The $900 Billion Auto Aftermarket: Where Total Losses Turn Into Big Gains

By Michael Sasso | March 1, 2019

Mike Rosser, a 41-year veteran of the salvage car business, remembers a day when auctions for junked cars drew 30 guys standing in the sun, inspecting mangled cars for intact alternators and transmissions.

On this February morning, though, the suburban Atlanta man is watching a real-time web auction conducted from three hours away in Birmingham, Alabama. Instead of popping hoods, salvage yard owners like Rosser rely on software called Bid Buddy to identify cars with the parts he wants and to tell him how much to bid. And, rather than competing against a few dozen buyers, on this day a counter at the top of the auction website shows almost 2,400 participants, with bidders as far away as the United Arab Emirates.

“Sometimes a wrecked car can be worth more than a good running one,” said Rosser, owner of Newton Auto Salvage Inc. in Covington, Georgia.

Last week, Dallas-based auction giant Copart Inc. said its average selling price for cars deemed “total losses” by insurance companies was up 35 percent in two years. That is at least partly behind the 100-percent surge in Copart shares over the past two years, Stephens Inc. analyst Daniel Imbro said.

Prices in the global automotive aftermarket – which McKinsey & Co. estimated at more than $900 billion in 2017 – would soar even more if the Trump administration deems imported cars and parts a national security threat and imposes steep tariffs.

Contributing to the rise are higher prices for scrap metal and for used, operable cars, as well as an influx of international buyers bidding for junked cars. But the biggest factor may be that insurers are increasingly writing off damaged vehicles and sending them to salvage auctions. Earlier this decade, insurance companies wrote off about 15 percent of vehicles in collisions as total losses, but that has risen sharply since then and reached 19 percent of accident vehicles in 2018, according to collision industry researcher CCC Information Services Inc.

What’s more, the vehicles showing up at salvage auctions nowadays are newer and less severely damaged than in the past, which is pushing up prices, Copart Chief Financial Officer Jeffrey Liaw told analysts this month. Insurers attribute the trend to the ballooning cost of car repairs, which makes it more cost-effective to cut consumers a check and send their vehicles to salvage auctions than to fix them.

Consumers Lose

While auction houses like Copart and rival Insurance Auto Auctions Inc., a unit of KAR Auction Services Inc., are benefiting, losers include consumers who still owe money on a wrecked car and who may not get a satisfactory settlement from their insurer.

“The loser in all of this is the consumer,” said Sandy Blalock, executive director of the Automotive Recyclers Association. “You have someone who’s lost their vehicle who may not be made 100 percent whole.”

From his 300-car lot southeast of Atlanta, Rosser is seeing the run-up in prices ripple through the collision industry. He keeps his eye out for late-model cars and trucks with under 100,000 miles, since he warranties the parts he sells to body shops for at least 90 days. Transmissions and motors fetch the most money, he says, but nowadays even small electronic components can draw hundreds of dollars. He sells a power-folding side-view mirror for a large SUV for $200, while the same part sold new by the original manufacturer can fetch almost $600, Rosser said.

Such pricey components have pushed the price of the average collision repair to more than $2,900, up from about $2,400 a decade ago, CCC data show. Other new parts driving up costs include back-up cameras, collision warning systems and adaptive headlights that turn with the road.

“Just replacing a headlight today – the average headlight on a car today is probably $600,” said Randy Stabler, who runs seven Pride Auto Body shops in the Los Angeles area.

Insurers typically declare a car a total loss if the repair costs exceed 70 percent of the car’s pre-accident value. The old age of passenger cars and trucks on the road is an aggravating factor, because millions of vehicles on the road don’t have much value left after depreciation, said Susanna Gotsch, an industry analyst at CCC. The average age of a vehicle today is almost 12, U.S. Bureau of Transportation Statistics data show.

Mexico and Nigeria

As a result, Copart and KAR are seeing an influx of late-model cars and trucks that years ago would’ve been patched up and put back on the road. Bidding on all these more desirable cars is a bigger cohort of international buyers, many from Mexico and Nigeria, where labor rates are low and vehicles can be rebuilt cheaply.

Revenue at KAR’s salvage unit, IAA, rose 9 percent last year on top of 11 percent growth the year before. KAR overall revenue, which also includes a used car auction, rose at about the same rate.

“We have buyers in 110 countries worldwide bidding in live auctions,” said IAA Chief Executive Officer John Kett. “They’re all competing for those vehicles.”

KAR plans to spin off IAA from its other businesses, which include the ADESA used car auctions. Long term, all the collision-avoidance systems on American cars will reduce some accidents and result in fewer total losses, KAR CEO James Hallett said at a September Goldman Sachs conference on global retailing.

However, “it’s going to take a long time to completely turn that fleet of vehicles, of 300 million vehicles, over so that all cars are operating with collision avoidance,” Hallett said.

For now, some consumers are stuck paying an outstanding debt on a totaled car. The Leon family of Camas, Washington, have struggled financially since George Leon, 48, was rear-ended while out fetching Chinese food last August. The other driver’s insurer deemed his 2013 Kia Soul a total loss instead of fixing it and, when it cut a check to Leon’s auto lender, the settlement came up short of the $13,000 he owed on it, said his wife, Damian Leon.

Even a gap policy intended to cover the difference shorted the family by $1,700, she said. While they were able to cover that with $2,000 in savings, it was a pinch for a family that gets by on George’s disability and VA benefits, she said.

“I was just getting Chinese food,” said George Leon. “This has been nothing but deterioration to my health and my psyche.”

The Leons heard through an attorney they hired that their car may have been auctioned off to someone in Africa. If so, it could have fetched up to $4,500 depending on level of damage, according to previous auctions of 2013 Kia Souls at IAA, a company spokeswoman said.


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