Cashing In: Tom Kontos on Liquidity & Depressed Values

At a time when cash is king, it’s more important than ever for everyone carrying used-vehicle inventories—manufacturers, captive and non-captive automotive finance companies, banks, commercial fleet management companies and dealers—to take advantage of the auction industry’s ability to generate liquidity. Auctions have the unique capacity for creating cash quickly through the robust, competitive bidding process this industry fosters both in the lanes and online. And let’s not forget the impact the auction industry has on the Big Three and its captive finance arms. Auctions play an important role in creating liquidity for these companies by remarketing its used, program, off-lease, repo and company vehicles. The remarketing of these used units, which is a regular part of the domestic manufacturers’ operations, can be accelerated as cash needs dictate.

On a daily basis, the auction industry establishes resale values for thousands of vehicles. Consignors are at liberty to sell or refuse to sell at these established values. Dealers also have other options—they can return offered vehicles to their stores and mark them down for retail sale. But most consignors are just delaying the inevitable by “no-sale-ing” their units. Moreover, they are also denying themselves of needed liquidity to fund their front-end lending operations or even of needed capital for their businesses.

While many may be thinking now is the wrong time to be selling used-vehicles due to the record wholesale price decline in October, the current need to generate cash may be more important than obtaining maximum vehicle values. This is especially the case at a time when auto asset-backed securities markets have collapsed and other sources of capital are severely restricted.

Moreover, not all segments of the wholesale market are experiencing weak demand. For example, demand for many of the sub-prime repossessed units — which tend to be older, rougher and, as a result, less-expensive — is relatively high at auction right now. This may be attributed to two things: the preference of some dealers to conserve floorplan capital, and the relative success retailers in the buy-here-pay-here space are having. The latter are often perceived as “lenders of last resort” for the credit-challenged car-buying public. Also, older units are in shorter supply at auction. This is because franchised dealers are holding on to trade-ins that they would have previously wholesaled. This is done in an attempt to retail these units for the attractive grosses they generate.

Often, sub-prime financing companies that have to satisfy certain covenants with sources of capital are basing sales strategies on liquidity considerations rather than retention considerations. As previously stated, this may be an appropriate and commendable strategy to provide “front-end” liquidity for retail lending. Dealers may also find it best to liquidate aged or unwanted used-vehicle inventory to generate cash in order to weather potential economic storms.

So at a time when the government, the financial community and the automotive industry are all seeking ways to inject liquidity into the market, the auction industry represents a ready source of cash from ample volumes of used-vehicles.

Wholesale market values may be depressed at present, but there are pockets of healthy demand for certain types of used-vehicles and auction companies can advise remarketer of those opportunities. In these unprecedented times, the need to create liquidity may ultimately supersede the desire for price maximization.

Tom Kontos is Executive Vice President of Customer Strategies and Analytics at ADESA, Inc.

Posted in Marketing Matters, News

Written by

Enjoy this Post?

Remember to subscribe to our RSS Feed and if you would like, please share this post.

Leave a Reply