Expert insights | The used-car inventory crunch

Change continues to buffet the automotive industry in Canada, as evidenced by the severe shortage of used-car inventory. In fact, the pandemic, coupled with the rise of digital tools, has dramatically altered the used-car landscape and transformed it into a more global marketplace in order to meet rising demand. What does this mean for Canadian auto dealers and how can they capitalize on this trend? Luciano Butera, the Executive Vice President and Chief Operating Officer of TRADE X, as well as a member of the company’s Board of Directors, offers some compelling insights.

Q: How has the lack of new-vehicle inventory changed the interest in and value of used-car inventories?

Luciano Butera: The lack of new-vehicle inventory has pushed demand for used-car inventory to unprecedented levels. In the absence of new-car inventory and the extended waits to obtain vehicles, used-car pricing has risen to the point where, in some cases, late-model used cars are priced comparably – and sometimes higher – than a corresponding new vehicle’s manufacturer’s suggested retail price. The demand on both sides of the border also has driven up used-vehicle demand and many dealers are finding it more lucrative to export used cars south of the Canadian border or abroad to take advantage of the higher pricing.

Q: Traditionally, what were the primary ways dealerships used to acquire used vehicles? How has that changed?

Butera: Traditionally, dealerships used to acquire used-car inventory through auctions, dealer-to-dealer wholesale acquisitions, customer trade-ins and fleets. The pandemic accelerated the use of digital auction platforms, which have dramatically increased dealers’ willingness, in certain markets, to search outside their borders and procure vehicles internationally. For example, many dealers in the United States that typically shied away from Canadian vehicles have now embraced Canadian inventory as a viable alternative to stocking their lots and supplying their local markets.

Q: Traditionally, how would dealers dispose of used-car inventory that didn’t match their market/client base?

Butera: To dispose of unsold inventory, dealers traditionally used the same outlets that they used to procure used-car inventory – wholesaling to other dealers and auctions. After that, depending on the vehicles’ age and condition, they’d send them to be recycled or exported them to markets where there’s higher demand.

Q: How has the used-vehicle marketplace changed over the past two years? What opportunities has this created for the dealers in both buying and selling used vehicles?

Butera: The pandemic has certainly taught the industry that the need for traditional bricks-and-mortar selling outlets is not as critical as previously thought. Many dealers have adopted digital contracting, touchless delivery, remote trade-in valuation processes and home test drives and deliveries to create a faster and more seamless customer experience when buying a vehicle. Dealers who quickly adopted new selling techniques and technologies found favor with customers and, in turn, they were able to continue to sell and purchase vehicles throughout the pandemic without much disruption.

Q: Historically, numerous barriers made it difficult to move used vehicles, not only from one province to another, but from country to country. Can these barriers be removed and if so, how?

Butera: With the advent of modern digital resources and platforms, moving vehicles from province to province and between countries has become very transparent, easy to navigate and as seamless as local transactions. Dealers now have tools available that allow for the safe and secure transportation of vehicles, a simplified documentation process and secure payment methods to help build trust between buyers and sellers.

Q: Do you believe the used-car industry has become a global market?  If yes, why is this occurring?

Butera: Yes, technology and trading platforms powered by artificial intelligence are making it possible for both buyers and sellers on opposite ends of the globe to gain increased visibility of vehicle valuations, vehicle conditions and arbitrage opportunities, as well as safely transact payments and easily handle logistics and compliance, just as if they were buying or selling locally. Due to the pandemic’s impact, dealers were left with no choice but to expand their geographic trade markets to survive the rapidly evolving way business was being transacted. Dealerships strove to keep their doors open and consumers required vehicles, especially if public transportation had been their primary mode of transportation – a means of travel that posed a risk to people’s health. Dealers quickly expanded their selling and purchasing corridors to global markets to maintain liquidity in the industry.

Q: How do dealers and consumers benefit from this globalization trend?

Butera: Globalization is providing both dealers and consumers access to vehicles they previously could not buy or sell in their marketplace. In an export market, the sellers have an advantage: they can sell vehicles for what they’re truly worth to the world’s highest bidders and according to arbitrage data for each specific area. Meanwhile, buyers now have an opportunity to access vehicle inventory that would normally not be available or difficult to obtain. As a result, increased availability has improved transportation and mobilization of goods and services in local and global marketplaces.

Q: What opportunities do you see for Canadian dealers in terms of either sourcing or disposal of used vehicles?

Butera: Canadian dealers can both source compliant vehicles that are in demand and dispose of vehicles for much more than local wholesale values, as there is a greater appetite for older vehicles in various international markets. Vehicles typically deemed as having little more than scrap value in Canada are in higher demand and carry significantly higher value in developing nations.

Q: How do you build trust between international buyers and sellers of used vehicles when they don’t know each other?

Butera: Simple – you provide both buyers and sellers with a transaction outlet that provides complete transparency, minimizes trade risk by providing data to ensure vehicle admissibility and protects the trade by using a trusted logistics and payments partner. The complexity of global automotive trade has been dramatically reduced by the introduction of advanced but easy-to-use trading platforms such as TRADE X, which provides data and facilitates the trade by ensuring vehicle condition and admissibility, while also handling logistics, homologation, and taxes. Trust also is built by ensuring a seller gets paid in their local currency without having to wait for the buyer’s full payment, as platforms such as TRADE X pay the seller in advance. Alternatively, the buyer can make a deposit that’s held in escrow by TRADE X until the vehicle is delivered. Then the buyer can provide full payment. Traditionally, trust between dealers was either earned or broken through cross-border trade experiences that called for dealers to take risks. Now, thanks to advancements in technology, trust no longer needs to be earned and can’t be broken, because it’s now guaranteed by platforms such as TRADE X

Q: As vehicles move from country to country, do currency valuations and fluctuations create risk for both buyers and sellers? If so, please explain.

Butera: Currency risk is always top of mind for exporters, as it takes time to move vehicles from country to country. This risk, however, can be mitigated by using foreign-exchange hedges to lock in a foreign exchange rate for a given period to complete the vehicle purchase. TRADE X handles this on behalf of its platform users and eliminates currency risk by enabling the buyer to pay in their local currency and by paying the seller in their local currency. It also satis-fies the seller’s local taxes. Therefore, counterparties have complete certainty as to what they are receiving and paying after the transaction is completed.

Q: From a global standpoint, what are the cross-border trade corridors for used cars? Where are the cars sold from and to?

Butera: New corridors of cross-border automotive trade are opening in developing nations worldwide, with a particular emphasis on West Africa, Latin America, and Asia. As the U.S., Canada and European Union tighten environmental standards, giving rise to greater demand for electric vehicles, sellers are finding that older cars can generate significantly higher values in developing countries such as Nigeria and Kenya, where there are fewer vehicle-manufacturing plants and a lack of reliable public transportation. In these developing nations with growing populations and rising middle classes, the demand for used automobiles has surged.

Q: Are there certain sorts of vehicles that are commonly exported to certain countries?

Butera: At TRADE X, we trade a variety of vehicles, from ultra-luxury cars to vehicles more than 10 years old and everything in between. It’s impossible to say which vehicles are most in demand, as every market is unique. However, TRADE X is committed to meeting the needs of individual markets by providing a feature called Instant Request which allows dealers to highlight and narrow their preferred vehicles when interacting with potential sellers.

ABOUT THE PANELIST

LUCIANO BUTERA

Executive Vice President, COO + Board Member

TRADE X

Luciano provides over 25 years of experience in the automotive industry. Formerly Group General Counsel + Head of Risk for Cox Automotive Canada + Brazil, Butera holds a J.D. from Osgoode Hall Law School, and is a member of the Law Society of Ontario and The Canadian Bar Association.