Auto Makers Keep Eye on Used-Car Market

Randy Beil recalls an awkward encounter as the new guy at BMW several years ago.

He had hired on as a remarketer assigned to the used-car side of the business at the German luxury auto maker’s U.S. unit. Making the rounds, a visiting home-office executive wanted to know what Beil did.

“We sell new cars, not used cars, so why do we have a used-car department?” he said to the newbie.

“It’s my second day on the job,” Beil says. “And he’s asking, ‘Why do you work here?’”

Even today, some people think it is odd that makers of new cars would show a proprietary interest in used vehicles, something they didn’t do before.

“Twenty years ago, no manufacturer had a used-car department,” says Beil, currently Chase Auto Finance’s vice president-vehicle remarketing.

Now, all auto makers are active in used-car matters, from monitoring residual values to managing trade cycles to operating certified pre-owned programs.

That is because what happens on the used-car lot doesn’t stay there. Good or bad, it beelines back to the new-car side.

If auto makers neglect the back end and used-car residuals fall, new-car demand and prices go down, too.

“For manufacturers, it’s really about selling new, but used-car strategies are so critical,” Jennifer Costabile, General Motors’ general director-fleet and commercial operations, says at a recent National Remarketing Conference.

Every used car begins as a new car. So auto makers need to mind the full lifecycle of vehicles coming off their lines. 

“It’s about making sure residuals are high,” Costabile says, referring to the positive effects of strong brands and production schedules in sync with market demand.

When considering what to buy, many new-car shoppers, especially informed consumers, look at how well a vehicle retains its value after crossing the dealership curb. They want to know how their prospective purchase will do in the long run.

If that visiting BMW executive was clueless back when Beil worked there, the auto maker certainly now knows how the new- and used-car markets interact. BMW is the No.1 luxury-car seller in the U.S. largely because its resale values are so high.   

Successful new-car leasing programs depend on strong residuals, too. A good lease deal is premised on a car retaining reasonable value a few years later.

If the off-lease residual is lower than anticipated, an auto maker’s financing unit takes a hit. If too many leased cars come back as big residual losers, the captive company must consider its options.

Plan B is to bail. That is what General Motors and Chrysler did when they got out of leasing in 2008. They now are back, feeling better and seeing residuals high enough to make new-car leasing work.

Volkswagen’s lease rate is about 50%. That is relatively high but sustainable if the auto maker pays attention to brand strength, production levels and vehicle lifecycles.

“We’re doing that,” a VW spokesman tells me. “There is a right way to do it and a wrong way.”

He should know. He worked for GM and Chrysler in the dark days when the used-car market and leasing in particular haunted those auto makers.

Some used-car consumers ultimately step up to new cars. That’s another reason auto makers show a healthy interest in the pre-owned market.

“It’s about giving consumers a chance to experience product, and get them in our family,” Costabile says. If someone buys a used GM product, and likes it, “they might eventually want a new one.”

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