Auto Auctions, Japanese Style

Here're just a few notes on a visit to the Kinki branch of Toyota Auto Auction on a day when they were offering 1,700 vehicles (of which 10% or so might not hit the reserve price). This was arranged by Prof. Shioji of Kyoto University who helped host the first meeting in Japan of GERPISA, an international consortium of (mainly social science) researchers on the global auto industry. Now I've yet to see a Manheim or an Adesa auction so I can't compare and contrast. Perhaps later this summer I can rectify that...

At the Kinki site there's a massive multi-floor garage; land's too valuable close to Osaka for a massive open-air parking lot. We watched one of their evaluators go through a vehicle with a long checklist, from spots of corrosion to paint that suggests a repaired ding, including pulling away the fascia in a couple places. Most purchasers don't look at the actual vehicle but rely instead on the (target) 7 minutes that an inspector spends on a car.

Indeed, when we moved inside it was apparent that many purchasers are remote. While there is a large room of people bidding, many others are at computer screens elsewhere, while those at the Kinki site are watching simultaneous auctions held at other TAA sites. For that matter, Kinki TAA itself runs two lanes simultaneously; each computer in their bidding room has a red button on the left, a blue on the right. So first the screen updates as pre-bids are sorted out, and then the live bidding begins as those sitting in the auditorium or elsewhere click the bid ¥1,000 higher. The screen changes color once the reserve is hit – most of the cars are from trade-ins at Toyota dealers – and sellers can negotiate with the highest bidder when the reserve isn't hit. (I will check my notes later, but recall the no-sale rate is about 10% or, to put it the other way, the conversion rate is 90%.)

Now several larger trends in the Japanese market and in used cars showed up in our discussions. One is the role of cars as durable goods. Japan raised its consumption tax from 5% to 8% on April 1st and given that processing paperwork for a new car purchase takes several days (you have to file proof of a parking spot, which must be vetted by the relevant local government), sales plummeted in late March and are only now starting to recover. The result was a short-run dearth of vehicles coming to auction, and a modest bump in prices. Now at one time cars were kept but a few years, typically being scrapped before vehicle inspections became annual in year 10. That in turn meant low prices for used cars in year 8 ... so the prospect of even a minor repair could lead to a vehicle being scrapped. However, in the early 1990s the vehicle inspection system was relaxed, with less frequent inspections, fewer mandatory parts replacements (reflecting the abominable quality of Japanese cars in the 1960s, brake lines were one mandatory item), and allowing non-dealers to do the inspections. As a result the average age of vehicles is higher, and with a more vigorous resale market, well, that's when TAA switched from a way for Toyota to help dealers by buying trade-ins at an artificially high price as a quiet, off-books subsidy to a real entity. Of course the fact that one friend drives a 13-year-old vehicle that he's in no hurry to replace is not necessarily good news for those selling new cars. Even so, the market remains thin at older ages, where roughly one-third of cars are bought by foreign traders (many in evidence at TAA that day) for export to Russia, Pakistan and West Africa.

The group also visited a shredding operation; more on that later. The key link to TAA is that their business is down by about 50% as vehicles are on the road longer and more are exported (including some apparently exported to be scrapped). As noted in earlier posts on this blog (The Decline of the Japanese Auto Industry), it's going to be really interesting to see how all of the loss of a large domestic market interacts with the product mix of Japanese car companies and particularly the survival of Japanese parts makers.