The used car industry has transformed from a bumpy ride, to a smooth drive and the languorous but steady shift in fortune is a national and even global phenomenon.
Most analysts would have predicted far harsher times for both the independents and chains that supply second hand cars to families and corporate bodies alike, labelling them as inevitable victims of the treacherous game of fiscal tag that travels insanely through any recession.
But a closer examination of data suggests that better times are here for used-car sale businesses, and despite differing opinions, things are likely to improve further.
Two main factors have influenced the new-found popularity of used car dealers. The first is the collective effect of the car manufacture incentive schemes, introduced by various governments around the globe. The second is the relative-scarcity effect of the recession itself.
Scrappage schemes
Vehicle scrappage programmes have been introduced in a number of countries, including Canada, USA, Italy, Portugal, France and Germany. The idea behind such initiatives is to encourage the replacement of older, less efficient and emissions-rampant cars with new and modern substitutes, stimulating car manufacture in the process.
Environmental benefits are often cited as the principal motivation, but during recession the more pressing objectives are linked to kick-starting the economy, and the UK government was quite open about this when it launched its own scheme during the 2009 Budget.
What consumers are encouraged to do is scrap an old car (at least 10 years old) in exchange for a £2,000 payoff (half-funded by the government). The programme has been allocated £300m, which allows for about 300,000 customers to benefit. The scrappage scheme has been so successful in the UK that the government’s contribution to the fund is due to dry up around October 2009.
A similar scheme in the US cost $3b, $2b more than originally anticipated and just less than 700,000 dealer transactions were submitted for rebate.
Scrappage schemes have their critics, but they have undoubtedly helped to ease national economies away from their wretched penance. As The Economist stated in August 2009: “The boost in demand that the rebates have brought about is exactly the sort of stimulus that is urgently needed to escape what John Maynard Keynes called a ‘liquidity trap’.
“According to his theory, consumers may become so worried about the economy that they cling to as much liquid wealth as possible, cutting their spending sharply and thereby triggering precisely the slump they feared.”
The scrappage scheme in the UK has probably turned out to be one of the most significant developments to have affected the used car sector
The scrappage scheme in the UK has probably turned out to be one of the most significant developments to have affected the used car sector. The Northern Echo reported in August 2009 that Pendragon, one of Britain’s biggest (and largely new car) dealership groups, “is guardedly optimistic that the worst of the downturn may be behind the industry after the Government’s scrappage scheme played a surprising role in boosting used car sales.”
The Nottingham-based company reported pre-tax profits of over £11m in six months. The Echo article went on to state “the company would be investing more in used cars as demand outstripping supply had seen average used car prices recover to levels last seen at the start of last year.”
Boosted sales
The chief executive of Pendragon, Trevor Finn, says: “While cars under the scrappage scheme are definitely scrapped, the fact that they are not coming onto the used car stocks has helped to boost second-hand prices.”
That’s a markedly different picture to that of 2008, where unsold used cars were starting to clog up British auction halls, their values having dipped by an average of £500.
The global credit information group Experian reports in the first quarter of 2009 (1st January – 31st March), used car sales statistics were 5% lower than in the same period in 2008, but up 17% on the final quarter of 2008. This is the widest fourth quarter to first quarter increase since 2003/04. The biggest sales increases appear to have come for Citroen, Renault and Nissan.
Kirk Fletcher, managing director of Experian’s Business Information and Automotive Businesses is quoted on the company’s website saying: “This is the clearest indication so far that consumers are slowly beginning to spend again in the used car market, and it also reflects the anecdotal feedback we are getting from dealers…. The decline was not as severe as many in the industry had been expecting.”
