ATLANTA -

In light of the Japanese natural disaster and a flagging U.S. economic recovery, Tom Webb and Manheim Consulting had plenty of unique factors to consider when compiling this year’s Used Car Market Report — Mid-Year Edition.

Pinpointing what would boost all segments of the industry most, Webb didn’t hesitate to tell Auto Remarketing it is new-vehicle sales.

In responding to what he’s going to watch closely during the second half of this year, Webb immediately said it “is how quickly new-vehicle sales return back to where they were say in the first quarter, which would be nice. That would be an optimistic scenario.

“That certainly will impact all aspects of the auction business,” Webb continued. “You’ve got to get some churn going on. You’ve got to get some trade-ins going on in order to get some volume into the market to get a more realistic placement of used-vehicle values. You need the market moving.

“It looks like the July sales rate will be close to 12 million; maybe slightly above, if we’re lucky,” he went on to say during an interview in advance of Manheim’s report release Monday. “But in the first quarter, we were at a sales rate close to 13 million. Hopefully, we’ll get back to that level fairly quickly and without doing it with heavy incentives.”

Now in its third year of rolling out in-depth analysis at the calendar’s midpoint, Manheim dissected all segments of the auto industry. Here is a synopsis of the major data points Manheim discovered:

Retail Sales

—Manheim noted new-vehicle sales climbed 13 percent during the first half of 2011 over the same period last year for an annualized sales rate of 12.6 million. A 17-percent increase in commercial fleet sales was offset by a 5 percent decline in rental sales.

—Webb found total used-vehicle sales ticked 3.5 percent higher during the first half of the year compared to last year, including an 8.5-percent rise in certified pre-owned vehicle sales. Manheim indicated that makes a pace for a record year.

—During the first six months of the year, the 18.6 million used-vehicle sales were composed of 6.7 million franchised dealer sales, 6.8 million independent dealer sales  and 5.1 million private party sales.

Wholesale Market

—Manheim determined wholesale used-vehicle prices continued to rise in the first half of 2011. The Manheim Used Vehicle Value Index (which is a mix-, mileage- and seasonally adjusted measurement of wholesale prices) reached a new high in May and retreated only slightly in June.

—Webb also pointed out total volume of wholesale transactions declined by nearly 10 percent in the first half of 2011. Total National Auto Auction Association member volume is expected to dip below 8 million vehicles for the year.

—Manheim also said dealers continued to emphasize faster inventory turns in the first half of 2011. For many, that meant stocking fewer units, buying vehicles more frequently and utilizing more sources. As a result, dealers accounted for nearly 55 percent of auction volume sold in the first half of the year, up from 44 percent over the same period a year ago.

Online & Digital Activity

—Manheim has seen a steady increase in the number of online bidders and the number of vehicles they purchase. Officials discovered the largest gains have come via OVE.com, which saw a 10-percent increase in buyers from January through June compared with the same months last year.

—Webb indicated visitor traffic to Manheim.com continued to increase in the first half of the year, with some months at or above 5 million visits.

—Meanwhile, AutoTrader.com reported that visitor traffic set a record at 17.4 million in January, up more than 9 percent from a year ago.

Rental Market

—In the first half of 2011, Manheim computed rental companies purchased 788,400 units, down 5 percent from last year. However, Webb believes the industry will increase its purchases in the second half of the year and in 2012, leading to an eventual increase in the supply of rental risk vehicles across all remarketing channels.

Leasing & Repossessions

—As previously reported by Auto Remarketing here, Manheim reiterated that total repossessions peaked at 1.9 million units in 2009 and declined by 19 percent in 2010 to 1.55 million units.

—Webb noted that results for the first half of 2011 suggest that repossessions will fall by a similar percentage this year. That would push repossessions to 1.3 million units, their lowest level in more than a decade.

—After falling to a cyclical low of 1.1 million in 2009, Manheim mentioned new-vehicle lease originations grew by more than 50 percent in 2010 to 1.7 million units. In the first half of this year, Manheim indicated that growth continued with an estimated 25-percent increase in originations. The full-year total is on pace to exceed 2.2 million units.

Fleets

—Manheim calculated commercial and government fleets bought a combined 388,508 vehicles in the first half of the year, up 11.1 percent from last year.

—Webb also determined the average auction value of a midsize commercial fleet vehicle at auction was more than $9,700 in the first half of this year, up 18 percent from last year. At the same time, the average mileage declined 7 percent to just less than 65,000 miles.

Manheim president Sandy Schwartz declared in his midyear report message that, “It is fair to say that few of us have ever witnessed a period like the first half of 2011.

“Early in the year, it seemed that the economy was following a predictable, if slow, recovery path,” continued Schwartz, who has been at the top of Manheim only a few months. “Credit was easier, and as more customers could afford to buy a used vehicle amid tight supply, wholesale prices moved higher.

“In the second quarter, we witnessed the combined impact of high fuel prices and the Japanese earthquake and tsunami on the used vehicle markets,” he pointed out.

“In preparing this report, our chief economist Tom Webb and the staff at Manheim Consulting had one goal: to provide our clients with an interpretation of events so that they could apply that information to their remarketing strategies, whether buying or selling used vehicles,” Schwartz went on to say.

Inventory Sourcing: Franchised Versus Independents

In another segment of the report, Manheim delved into the varying challenges franchise dealers face when looking for used inventory versus their independent counterparts.

“Access to the most desirable categories of used-vehicle supply has been an important factor in the superior retail performance of franchised dealers,” Webb began. “Not only do franchised dealers have better access to late-model vehicles, they can often acquire them at lower prices than can independent dealers.”

To reinforce the point, Manheim insisted a high percentage of off-lease vehicles were bought by grounding dealers from the automaker’s captive finance operation at attractive residual values and without the added fees and transportation charges.

“That same model might sell for $2,000 to $3,000 more in the auction lanes plus have the additional expenses associated with purchasing and moving the vehicle,” Webb pointed out.

Manheim elaborated on franchise dealer advantages by touching on a strategy utilized by AutoNation, the second largest retailer as measured by units sold. AutoNation began to solicit specific models from its service customers.

Webb explained AutoNation’s “Winning Trades at the Door” program has service employees alerting customers that the dealership will pay 120 percent of the current book value for their vehicle. Employees target specific vehicles in good condition that are less than four years old and with fewer than 50,000 miles.

“Over the years, the practice of dealers directly buying a customer’s vehicle outside the trade-in process became a rarity,” Webb surmised. “But now many dealers actively promote in-store appraisals, separate from the vehicle purchase, knowing that the vehicles can either be wholesaled or retailed profitably.”

Meanwhile from the independent perspective, the inventory search process has been considerably more difficult, according to Manheim.

“Independent used-vehicle dealers have always been creative in overcoming inventory-sourcing challenges,” Webb acknowledged. “Compared to franchised dealers, they have less access to late-model vehicles and acceptable trade-ins that can immediately be retailed. As a result, they rely on a local network of dealers, wholesalers and auctions. Most independent dealers participate in at least one auction sale each week.

“But in 2011, local sources often had less supply as franchised dealers either retailed more of their trade-ins or took them to the auctions knowing that the vehicles would bring top dollar in the weekly sale,” Webb continued. “Many dealer-consigned vehicles were also listed in online channels, as dealers embraced the idea of multichannel remarketing. With prices rising, dealers felt that they had little risk in waiting a few extra days to sell their unwanted units as auction prices were strong enough to compensate for any added costs.”

Manheim believes some independent dealers were slow to utilize online channels, but out of necessity, many got on board this year.

Officials from OVE.com mentioned they have more than 115 independent auction partners who list dealer inventory online prior to live sales. As a result, the volume of dealer consignments on OVE.com has increased even as total auction volumes declined.

Transportation Issues Increased for All Dealers

Manheim asserted that dealers have loosened vehicle criteria and shown a greater willingness to transport vehicles longer distances to their stores, but many small dealers find that managing the logistics when they buy one or two cars from multiple locations is hard and expensive.

Webb pointed out that most floor-plan lines limit the number of days that a vehicle can age before curtailments or a full payoff is required.

“As a result, dealers are reluctant to use too much of that time on transportation,” he noted.

Despite the added time and cost of transporting used vehicles, Manheim cited a trend from Central Dispatch — a company that links dealers with vehicle transporters around the country — that indicated steady year-over-year increases in units shipped by dealers.

However, early in the second quarter, Central Dispatch’s month-to-month trend turned negative as transportation costs soared due to rising diesel prices.

“As more transactions take place online, dealers will have to coordinate deliveries of vehicles from multiple locations rather than a single auction,” Webb projected.

More Discussion about Rental Risk Units

In another segment of Auto Remarketing’s discussion with Webb, the Manheim economist reiterated the daily rental industry has been shifting from program to risk vehicles for more than a decade.

Webb calculated the U.S. rental fleet is now more than 75 percent risk, with Hertz at 77 percent risk, Dollar Thrifty and Enterprise close to 100 percent risk and Avis Budget Group at around 55 percent risk.

“In terms of the industry, it is unprecedented, but in terms of a business model, not at all,” Webb explained about those risk-unit levels. “Enterprise has historically always been 100 percent risk. It’s the other rental car companies, the big ones, Hertz, Avis, Dollar Thrifty, who have moved from program to risk units because the manufacturers have been cutting back on program units. For them, this is a change in the business model, but for Enterprise it is not.

“Certainly, we’re not going to go back to the ways of the past where some of the major rental car companies were almost 100 percent program. That is not going to occur,” Webb continued.

Manheim stressed that rental companies concentrate their program units in more expensive models and those that have high seasonal demand, such as minivans and convertibles, so that they can be returned to automakers at the end of the summer vacation season.

So how have dealers responded?

“The dealers had to change and most of them really made that change in 2010 if not earlier,” Webb responded. “Essentially, for some franchise dealers, their sourcing strategy was to attend the factory closed auctions and buy program units. That avenue was not there so they had no choice but to go through the more open auctions and buy vehicles more from Hertz and Avis rather than Ford and GM.

“Then again, the thing they can’t really adapt to is the fact there are not that many vehicles coming off rental today with less than 20,000 miles on them. That supply is not there,” he went on to say. “That doesn’t mean a 40,000-mile vehicle is a bad vehicle. Certainly, in terms of marketing at your dealership, it’s a different customer. They have had to adapt to that as well.”

To clarify, Manheim defined that on average, risk vehicles are kept in service approximately 40,000 miles or 15 to 18 months, in order to minimize monthly depreciation, while program units are typically taken out of service after six months or less and usually with fewer than 20,000 miles.

Lessors Use “Pull-Aheads” and “Push-Backs”

With the rise in wholesale used-vehicle values, Manheim stressed that lessors and dealers have found it an ideal time to pull customers out of their leases early in order to secure a new sale as well as a needed piece of used vehicle inventory.

In the second quarter, however, Webb also saw some Japanese OEMs offering to extend the customer’s lease (at an attractive rate) until such time as new vehicle inventory levels improved.

“Certainly we weren’t surprised by the pull-aheads. Because of strong residual values, that’s always been a good avenue for dealers to initiate on their own engagement with the lessor and the captive finance company to do those programs in order to get that new-vehicle sale and get that inventory for your lot. It increases customer satisfaction also,” Webb said in the interview with Auto Remarketing.

“But the push-backs due to some of the Japanese nameplates who had that inventory shortage, having the person coming back off-lease until they had the perfect inventory selection for them, that was a very smart move by (the automakers) to possibly extend the lease a little bit longer to see when inventory might be better,” he continued.

“Again, it’s a way of satisfying your customer to the full extent possible,” Webb went on to say. “That’s the whole point of leasing, to increase customer loyalty and increase the turn cycle. In order to do that effectively, you should be monitoring the lease throughout its life. There might be a point in time where it’s advantageous to everyone to terminate that lease rather than wait for the actual culmination date.”

What Else Could Be Ahead in 2011?

After focusing on elements directly related to the industry, Webb also touched on broad economic factors that could contribute to whether the U.S. recession rebound strengthens in the second half of the year.

“With hope — and discounting fears — we believe the U.S. recovery will withstand the shocks from overseas. But, we still need to get our own house in order,” Webb stated.

At the time of the report release, Webb pointed out the U.S. had not finalized an increase in the debt ceiling in order to prevent default.

“Sure, it’s all a game of chicken, but sometimes in that game there really is a crash,” Webb cautioned.

“More optimistically, we remember the recovery pattern of earlier this year,” Webb reiterated. “That growth was carrying a heavy load of uncertainty piled onto it by policymakers, was wrestling with financial deleveraging and was no longer being supported by additional monetary and fiscal stimulus. Despite that, growth occurred. It wasn’t strong enough to withstand several negative transitory events, but that doesn’t mean growth won’t resume.”