There are billions of people who know about Wall Street. However, the second largest free market in our country is an unknown to most folks. It’s a place I get to visit every single week.


The wholesale auto auction market.

Every year there are over 10 million vehicles that are inspected, appraised and liquidated by sellers throughout the United States. Off-lease vehicles. Repossessions. Trade-ins. Totaled vehicles, and most importantly, vehicles that simply don’t sell because they are no longer popular.

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These vehicles inhabit a world we know in our business as “Wholesale Heaven”. A place where cars are stuck in limbo until someone, somewhere, is willing to buy what the dealer is asking for that car and take a chance on it.

If you want to know the difference between the winners and losers of the car market, this is where you get to see it firsthand. The recent demise of Pontiac, Saturn, SAAB, Hummer, Mercury, and Isuzu, even older historical footnotes like Daihatsu and Yugo, are usually foretold first in the wholesale markets where a weakening brand’s off-lease vehicles were going for nowhere near their past prices.

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As these brands became unpopular and less desirable, the pricing issues become more extreme.

For example, a solid eight years or so before SAAB’s demise, I could often times buy an older base Toyota Corolla in the seven to twelve year old range for a similar price of a SAAB 9-3 or 9-5.

The fact that those SAAB models had an MSRP that was sometimes as much as twice the price of the Corolla when new made no difference. While all Corollas remained easy to finance in the used car market and a favorite buy of large used car dealerships. SAAB was banned for purchase by these major market movers, from Carmax to Drivetime, due to their lack of popularity with the mainstream public.

Near-new? Older? Loaded? Didn’t matter. Nobody wanted them.

At this point in my career as a car dealer I go to the auctions and see these financial realities week in, and week out. I call them ‘bends’. Those unique points in time where nearly all the models of a given brand are beginning to offer a foreboding sign of a brand in decline.

Here are two brands, Scion and FIAT, that I believe will likely head down that lonely road to permanent wholesale heaven.

Scion

At first the losers in this brand appear to be the minor players.

A two year-old Scion iQ, well-equipped, often times has trouble selling for $8000 at a wholesale auction. In many of the independent sales, a repossessed iQ will typically sell for only the $6500 to $7000 range.

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Not a big deal you say? Well, it gets worse for Scion real quick. A 2013 Scion Xb that would typically go for around $20,000 new, is now selling for only $12,000 with less than 25,000 miles in my neck of the woods. A 2013 Toyota Corolla LE, which was aggressively leased and financed (and overproduced) during it’s final year of production, only experienced about $1300 worth of depreciation over the past year versus over $2500 for the Xb. This is according to the Manheim Market Report which tracks these sales all over the United States.

This level of depreciation in the wholesale market is a huge concern for the parent company, Since both cars are marketed at similar price points, it doesn’t take long for a company like Toyota to gradually monitor whether this marketplace failure is just a one-model scenario, or one where the entire brand is a long-term negative that requires the disbanding of the brand itself.

As for everything else Scion has recently sold in the marketplace, the Xd is a forgotten model (like the old Xa), and Scion’s two-door coupes, the Tc and FR-S, are now getting their clocks cleaned when it comes to retail sales.

(Graph courtesy of goodcarbadcar.net)

Scion has been incapable of sustaining a market leader since the beginning of their existence, and to be brutally blunt, when you look at the Toyotas that are sold at the dealer auctions, you realize real quick that the sporty character of a few of Scion’s offerings would probably be a boon to the overall Toyota brand.

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If Toyota ever wants to become a market leader in the emerging areas of tomorrow’s market, such as the compact crossover segment which is about to have 11 competitors by the end of this year versus only 3 models last summer, I believe Toyota needs to make a more sporty youthful Toyota their main focus and Scion, a memory of Y2K-era marketing. The auctions are already reflecting the long-held financial reality that the low-volume Scion sub-brand is not adding any enduring value to Toyota’s North American operations.

FIAT

The most difficult hill a brand can climb in this business is emerging from a successful one-model brand to a successful multi-model brand.

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FIAT, Mini, and Tesla are gradually trying to accomplish this feat over the next five years, and out of the three, the wholesale auctions are already betting that FIAT will be the one that can’t sustain the market momentum.

It all comes down to resale values.

At the auctions there is a constant push and pull in price for these emerging brands. When these brands push an aggressive lease program (even one that may not exist), the wholesale price will go down dramatically once those leases start getting returned back to the dealerships.

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Every form of subsidy — rebates, incentives, cheap and easy financing, generous lease terms. They all open that spigot of used car supply down the road and depress the value of those used cars.

In the case of FIAT, this spigot has been on for almost their entire period of existence. The new products have been an epic failure. The resources to sell these used cars is challenging due to FIAT’s small dealer network, and this inventory is now going head-to-head with a new model that is almost visually identical to the off-lease cousin.

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A 2013 Fiat Sport with 25,000 miles has already sustained a nearly $2400 depreciation hit in less than a year according to the Manheim Market Report (from $12,090 to $9.725), and the following year, MMR values are forecast to sink all the way down to $7850 at a wholesale level.

This represents a greater than 50% hit over a three-year period for a used car that will likely have fewer than 40,000 miles on it once it goes off-lease. Those financial institutions that hold the paper on these vehicles will get creamed, and the $199 lease over 36 months with nothing down offers will not be sustainable.

The other crowning issue for the FIAT brand comes in the form of Alfa-Romeo.

If the FIAT brand can’t be successfully expanded beyond the 500 model, there is little harm for the parent company to transfer that model to another Italian-flavored brand that will likely serve a far greater level of volume in North America. Right now the 500 is not enough, and I can easily see all FIATs quickening their counter-clockwise depreciation spiral at the dealer auctions.

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Steven Lang is the co-developer of the Long-Term Quality Index and has been involved in the wholesale side of the car business for well over 15 years as a remarketing manager, auto auctioneer, and car dealer. You can either contact him via Facebook or reach him directly at steven.lang@alumni.duke.edu)