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Used cars online: Going, going, gone
Tim Walters used to attend six used-car auctions a month to buy vehicles for his employer, the Fagan Chevrolet Cadillac dealership in Janesville, Wis. These days, Walters, the dealer's used-car sales manager, skips most of those events.
He still is buying as many used cars, though. Every morning, he logs onto SmartAuction, a Web site run by General Motors Corp.'s financing arm, to bid on leased cars that have been returned to the company. Last year, he made about half of his 400 used-car purchases on the site.
"I don't have to spend the whole day on the pavement," Walters said.
Internet sales are transforming the $81 billion North American used-car auction business. Since the 1930s, giant regional auction yards have been the primary place for dealers to buy and sell cars previously used for rentals or leases. Auto makers and dealers still send many used vehicles to the auction houses by truck.
On auction day, buyers from dealerships around the region inspect the cars and bid for the ones they want. Winning bidders send their purchases back to their dealership on trucks.
About 9.5 million cars were sold that way last year, according to the National Auto Auction Association.
Online auctions allow buyers and sellers to meet without traveling to a regional auction. Industry observers say the online portion of the market has grown rapidly in the past few years to account for 7 percent to 8 percent of industry sales.
During the business-to-business dot-com craze, some entrepreneurs had higher hopes for the online auto-auction industry.
In 2000, a group of Stanford University business-school graduates raised more than $38 million for an online-auction company, AutoDaq Corp. Its chief rival was AutoTradeCenter.com Inc., an online site created by a group of auto wholesalers.
By 2002, the market hadn't grown as fast as they had hoped, so the companies merged and formed AutoTradeCenter Inc., which says it will sell nearly 100,000 cars this year.
But the real winners in online auctions are the auto makers. General Motors Corp. says it sells about 300,000 off-lease vehicles a year, or 40 percent of its total sales of such vehicles, online through SmartAuction. The company estimates it saves $400 to $600 per car it sells online.
Honda Motor Co. says its receives "substantial savings" by selling off-lease vehicles via a private Web site managed by AutoTradeCenter. DaimlerChrysler AG launched Web operations in February and since then has sold 30 percent of its off-lease cars online.
"We save the transportation cost, the reconditioning costs and the auction fees," said Eckart Klumpp, vice president of remarketing at DaimlerChrysler Services, the finance arm of DaimlerChrysler.
Many traditional auctioneers say the growth of what is known as "upstream remarketing" has decreased the number of cars that make it downstream to their auction yards. They also worry that the cars sold online tend to be the ones in the best condition, leaving vehicles of lesser quality in the auction lanes.
"It's a threat to our industry," said Brett VanMeter, general manager of the Columbus Fair Auto Auction in Columbus, Ohio, one of the nation's largest independent auto auctioneers.
Still, he said he hoped online sales eventually would prove less profitable for the car companies. "I'm not trying to keep my head in the sand, but I do believe in the long haul the value of the auction will prevail."
Traditional auction favored
Advocates of traditional auctions argue that their format provides essential services, such as reconditioning, that can increase the selling price of a car. Many also believe that the live bidding process can often garner higher prices.
Still, some auction companies are making exploratory forays into cyberspace. The largest U.S. wholesaler -- Manheim Auto Auction, a unit of Cox Enterprises Inc. -- said sales on its Web site have increased 30 percent, to 150,000 cars this year, compared with the company's total annual sales of five million cars.
Dean H. Eisner, chief executive of Manheim, said he believed that online transactions could grow to as much as 10 percent to 15 percent of the market. There still remain good reasons to bring cars to auction sites, he said: "Part of it is, if you're a rental-car company, you need a place to put your cars when the new fleet comes in."
Many auto makers also like physical auctions because those venues provide a benchmark for prices in the industry.
"We still believe that the traditional auction is the best way to establish a market," said Linda Silverstein, director of Ford Motor Co.'s remarketing-business operations. Ford is testing some Internet sales techniques but sells nearly all of its off-lease cars through traditional auctions.
Buying sight unseen
General Motors Acceptance Corp., the financing unit that owns most of the off-lease vehicles, started SmartAuction in 1998, when it was selling record numbers of leased vehicles.
Bill Ploog, GMAC's general director of remarketing, said the idea came from his boss, who was worried about the cost of auctioning all those vehicles when their leases expired. "He had the foresight to see, 'Hey those vehicles are going to come back at us,' " Ploog said.
At first, GMAC simply faxed a list of vehicles to dealers in the Michigan areas to see if any of them would buy the cars sight unseen. "Lo and behold, they did," Ploog said. Of course, it helps that GMAC guarantees the quality of the cars it sells online; as a result, it says it ends up buying back about 2 percent of cars it sells online.
In 2000, GMAC converted the fax system into SmartAuction. The number of vehicles sold online has grown to 300,000 in 2002 from 34,000 in 2000. To ensure the safety of the marketplace, GMAC guarantees payment to the selling dealer. So far this year, 12,000 dealer-owned vehicles have been sold online.
"The nice thing is if you decide to sell the car on Tuesday, you can have it on the [Web] site on Wednesday," said Jeff Richards, used-car buyer at Bob Richards Chevrolet Company in Augusta, Ga. "With physical auction, you have to transport it to auction, clean it up because it gets dirty in transport, and you have to have someone there with it."