CARY, N.C. -

Recently, I was invited to attend an automotive remarketing conference to chair two roundtable discussions titled, “As the Market Turns — What's Your Game Plan?”

It was the underlying view that the supply-demand curve will weaken as used-car volume, fueled by the increased numbers of new car trades, flood the market. The prediction for the future — sale prices, net of expenses — will deteriorate.

The Perfect Storm

We are already experiencing manifestations of this phenomenon.

Edmunds.com reported that used-car values are off 2.8 percent from the previous quarter, and that the market has not experienced lower average used-car prices since 3Q 2009, during the height of the recession.

Average days-to-sale, translating to inventory aging, and implicit depreciation, has increased, a fact that will ultimately translate to weaker demand at auction.

RVI Group predicts that by 2018, used-car pricing will decline by 5.8 percent from current levels. RVI reports that increased competition for new-car sales is applying downward pressure on pricing, only exacerbating the negative impact on used-vehicle values.

Moreover, cheap credit on new cars, coupled with factory incentives, result in monthly used-car payments that are bumping their heads against new-car payments — both purchased and leased, and leasing penetration is ever-increasing, up to 27.6 percent in 2Q 2013, according to Swapalease.com.

In fact, Art Spinella, president at CNW Research, indicates that the competitive nature of leasing has resulted in very aggressive, and to some extent, irrational residuals. CNW believes that, in the interest of lowering monthly payments, many automakers have overvalued residuals by 5 percent to 10 percent.

In fact, CNW predicts that manufacturers are on track to lose between $5 billion and $8 billion within three years on their lease portfolios. Moreover, these lower monthly payments convert used-vehicle buyers to new-vehicle sales and leases.

These market dynamics result in the perfect storm. The used-vehicle market cannot remain irrational — there must be a pricing correction: downward.

Rear-View Mirror

Conversely, when new-cars sales crashed during the recession, we collectively enjoyed several years of strong demand.

The pool of used vehicles contracted, and the dealers were vying for that shrinking volume of low-mileage used vehicles. Predicated on the recessionary crash of 2008-09, new-car sales dropped precipitously, and used-car supply followed in lockstep. Dealers, who had to replenish their inventories, paid the price in a robust bidding environment.

Remarketing Strategies — We Must Not Confuse Efficiency with Effectiveness

From an efficiency perspective, the remarketing industry has made significant advances in the last 20 years. To our credit, we have streamlined the process.

We have developed elegant technology, and the scope of sale venues have broadened, including areas like multi-platform sales.

Whether in the lane or online, dealer or consumer-direct, science has been introduced into condition reports, inventory aging has been reduced and the cost-benefit of reconditioning and certification is data-driven and being appropriately employed.

While we have made great strides in this area, one must recognize that sales facilitation is important — but it is not strategic.

Additionally, we have access to robust data — but knowledge is not powerful unless the data is vetted, and strategic decisions that positively impact sale prices are deployed.

How are we utilizing the data to create arbitrage models and develop algorithms that will direct our management decisions?

Have we identified, by make, model, mileage and condition where we can most effectively generate stronger prices?

Recognize that, on an individual vehicle basis, it is not an exact science. One will not enhance results on 100 percent of the vehicles.

However, on a portfolio basis, the axiom applies, and lift will be generated.

We must not, however, confuse activity with outcome. The true measure is ROI translates to effectiveness as well as efficiency. In the last several years, we enjoyed tailwind — demand outstripped supply.

Now that the world is changing, how will we adapt to enhance and optimize net sale proceeds? We all know the definition of insanity … so what new strategies will we pursue to bend the curve to generate a more favorable outcome?

The Conference

Aware of the topic of the roundtable, with approximately 100 participants in each session, my thought was that the conversation would gravitate to a discussion of how we, as an industry, would modify current tactics and explore additional opportunities.

My hope was one of generating conversations that would inspire the formulation of strategic initiatives focused on modeling new behaviors to enhance net returns for the consignor.

With very few exceptions, we heard tactics being discussed. We addressed facilitation of the process. With few exceptions, we did not hear that a deep dive was to be taken.

While the next statement may be perceived as a generalization, the majority of participants indicated that they would pursue strategies that fundamentally mirrored historical activity.

I sensed some resistance and push-back to the concept of exploring new strategies.

World Markets

We spoke to the concept of pursuing a global initiative. Fundamentally, the world is our market. One participant stated that, for his portfolio, sales to the Mexican market defined business as usual.

Others indicated that it was too difficult to sell into foreign markets, referring to issues of control, logistics, paperwork, tariffs, compliance with regulatory issues and transportation.

In some countries there are barriers to entry. In most cases, with additional sweat equity employed, these walls can be penetrated. The time may be propitious to explore there options. If not, we may be perceived simply as facilitators.

Parenthetically, at Marine Midland Bank, in 1988, we were the private-label captive finance arm of Porsche. We routinely sold off-lease and repossessed 911s in Germany and other European countries. Yes, there were additional steps in the process, and the transaction required enhanced due diligence, but ultimately, the incremental $3,000 to $10,000 sale price — net of incremental expense — justified the effort.

Recently, we traveled to Singapore. Used cars are routinely sold offshore. I found that Singapore views the transactions as “business as usual.”

There are 196 countries in the world. Many do not contain the level of infrastructure to support used-vehicle sales, so they operate from a global perspective, selling vehicles into markets that will support the sale/purchase.

From what I have been able to ascertain, from my experience in Singapore and other countries, they have created a compelling business model to facilitate used-vehicle sales.

We are no longer the largest car market. Typically, there is a stronger demand for used vehicles in the emerging markets, simply predicated on the match with disposable income. Demand outstrips supply. Used heavy equipment from the U.S. routinely cross borders and oceans — and at a profit. Why not our vehicles?

Domestically, we must always be cognizant that the role of the auction — whether it be live or cyber is simply to create a venue to bring buyer and seller together. Auctions cannot serve two gods, and they do not purport to do so. They simply bring buyer and seller together, and generate market-based returns.

Can an auction state to the consignor that it will generate stronger returns? Implicit in that declaration is the message to the bidder that he/she will pay more for those vehicles! Nor does the auction state to the buyers that they will be the recipient of a “great deal.” The goals of the consignor and purchaser are not coincident.

Therefore, it is incumbent upon the consignor to cast a very wide net, exposing the inventory to as many eyeballs and wallets as possible — and they include global markets.

Ownership and senior management have enjoyed robust used-vehicle sales results over the last several years. They may be asking harder questions when sale prices deteriorate.

Our collective reply must include the fact that we are exploring alternative options. In our busy day, it is quite easy to transition from investing our time dedicated to identifying our greatest opportunities, enabling us to enhance results, and slip back into the mode of addressing our biggest problems.

Predicated on current market conditions, it is incumbent upon us to focus our attention on the former activity.

Remember, when business is slow, or markets are weak, expand the pie.