When I speak to industry groups across the U.S., the question I’m most often asked is “what has changed since last year?” One of the biggest changes in the industry recently has been the softening of used vehicle values. Since the financial troubles that began in 2009, new vehicle sales in the U.S. have tumbled. According to Wards Auto Info, sales in 2009 were the lowest in a decade, and the following years – 2010 and 2011 – were not nearly as robust as they had been in previous years. That led to a domino effect, which saw used car values increase as financial institutions restricted leases and rental car and fleet companies (the major suppliers of two- to four-year-old vehicles to the market) kept vehicles in service longer. With fewer late-model vehicles available, resale values for used vehicles rose across the board.
The dearth of used vehicles eventually bled over into the claims and collision repair environment, causing an increase in the appraisal values of vehicles. Instead of being declared total losses, more and more borderline vehicles fell into the repair category. The U.S. saw total loss rates plummet to percentages the industry had not seen in nearly a decade.
Of course, all economic bubbles must burst eventually and the time is now for used vehicles. Values of vehicles being appraised have fallen from the preceding two quarters, signaling an increase in the number of damaged vehicles that will be declared total losses. Based on these trends, I expect total loss percentages of claims made to increase by a full percentage point or more in 2013 compared to 2012 levels.
The impact of exchange rates
The second factor worth looking at when discussing total losses is the value of salvage and the factors that influence salvage values. An examination of the exchange rate of the U.S. dollar to the Euro and the Mexican Peso over the last five years shows the strengthening value of the dollar. The result of that stronger exchange rate means that fewer salvage vehicles will be sold to international or Mexican buyers, and reducing competition inevitably lowers salvage values.
Ultimately, the stronger dollar will likely benefit alternate parts supplies, both aftermarket and recycled. A stronger dollar means more vehicles will stay in the U.S. rather than go overseas. As a result, the salvage for harvesting parts will also stay in domestic sources, increasing supply and lowering salvage part prices. A stronger dollar will also benefit the aftermarket parts supply. Because the vast majority of aftermarket parts originate in Taiwan, favorable exchange rates against the recession-weakened Chinese Yuan will likely result in more attractive aftermarket parts pricing. Given this potential to lower aftermarket prices, GM, Ford and Chrysler could eventually lose the ground they have recently gained by the expansion of their “beat the competition” aftermarket part price matching programs.
Preparing for the trends
Will the benefit we see in lower parts prices offset the softening resale values of used cars? Probably not. Parts prices are an important part of the cost containment of the overall appraisal, but parts represent just 43 percent of the cost of the estimate. Labor rates and paint and materials make up the other portion of the costs and, after years of stagnation, hourly rates and paint costs are likely to increase this year. In the end, the relief we see on parts prices will be partially offset by increases in the other parts that make up a repairable appraisal, while the impact of the lowering of the actual cash value of the vehicle being appraised will be greater.
How can a shop prepare for these future trends? First, estimate the value of a vehicle with the options to condition and educate the claims department about the accurate value of the vehicle. Explore what the potential salvage values of the vehicle are. Then inform the vehicle owner that in your expert judgment the vehicle is likely repairable. In these cases, negotiate a tear down with the carrier to accurately and completely assess the damage. It will be money well spent for an insurance company. Will this work in every case? Of course not! Owners may not want their cars back and insurers may balk at the cost of a tear down. But if you can provide the insurer with numbers that make sense, the insurer will likely give you the green light. The reality is that more insurers are waking up to the fact that they lose more policy holders after a total loss than a major repairable claim. You can help with the wake-up call.
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