Salvage sales moving to the Web

Publish date: Dec 3, 2008
By: Brian Albright

Salvage vehicles have long been a valuable source of replacement parts and sheet metal for the automotive repair industry, and a reliable way for insurance companies to dispose of total loss vehicles. In the past, salvage vehicles were primarily sold through live auctions where recyclers, scrap dealers, parts refurbishers and others would gather in person to bid on these vehicles. Advancements in e-commerce technology, however, have moved a significant portion of the salvage business online, greatly expanding the universe of buyers and driving up salvage prices.

According to data from Insurance Auto Auctions (IAA), the largest auto salvage auction company in the North America, in 2007 nearly 80 percent of all auctioned vehicles were sold in auctions that utilized the Internet, and while the majority (56 percent) of salvage vehicles were still sold to live auction buyers, 44 percent were sold to Internet bidders.

“The biggest impact the Internet has had is that is has made product available to buyers that wouldn’t have had access to it previously,” says Dan Oscarson, vice president of global buyer marketing at IAA. “Before, buyers would go to an auction to see what was available, and might have to hit a few different auctions to find the cars they wanted. The Internet has enabled them to avoid having to stand outside and drive from place to place. They can bid from home or from their office, and they can buy more precisely. There’s no way you could physically be at every auction every week.”

The IAA Average Selling Price Index was 40 percent higher in 2007 than it was in 2003, with that increase driven partly by increased auction competition from Internet buyers. Rival Copart reported last year that since launching its online auction tool (VB2) in 2004 its gross margin had grown by 10 percentage points (to 45 percent) and that out-of-state bidders now represented 40 percent of the bidding population.

That’s been good for the insurance companies that are selling the cars and the auction houses handling them, but increased competition and rising scrap metal prices have been hard on some recyclers and parts refurbishers, who are now paying a much higher price for wrecked cars.

“That’s made things more difficult,” says Mark Carnesecca, vice president of vehicle purchasing for the Auto Parts Business (APB) division of Schnitzer Steel Industries. The company operates GreenLeaf Auto Recyclers and Pick-n-Pull parts store chains. “We’ve had to continue to look for other sources of vehicles to augment what we purchase at auctions.”

Carnesecca says the company also purchases vehicles directly from insurance companies, from individual body shops and from smaller auction houses that don’t have a broad bidding base. “We have to be a little more creative,” he says.

On the flip side, these companies now have access to a much wider range and selection of vehicles by accessing out-of-state auctions.

“There are still tremendous values if you are looking for a particular type of vehicle,” Oscarson says. “There is enough product out there that you can wait to find what you’re looking for. Prices have gone up, but that has been offset by the ability to buy more precisely. You can still make a profit by buying smarter; you don’t have to buy 10 cars a week or drive all over the place to attend the auctions.”

While purchasing a salvage vehicle online does entail some risk, most buyers are comfortable with the process.

“Some guys will preview the vehicles beforehand, but they can do it on their own time now,” Oscarson says. “It’s also very common for buyers to network and help each other. If you want to buy a car in Arizona, you find someone who can look at it for you, if that’s what you need.”

Purchasing vehicles from other states can require the buyer to jump through a few hoops, however. Some states require out-of-state buyers to apply for special identification cards, and those requirements can vary significantly. Salvage industry efforts to reduce these restrictions have been fairly successful, however. Last year, Oklahoma loosened its highly regulated salvage market, and Illinois recently adjusted its out-of-state licensing requirements.

Buyers also have to factor in the cost of transporting a vehicle from out of state. According to CentralDispatch, an auto transportation marketplace, the cost to transport a standard sized vehicle rose by $77 (11.8 percent) between April and July this year, following a 17 percent increase between February and April. These price increases have had minimal impact on the number of vehicles being shipped, however.

Who is buying these vehicles online? Primarily recyclers and refurbishers who are either fixing up the cars or cannibalizing the parts and selling the sheet metal.

There is also a whole new class of international buyers, many in developing markets with a high demand for scrap metal and replacement parts. Approximately 25 percent of all vehicles sold at IAA in 2007 were exported to foreign countries. Some border and coastal salvage pools have claimed that as much as 40 percent of their rebuildable salvage goes overseas.

According to Oscarson, foreign companies are also buying damaged vehicles, repairing them and selling them at a much lower cost than other used vehicles. The weak U.S. dollar, low shipping rates and cheaper labor in foreign markets have helped make this imported vehicle repair business extremely profitable, and salvaged vehicle exports have increased steadily over the past few years.

“In countries like the Ukraine or Guatemala, the overhead costs are much less and they can spend more for a vehicle because the U.S. dollar is worth less to them,” says Carnesecca. “They also have a whole different set of costs and regulations in terms of bringing that vehicle to market. A vehicle that might have gone straight for parts here can be rebuilt in another country because the overhead and labor are cheaper.”

For body shops, salvage auctions present a possible revenue opportunity as well. The cost for a repair shop to fix-up a totaled vehicle is usually less than what an insurance company would pay for the same repair. “During slow periods, a shop could pick up those cars and repair them, and that could supplement the walk-in business,” Oscarson says.

“This continues to be a profitable business for everybody,” Oscarson says. “The sheer product selection that the Internet opens up makes that possible.”

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