Government Cars Auctions

How many new cars does it take to make a used-car market? For years, anyone in China wanting a set of wheels pretty much had to go to a new-car dealer. Why? Because as recently as a decade ago, Chinese bought just 300,000 new cars annually. And without a lot of new cars, it’s hard to have many used ones.

But in 2005, Chinese consumers bought 3.1 million new cars and have purchased more than 1 million vehicles annually since 2002. That has led to a growing market for secondhand vehicles — more than 1.25 million last year. Used cars “are much cheaper, and the condition is still very good,” says 21-year-old Gong Jianmin, who expects to spend $12,000 for a five-year-old VW Jetta. “For me, that’s a deal.”

Used cars are poised to become a much bigger deal. In the U.S. and Europe, as many as three used cars are sold for every new one, so there’s plenty of room for growth in China. And new regulations approved in October make it easier and less costly to transfer ownership of a car.

That has led a host of foreign auto companies to jump into the business. General Motors, VW, Audi, BMW, and Toyota Motor all have authorized dealers to sell their cars used, which should boost trade-ins and increase consumer confidence. But the business isn’t easy, particularly given buyer suspicions about secondhand cars and those who sell them. Just ask Meng Qingkai, manager of the used-car department at Beijing Dashihang Auto Sales Co. Although he says customers trust his company because it’s an authorized Buick outlet, he allows that other shops “cheat consumers.” China’s market for secondhand vehicles may be nascent, but its reputation, at least, is apparently little different from the used-car business worldwide.

Government Cars Auctions

Here’s how fast the world of publicly traded car dealerships changes: United Auto Group was the largest in early January. But it didn’t take Republic Industries long to overtake it.

But Carl Spielvogel, the former adman who’s chairman-CEO of United Auto Group, doesn’t seem concerned.

“The key in the used-car business doesn’t depend on how many locations you have,” he says. “The key is how much money you make.”

FULL SERVICE
United Auto is looking to sell not just cars but other auto-related features such as service, parts, warranties and finance. Its wholly owned subsidiary, Atlantic Finance, makes car loans to credit-worthy buyers.

Company founder Marshall Cogan, who later this month will succeed the resigning Mr. Spielvogel as chairman, says all United Auto’s used-car stores offer a 132-point car inspection and a “security blanket” guarantee that lets customers return vehicles in 15 days for exchanges.

Unlike its main competitors, United will negotiate on used-car prices.

United Auto opened its first used-car outlets in early 1996, ahead of key competitor Republic’s AutoNation USA but behind Circuit City Stores’ CarMax. As of early March the New York-based company had eight free-standing used-car superstores in four states and 51 new car dealerships, with used-car areas, in 11 states.

The new-car dealerships feed the used-car system. United Auto’s used-car stores sell mostly 2- or 3-year-old, off-lease vehicles, and manufacturers only invite the retail chain’s new-car dealers to their off-lease car auctions. But United is experimenting with older cars and trucks retailing for $5,000 or under at its Jersey City, N.J., used outlet.

CLUSTERED
Geographically, the company’s stores are clustered. United Auto has four used-car stores in Arkansas, two in Georgia, and one in both New Jersey and Connecticut.

“We have five to six [new] dealerships per hub,” Mr. Cogan says.

The system provides economic benefits for advertising and operations, says Mr. Cogan, who describes the new-car stores as the “backbone of our used operations.”

He says the company plans to continue growing via acquisitions, mostly on new-car dealerships.

LEASING FACILITIES
Unlike other superstore chains, United Auto prefers to lease rather than own their facilities because of cost advantages and the riskiness of real estate.

When United Auto wanted to open a free-standing used-car store in Little Rock, Ark., it leased a shuttered restaurant that already had a paved, lighted parking lot. Mr. Spielvogel, who will be a consultant with United Auto through 2000, says the company spent $86,000 setting up the lot and turned a $65,000 profit the first month with about $180,000 in operating costs.

United Auto’s 1996 pro forma revenues totaled $1.6 billion last year and are expected to hit $4 billion by 2000. Used-car sales are expected to account for 45% of total sales by 2000, up from 27% in 1995.

The company continues to use the names of the various, well-known dealerships it has acquired because the local dealers have high consumer recognition. There’s no national United Auto advertising tagline, but all communications carry the company’s name.

Government Cars Auctions

They’re called used-car superstores, and with their computer-assisted shopping, huge selection, spacious showrooms and no-haggle price policy, they are designed to eliminate everything that Americans have come to know and hate about buying a used car.

So far, there are only 10 of these soft-sell operations scattered around the country, but that number is expected to mushroom in coming years. CarMax, owned by the Circuit City Stores electronics chain, opened the nation’s first used-car superstore in Richmond three years ago; it now has five outlets and plans to build 75 to 85 new ones around the U.S. over the next five years. Republic Industries, headed by Blockbuster Video founder Wayne Huizenga, plans to open five AutoNation USA superstores by the end of this year–mostly in Texas and Florida–and get 12 more up and running next year. Republic is also acquiring Car Choice, which has two superstores in Dallas and Detroit that will be folded into the AutoNation chain.

To see whether the superstores really are super, we dispatched five MONEY staffers to go through the motions of buying a car at five CarMax and Car Choice superstores in Georgia, Michigan, North Carolina, Texas and Virginia. We then tried to find similar cars at traditional dealers located within a few miles of the superstores. Our findings: Shopping at superstores was far more pleasant and efficient, but dickering with a dealer always got us a better price, generally $100 to $300 less than the superstores’ for a similar car. Here are the details:

The shopping experience. The superstores are bright, clean and airy. Some have snack bars and supervised playrooms where kids can entertain themselves while mom and dad kick tires. You use a computer terminal to help find the cars you’re interested in. By touching the screen, you specify the make and model you want and the amount you’re willing to spend. The computer shows you all the cars that fit your requirements. It will also print out a sheet showing a picture of any car, a list of all its equipment, and the price–plus a map indicating where the car is located on the vast lot–usually 16 to 30 acres–adjacent to the showroom.

Conditions at the traditional dealers varied widely. But their used-car lots were generally crowded and badly organized. And sometimes the physical setting was rank. Correspondent Steve Marsh describes one particularly run-down Florida Ford lot: “The sales office is a mobile home on a muddy mound. Inside, you encounter a linoleum floor, crumpled paper wads and overturned coffee cups. The lot itself has cars crammed together, and it’s swarming with bugs.”

- The salespeople. The people we dealt with at the superstores were almost always attentive, polite and friendly. But, while they didn’t try any high-pressure sales tactics, many seemed brand new to the business and didn’t know much about cars. Meanwhile, the salesmen on the traditional lots ranged from helpful and knowledgeable to ill-informed and rude. Many tried to steer us toward models that cost more than we wanted to spend.

Government Cars Auctions