 15,200 used cars were auctioned at bilauktioner.se, 50 percent more than the previous year. The goal for this year

is an increase to 17,500 used cars despite the crisis. In 2009, KVD broadcast its first television ads. When a vehicle is offeredfor auction at bilauktioner.se, the chances are good that it will find a buyer. Up to now, more than 80 percent of the listed carshave been auctioned. KVD intends to increase the success rate to 90 percent this year.

All vehicles being auctioned are checked by appraisers. Their reports appear on bilauktioner.se along with a sticker price

that corresponds to the average dealer price. The site also contains information about vehicle defects as well as the condition

of key components like tires, brakes and the transmission. Nearly all vehicles have a service history as well. KVD strives to pro-vide the most precise descriptions possible in order to avoid raising false expectations. Disappointed customers are really

painful to us, Johnson says. Bidders can ask questions about the vehicles by e-mail or telephone and have a look for them-

selves at one of five locations in Sweden.

Each auction lasts one week, and all vehicles being put up for auction have a minimum price. If this price is not reached,the seller can decide whether he or she wants to accept the highest bid. The winning bidder is notified within 24 hours and

then has 24 hours to confirm the bid. Afterward, the buyer has to make a payment to prevent the purchase option from expir-

ing. He or she has a week to pick up the vehicle. It is only at this point that KVD presents a purchase contract to the customerfor signature. An auction fee of about 1240 is then charged. In addition, KVD receives a commission from the seller that islinked to the auction price. But a previously set limit applies to the commission (between 16,000 and 17,000 depending on

the provider) to assure the neutrality ofKVD.The handling of vehicles at KVD is done with predefined processes that are continuously optimized. We dont have any

problems with turnover times on our lots, Johnson says. In 25 days at the most, a vehicle is out the door. This efficiency

speaks forKVD, particularly among leasing companies. KVD creates added value by reconditioning the vehicles jointly with

service partners. Such reconditioned used cars regularly generate higher bids and increased customer satisfaction. KVD

receives a handling fee for the reconditioning.


16/32

The European used-car market is becoming an increas-

ingly important part of the passenger-car business. The

market has discovered the opportunities presented in

the used-car business among both customers and sell-

ers even in Spain, where a buyer would have consid-

ered only a new car 10 years ago. Today, a used car is

no longer just an alternative for customers with small

budgets or people who have recently gotten their dri-

vers licenses. The quality of vehicles is now so good

that used-car customers can expect to enjoy a long

average service life. In addition, a large selection of rel-

atively new used cars is available today.

Generally speaking, the rule for the automotive market

is: no used cars without new cars. Conversely, the new

car business cannot exist without used-car sales. The

trade-in is a key purchase incentive for most new-car

customers and an important component of the financ-

ing package. Automakers who lose sight of the used-

car business or destroy residual value are creating athreat to their entire business, one of the surveyed

importers noted. For this reason, they should develop

a used-car strategy that underpins their business

model. Errors in vehicle production (recalls) or in new-

car sales (rebates) also put a strain on the used-car busi-

ness.

Used-car sales can offset cyclical swings in the new-car

business as well. One of the interviewed experts even

described it as a commodity futures exchange. In the

examined markets, the number of title transfers in

2008 fell at a lower rate than among new-car sales. As

a result, the market share of used cars has grown. This

is the case in Sweden. Last year, the lots of used-car

dealers there were packed. Today, somewhat of a vehi-

cle shortage exists. According to the Swedish associa-

tion for motor retail trades and repairs MRFthe numberof vehicles fell from 50,000 in December 2008 to

37,000 in April 2009.

In terms of engineering, there is little that separates rel-

atively new used cars from new vehicles. As a result,

there should be no fundamental difference for private

customers in the choice they make between the two,

auto experts say. Frequently, though, emotional factors

and the ability to individually configure a drivers

dream car are the decisive factors leading to the pur-

chase of a new car. In our market research (Study 3), 61

percent of surveyed new- and used-car customers stat-

ed that they wanted to pick out the equipment fortheir cars themselves. Thanks to the Internet, the used-

5 | Growth market: used cars

The European used-car business is a growth market. Given the quality of the vehicles and thehuge supply of relatively new cars from commercial businesses, used cars are a true alternative to

new cars. Dealers are slowly taking advantage of their opportunities but losing sight of middle-aged vehicles that are three to eight years old.

The used-car market is an extremely importantpart of the auto market. (a consultant)

The manufacturers have a strategic interestin the used-car market because they mustprotect their brand equity.


Dealers who upgrade their used-carbusiness enhance their new-car sales.

(a consultant)

16 |


When does a new car become a used car?

For cars, the line between new and used is blurred. Many

of the surveyed experts do spontaneously draw the line at

the first registration of the vehicle. But, when pressed fur-

ther, they also classify single-day registrations as new cars.

Most of them consider demo cars to be new, and these

vehicles are also sold as such. Increasingly, the previous

owner of a vehicle is a dealer or another company and not

an individual driver. For this reason, one of the surveyed

media representatives defines a used car this way: A car

that had a previous owner who actually drove the vehicle.

Generally speaking, used cars can be broken down in the

following way: Young used cars are no older than 12

months. The rest are considered to be normal used cars.

For the used-car customer and the market price, the criti-

cal factor is how many people and what type of drivers

drove the vehicle for what length of time. If the vehicle had

one previous owner, the loss of value is lower. If it had sev-

eral, it is higher. If it is a rental car, the loss is higher. And if

it was an executives company car, it is lower.


17/32

| 17


car customer now has many configuration options as

well. Forty-one percent of new- and used-car buyers

are interested in having the latest technology and this

technology is offered to them only by a new car or a

relatively new used car. Two-thirds of respondents gave

environmental arguments as reasons for a new car. On

the other hand, they rated the emissions from new-carproduction as less problematic, even though the Wup-pertal Institutehas determined that for a midsized car(10 years of service life, 150,000 kilometers), 20 per-

cent of emissions can be traced to the cars production.

From the customers point of view, the difference

between new cars and used cars remains real. Indeed,

used cars are no longer considered to be second-class

vehicles only 17 percent reject pre-owned vehicles as

a matter of principle. But used-car dealers still have to

contend with a negative image, our baseline psycho-

logical study (Study 1) shows. During group discus-

sions, participants conjured up images of a dense, trap-

filled jungle. Buying a used car is frequently considered

to be an unpleasant experience or is even associated

with a risky gamble, given the markets lack of trans-

parency and consumers wariness. The flip side of the

coin: Qualitative research also reveals that opportuni-

ties are connected to the risks. In this scenario, buying

a used car is an adventure for the customer in which he

or she can end up getting a great deal by shrewdly tak-

ing advantage of the markets freedom. By contrast,

buying a new car is viewed as a rather dry, choreo-graphed process.

For automakers who have to utilize their capacities,

there is indeed a difference between the sale of a new

or used car, even if economic considerations point

toward a used-car purchase. After all, automakers can

sell their product for a second time in such transac-

tions. In the survey of European buyers of new and

used cars, every third respondent said automakers

could earn more money by selling used cars.

And what about dealers? If they do not specialize in

used cars, they must create a good balance between

their new-car and used-car businesses. In working with

customers who are unable to afford a new car or do

not want one, they can play up the benefits of used-car

ownership. Thanks to the much lower price of the used

car, the smart buyer can acquire a higher-quality

brand or a higher-level model class. In dealing withcustomers who have large budgets, the dealers will

instead tout the benefits of new-car ownership. After

all, two-thirds of the surveyed new- and used-car cus-

tomers stated that they would definitely buy a new car

if they had a big enough budget.

All surveyed auto experts agreed that used cars will

play a prominent role in the auto market of the future.

A new study by the magazine AUTOHAUSshowed thatmore than 60 percent of independent and authorized

auto dealers said they expected the significance of the

used-car business would expand greatly in the future.

Drivers, too, are noticing the growing importance of

the used-car market and the potential awaiting dealers

in our survey (Study 3), 49 percent of surveyed new-

and used-car customers and even 60 percent in Spain.

The used-car market is evolving into a central private-

individual market to the same extent that the commer-

cial new-car business is growing. Authorized dealers are

currently focusing on used cars that are up to three

years old. But one of the surveyed consultants pointed

to the high level of untapped potential offered by vehi-

Used-car sales in Europe are three times as high as

new-car sales

The number of car-title transfers in Europe is about three

times as high as first registrations, with an average number

of 40 million vehicles changing hands (latest data from

2007). The importance of the used-car business is reflect-ed in the fact that it generates 40 percent of car sales vol-

ume in Germany alone.

The registrations of new cars in Europe have been hurt

by the worlds economic and financial crisis. This year, they

will hit a long-time low of about 12.6 million units. Within

two years, demand for cars has fallen about 15 percent.

The pull-in effect being exerted by government support

programs this year is likely to have the opposite impact

next year. As a result, registrations of new cars in western

Europe could fall to 11 mill ion units the lowest level since

1985. Beginning in 2011, the market can be expected to

recover as economic conditions improve.

The number of passenger cars in Europe has been con-stantly growing for years. The level of 240 million cars

could be reached this year in spite of the crisis. This trend

is being fueled both by the increasing purchases of a sec-

ond car and the need for a first vehicle in the markets of

eastern and southeastern Europe. In the saturated markets

of Europe, vehicle totals are holding up well amid the sales

crisis because newly registered cars primarily serve as

replacement vehicles and the first-time need for a new

automobile plays a subordinate role.


The used-car market is increasingly turning intothe most important private-customer market.

(an automaker)


18/32

18 |


cles that are three to eight years old. Given the relative

stability in value here, the inventory risk is lower than it

is for relatively new used cars. Thanks to todays high

vehicle quality, liability for car defects is unproblemat-

ic, the consultant said.

Our market research (Study 2) also showed that 40

percent of European used-car owners acquired their

vehicles from authorized dealerships, 26 percent from

independent dealers and the rest from private individ-

uals. The private market is particularly widespread in

Spain and Sweden. The study found additional evi-

dence of the trend in which used cars tend to be

increasingly sold by independent dealers and private

individuals as they grow older and their price falls.

The leasing of used cars in Europe is just getting start-

ed. Such companies as VB Leasinghave already beguntapping into this growing business. The benefit for the

financing companies: a slower and more consistent loss

of value than for new cars and a lower level of unse-

cured risk. The average share of noncollateralized

receivables for used cars is 15 percent compared with

40 percent for new cars. Forty-six percent of the sur-veyed new- and used-car customers in our market

research (Study 3) said they assumed that financing

and leasing would increasingly replace cash purchases

of cars including used vehicles.

In the future, large, specialized used-car dealers with

strong brands could take market share away from

authorized dealers. Every second dealer in the

AUTOHAUS study does indeed think that authorizeddealers selling the automakers own used-car brands

will gain market share. But every third respondent pre-

dicted a good future for the used-car business conduct-

ed in conjunction with a dealers own brand. Even

today, dealers are facing competition from leasing

companies like LeasePlan and rental firms that markettheir used cars themselves. In Spain, a European leasing

company, ALD Automotive, has already made a namefor itself as a used-car dealer with its own quality cer-

tificate. In addition to the domestic market, used-car

exports could gain significance. Demand is growing

particularly in eastern Europe. |

Used-car sales among authorized dealershipshave mutated into a business with relatively newused cars out of pure laziness. Sixty percent to70 percent of vehicles pass dealers by.

(a consultant)

Used-car buyers prefer authorized dealers

(source of a purchased used car; in % of used-car

customers1)

1) A total of 991 people from Germany, Italy, Spain, Sweden and theNetherlands who bought a used car within the past two years.

Source: CARFAX(March 2009).

Large authorized dealer

Small authorizeddealer

Large independentdealer

Small independent dealer

Private individual

3427

13

20 6

Italy

Second-largest new-car mar-

ket in Europe with a large

number of relatively new

cars (only one-third are older

than 10 years). Relatively weakused-car business with high

potential. Share of used cars

in the car business is compar-

atively low (ratio to new cars:

1.3:1). High share of relatively new used

cars, few old used cars on the market.








19/32

| 19


Companies that intend to profit from the growth

opportunities offered by the used-car market should

refine their management tools and increase their cus-

tomers trust in them. The surveyed auto experts agree

that used-car dealers can tap huge reserves of profits if

they optimize business processes and emphasize cus-

tomer benefits. Through more external transparency

about the used cars being sold and the support of

strong brands, dealers can gain customers trust. Cus-

tomers who have confidence in the sellers dependabil-

ity show a willingness to pay a higher price for a used

car. Trust strengthens customer loyalty, encourages rec-

ommendations to potential customers and promotes

cross-selling of value-added services like financing,

insurance policies and service packages. Through

shorter turnover times or a higher transition factor in

vehicle inventories, dealers raise their gross yield.

Trust is the key success factor in the used-car business.

As a result of the asymmetrical distribution of informa-tion the seller knows more about the vehicle than the

buyer customers must be assured that no negative

information is being withheld from them. For this rea-

son, dealers must have broad transparency in their

business, disclose all defects or repair them and cover

all potential problems by offering warranties. After all,

77 percent of surveyed new- and used-car customers

noted in our market research (Study 3) that hidden

defects were one of the main risks associated with the

purchase of a used car. And 80 percent stated that dur-

ing Internet searches they considered only those offers

containing detailed information and photos of the

vehicle. Every other respondent noted, however, that

these expectations are not being met. For this reason,

the motto of the Swedish auction portal KVD is: Itsbetter to have too much information than not

enough.

But how does the customer know that the dealer is

honest and transparent? Trust develops over time

through personal experience and through the credibil-ity of a strong brand, including that of the automaker

or an independent vehicle inspector.

In contrast to quality transparency, price transparency

is relatively high in the used-car market. Thanks to

online marketplaces, customers and dealers can check

the current prices of various cars and configurations

backed up by photos, videos and detailed specifica-

tions. Fifty percent of new- and used-car customers

(Study 3) check car prices in online marketplaces, and

60 percent compare the prices of individual dealers.

Most experts welcome the high level of price trans-

parency. They say it promotes the used-car business by

increasing trust. One of the interviewed manufacturers

also recommends that potential customers supplement

the information obtained on the Internet with price

lists from traditional providers of used-car data because

statements made online cannot always be taken at face

value (a come-on offer).

6 | Transparency + brand = trust

The biggest barrier facing the used-car business is customers lack of confidence in it.This situation can be improved by increasing transparency and gaining the support from strong

brands. In terms of prices, transparency is relatively high thanks to the Internet. But in terms ofthe vehicles condition and history, reports by independent vehicle inspectors are needed.

We need more transparency. Customers stillhave little faith in used-car dealers. (a dealer)

Offers on online marketplaces need improvement

(rating of online offers for passenger cars;

in % of surveyed users of online marketplaces1)

1) A total of 1,846 people from Germany, France, Italy, Sweden and Spainwho have bought a new or used car within the past two years and useonline marketplaces; multiple responses possible.


Only those offers that describe the vehicle in detail are relevant to me.

Meaningful, high-quality photos are crucial for an offer.

The pictures of a vehicle are often meaningless.

Offers frequently contain not enough detailed information.

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80

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An ideal solution would be something likecomputer tomography for used cars. (a consultant)

Transparency is a blessing for theused-car business. (a consultant)


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Most automakers support their authorized dealerships

by offering special used-car programs frequently fur-

nishing a manufacturers certificate, its own brand andthe corresponding marketing to gain customers trust

and increase the willingness to accept prices. The stan-

dards for the brand certificates generally cover specific

inspection processes and inspection areas for vehicles.

Each automaker applies different criteria. From the cus-

tomers point of view, a model like that used in the

United States would be more transparent: Automakers

there have agreed on standards for the Certified Pre-Owned (CPO) program. As supplementary added-value services, automakers offer (mobility) guarantees

as well as financing and insurance policies. In practice,

these programs apply only to used cars that are no

more than five years old. Most vehicles are not this old.

The automakers also provide dealers with relatively

new used cars from their own fleets or their commer-

cial business in order to complement their trade-in

vehicles with attractive cars. A few companies have set

up used-car databases that dealers can use to meet theneeds of customers and avoid price markdowns as a

result. Some automakers also centrally manage the

Lemons profit from the lack of transparency

In a market with information asymmetry like the used-car

market, customers willingness to pay is generally lower

than in a transparent market in which sellers and cus-

tomers have the same information. After all, the used-car

buyer runs the risk of ending up with a lemon, a vehiclewith hidden defects. For this reason, he or she will at best

be willing to pay a price that corresponds to an average-

quality vehicle. In turn, the relatively low willingness of

potential buyers to pay scares off sellers of high-quality

vehicles. But if such vehicles are not being offered in the

market, the average quality level of the vehicles for sale

falls, the U.S. economist and Nobel Prize laureate George

A. Akerlof writes in an essay titled The Market for

Lemons. Recommended ways out of this dilemma include

signaling, screening and a balance of interests. Signal-

ing means that the seller of the vehicle provides the cus-

tomer with documents that will raise the customers confi-

dence in the vehicles quality. This could include the seal ofan independent inspector. In screening, customers check

on the vehicles condition themselves by doing such things

as researching the vehicles history and taking a test drive.

Finally, a used-car warranty creates a balance of interests

between the buyer and seller. Regulatory actions can also

offset information asymmetry. As a result, the two-year lia-

bility for defects laid down by EU law provides customers

with more security. But many used-car dealers in Europe

work out a reduction of the time period to one year with

their customers.

Lack of transparency unsettles used-car buyers

(agreement with individual statements; in % of surveyed new- and used-car buyers 1)

1) A total of 2,675 people from Germany, France, Italy, Sweden and Spain who have purchased a new or used car within the past two years;remainder of responses to total 100%: undecided.


Hidden or unmentioned faults are a major risk when buying a used car.

When buying a used car, customers can be quickly taken for a ride.

You are likelier to consider a used car if there is independent and credible information about the car and its history.

The used-car market has no organization that stands for transparency and reliability.

The hunt to find a good used car is disproportionately time-consuming.

The used-car market is not a transparent market.

I am willing to pay a certain premium for more reliability when buying a used car.

I only trust in those used-car certificates issued by an independent organization.

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41

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68

60

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Thanks to the Internet, used-car margins haveclimbed. Customers are willing to pay more forincreased transparency. (an importer)

The automakers brand name is evenmore critical in the used-car businessthan with new-car sales. (an automaker)


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reconditioning of used cars so that dealers can increas-

ingly use their service departments for the profitable

end-customer repair business. Furthermore, they offer

training and consultation aimed at improving and

accelerating processes and controlling throughout the

used-car business: vehicle appraisal, reconditioning,

inventory management and dynamic pricing.

All of the surveyed experts rated the credibility of the

automakers certificates as very high. After all, cus-

tomers have considerable confidence in the automak-

ers brands. In such countries as Sweden, though, deal-

er brands sometimes carry more weight than automak-

ers brands do. But the strength of the dealers brands

does not reach that of companies like CarMaxorAuto-Nation that dominate the U.S. used-car business withtheir customer-centric business models. They offer set

prices, a 125-point inspection, excellent recondition-

Automakers lend a helping hand to dealers: used-car programs from A to M

Alfa Romeo Audi BMW Fiat Ford Hyundai Jaguar Lexus Mercedes Mitsubishi Autoexpert Plus Premium Auto- A1 Gechecked First Select Junge Diamant

Selection expert & perfekt Class Sterne

Maximum kilometer total 100,000 150,000 120,000 NA 100,000 195,000 Unlimited 160,000 120,000 NA

Maximum age (years) 7 6 5 NA 7 15 Unlimited 5 6 9

Warranty (years) 1 1 2 1 2 1 2 3 2 1Inspection program (points) 160 110 72 160 NA 67 140 125 NA NA

Test drive Trade-in Loan/leasing options Mobility guarantee 1 year No 1 year NA No

Right of return (days) No 10 5 NA No No NA No No

Exchange right (days) 14 10 30 NA No 14 NA 10 10

Participating dealerships NA 200/38% 600/95% NA 198/64% 160/34% 50/85% NA NA 150

Entry charge for dealers NA 15,000 NA NA No charge 13,000 11,000 NA NA 11,500

Sources: CARFAXand automakers

Used-car programs from O to VOpel Peugeot Porsche Renault Skoda Seat Toyota VW VolvoG2 Qualitts- Approved 7 Sterne 1+ eSeat Geprfte First Quality 1

Gebrauchtwagen Qualitt Gebrauchtwagen

Maximum kilometer total 150,000 150,000 200,000 125,000 NA 50,000 150,000 100,000 150,000

Maximum age (years) NA 7 9 4 NA 2 NA 4 7

Warranty (years) 1 1 1 2 1 1 2 1 1

Inspection program (points) NA NA 103 96 NA NA 100 195 NA

Test drive Trade-in No Loan/leasing options Mobility guarantee No No No NA

Right of return (days) No No No No No No No No

Exchange right (days) 7 14 NA 15 NA No 30 10 7

Participating dealerships 350 75% NA 244/65% 187/35% Not any 441/68% 191/15% NA

Entry charge for dealers NA Individual NA 11,000 NA No charge 14,000 Individual Individual

Sources: CARFAXand automakers (some programs are only available in Germany).

Used-car dealers should not just keep an eye ontheir own lot. What I have in mind is a type ofbroker who will do such things as search the Inter-net to find the right vehicle for his customers.


The automakers brand name is reallyimportant and produces strong customer loyalty.Marketing budgets are invested well here.

(a financial service provider)

The automakers brand name is even

more important in the used-car businessthan in the new-car business. (an automaker)


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ing, a guarantee for free repairs, a right of return, a free

vehicle history and financing plans. In Europe some

leasing companies now offer vehicles with their own

used-car certificate. The credibility of an automakers or

a dealers certificate can be increased by providing an

independent technical inspection report about the

vehicles condition, the surveyed experts noted. In

countries like Sweden, an independently issued certifi-

cate is ranked even higher than an automakers certifi-

cate. In our market research (Study 3), one-third of sur-

veyed new- and used-car buyers said they put their

trust in only those certificates issued by independent

inspectors.

Because many customers have doubts and not com-

pletely without justification about the vehicles

mileage and possible past damage, it is recommended

that the customer receive a vehicle history prepared by

an independent provider. Our baseline psychological

study (Study 1) showed that customers first ask a sales

representative or dealer about a vehicles mileage, acci-

dent history, condition and previous owners. The idea

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Best practice: BMW Group Beluxgrows with used-car program

The BMWregional branch for Belgium and Luxembourg has achieved tremendous success with the automaker used-car pro-gram called BMW Premium Selection. In four years, local BMWdealers have quintupled sales volume for certified used BMWs.

Today, they are even selling more used cars than they did before the economic crisis hit, and their market share in the BMWused-car market in the Belux region has jumped from 16 percent to 42 percent.

BMW Beluxhas been working with the group-wide used-car program for five years. All certified used cars are subjected toa 72-point inspection. The cars also have warranties, a Europe-wide mobility guarantee and

used car business

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