Used car values matter - The Business - Auto companies expand used car sector - International Pages - Brief Article

Automotive Industries, Sept, 2002 by Maryann Keller

2002 has brought considerable attention to the used car marketplace. While manufacturers set new car prices and incentives, it is supply and demand as expressed by buyers and sellers at the nation's auctions, that determines the market price of every used vehicle. Popular models retain their value making it easier for those automakers to command higher prices for their new models. Simply put, slower depreciation reduces vehicle operating costs, the largest expense associated with car ownership.

Auto companies are only now giving some thought to what their vehicles are worth when they are remarketed to the second owner. The issue of used car values is about to become more challenging for auto companies as they scramble to differentiate themselves in a crowded field with niche models and technology.

Last year American consumers could choose among a near record number of models and that number is expected to grow in the coming years. The Japanese are now introducing conventional light trucks and crossover models, as are the Koreans Luxury marques are moving downmarket to expand the reach of their premium brands. American companies are adding numerous hybrid car/truck vehicles that defy classification, except for fuel economy purposes. With so much to choose from, it's becoming difficult for auto companies to develop models they can expect to assemble in 400,000 unit-a-year quantities, which is further driving the development of profitable new niches.

The economics of vehicle assembly haven't changed much. High fixed costs necessitate full capacity production. Consolidation of platforms has occurred even as more body styles are drawn off of fewer platforms. The two trends are resulting in an enormous number of new products that manufacturers hope will be sufficiently distinct to command premium prices and generate high margins without incentives.

But no one knows how well these niche vehicles will retain their residual values. Anything that has fashion elements in its design, quickly and obviously becomes outdated. Even seemingly simple things like paint color, which seem so daring and appropriate one year, can limit the cars appeal to the next owner. Ask any used car manager if he would pay more for a magenta car over a dark green one?

New car buyers might go for some of the niche models. They might even like the new GEN Y Honda and Toyota oddly designed boxes. (I'm obviously not the intended customer for that model.) But what will those cars be worth when the first owner goes to trade them in on the next hip style? Fashion conscious consumers won't wear last year's clothes.

I don't know the answer, but it is a question auto companies should be asking themselves. Preservation of residual value should be as much part of their new model development as any other consideration.

Technology is another area that scares me in terms of future value. The more technology there is visibly in a car, such as a navigation or driving system like in the BMW 7-series, could well alter the depreciation rate of some vehicles. What happens if the car still has plenty of life in it, which today's high quality almost guarantees, but the electronic technology quickly obsoletes today's whizbang gadgets? All of us seem prepared to think of a three-year-old computer as geriatric, but few of us would feel that way about a three-year-old car. Electronic development has always proceeded at a faster pace than the mechanical components of the car itself. As long as this was largely invisible to the consumer, it probably didn't have a huge impact on residual values. But as these systems take up space on the instrument panel and add new functionality to the driving experience, we will notice.

MARYANN KELLER is a veteran auto industry analyst and author of the books "Rude Awakening. The Rise, Fall And Struggle To Recover At General Motors" and "Collision: GM, Toyata and Volkswagen And The Race To Own The 21st Century."