Auto Auction business

For those who are knowledgeable about the automotive industry, the term "auto auction" may ring a bell. Auto auctions have become a significant presence in the automotive industries of Japan, the United States, Europe, and more recently, in Southeast Asia. It is a professional world that may seem distant to the general public. In this article, we would like to provide a brief explanation of auto auctions from the perspective of someone who previously worked in the auto auction industry.
 

What is an Auto Auction?

The history of auto auctions in Japan dates back to 1967. It was established to meet the demand for inventory financing or cashing out due to the large number of trade-in vehicles generated by the rapid growth of the new car market. As the premise of the service was to sell quickly and within a specified period, a membership system was introduced, and credit management based on membership screening, security deposits, and transaction records became mainstream. The capability of expertise and financial strength were also necessary to transact high-value vehicles in a matter of seconds, leading to the growth of the market as a professional industry. Vehicles acquired from individuals are listed and traded through dealers.
Before the expansion of the auto auction market, the primary routes for used car dealers to acquire inventory were through wholesale transactions from dealers or other dealers, as well as trade-ins or purchases from users. On the other hand, the sales routes for used car dealers were limited to retail sales to users and wholesale to other dealers, and both procurement and sales were based on relative transactions. However, when acquiring through relative transactions, unless the number of trading partners increased, there was a risk of bias towards specific manufacturers or models, and it was not always possible to procure vehicles suitable for the store's policy. Similarly, the sales destinations for vehicles unsuitable for their own inventory or vehicles that had been in stock for a long time were also limited.
 
In this context, the auto auction market was formed to provide a place for a large number of used car dealers to expand their trading partners, enabling the healthy circulation of the used car market, where there had been frequent transactions of vehicles with rolled-back odometers or concealed accident histories. The achievements of creating a standard for the valuation of used cars and establishing a market (≒ creating a market) have been significant. Currently, more than 115 auction venues handle transactions of 150,000 vehicles every week, and it is now a core part of the used car industry.
 
 

Business Model

The business model of auto auctions is an intermediary fee-based business that provides a venue for sellers and buyers. It aims to facilitate smooth and fair transactions for sellers and to provide buyers with a place to purchase a wide variety of used cars.
Auto auctions also provide services such as vehicle inspections, auction operations, settlement and document mediation, and credit management to ensure smooth and fair transactions. Based on the credibility of the members, it is possible to arrange for the pickup before payment.
 
Many of the sellers are corporations that own a large number of company vehicles, and through auto auctions, they can easily plan their profits by anticipating the timing of sales and the approximate market price. Furthermore, the accumulated market information provided by the auto auction is now sold as statistical data and is utilized in residual value calculations by financial companies.
 
It is worth noting that the management of vehicles and documents in auto auctions is excellent. Documents are essential for the transfer of ownership to the next owner and for the continued use of the vehicle, and without them, the vehicle becomes nothing more than scrap. Managing both vehicles and documents is crucial and cannot be overlooked. While some of this physical management has its limits in digitalization, auto auctions have achieved seamless management through a delicate balance of systems and manpower.
 

Customers

As mentioned earlier, there are two types of customers in auto auctions: sellers and buyers. Registered members can be both sellers and buyers, and their general characteristics are as follows: 

Seller

• Leasing companies: Concentrate on their main business and consolidate auctions for immediate cashing out rather than dealing with buyers directly. Sometimes they require timely sales for fulfilling revenue target of the month.

• New car dealers: Sell trade-in vehicles that do not meet their quality standards.

• Day traders: Buy and sell through auto auctions by utilizing market knowledge of price gap which each auction house has.

Buyer

• Used car dealers: Search for vehicles according to customer requests and purchase for inventory.

• Used car exporters: Purchase vehicles for overseas markets. *Generally people in overseas are not allowed to participate in auctions.

• Day traders: Buy and sell through auto auctions by utilizing market knowledge of price gap which each auction house has.

Sellers mainly consist of corporations that own a large number of vehicles, such as leasing companies. The benefits for these companies have been previously mentioned. New car dealers also frequently use auto auctions as sellers to dispose of vehicles that do not meet their standards or vehicles that do not fit the characteristics of their area (e.g., luxury cars in rural areas).
 
On the other hand, buyers are evenly distributed among used car dealers, exporters, and day traders, with the presence of exporters increasing in recent years. Day traders may be seen as disruptive to the auction and other buyers, but experienced day traders who are knowledgeable about the market can compete for irregularly priced vehicles, ultimately raising the prices closer to market value. This helps maintain a stable market without significant price drops, making it easier for sellers to list their vehicles with confidence. In the past, auction companies themselves have also acted as traders. It is essential for auction companies in the initial stage to maintain a function that does not disrupt and maintain the market, and day traders are crucial customers for auction companies in the same terms.
 

Conclusion

So far, we have explained the business of auto auctions. Auto auctions have various unique and excellent functions to efficiently provide value to both sellers and buyers. In the next article, we would like to provide a detailed explanation of some of these functions.