Over-Production Diminishing Value of Used Cars
Adam Merlin, Decebmer 1, 2017
As new car manufacturers continue to broaden their line and ramp up production in order to gain marketshare, it brings to mind the question: how does this affect the value of pre-owned cars? What does it do to the current cars on the pre-owned market and how does it change? At the end of the day, it’s the same philosophy that we often talk about: Supply and Demand. Simple economics–as long as the demand exceeds the supply, then values will remain stable. However, when supply far exceeds demand, that’s what generates all the rebates and low prices, diminishing the value of all of the products. As a result, used car prices go down and new car prices go down. The reason why a lot of the domestic manufacturers and these super high-volume brands all have big rebates is because the supply heavily outweighs the demand–They have so much inventory they have to discount it to get rid of it. So what happens next? When you start selling new cars for $15,000 off of MSRP, whats a one-year-old one, same make and model, going to be worth? How many times have you seen a recent year model and thought, well, I could buy a new one for virtually the same price…so why would I buy the used one? This starts to kill the market.
Another thing that happens when these manufacturers broaden their brand to this degree, is they can confuse customers. Someone who wants to spend upwards of $100,000 on a highline car, a BMW, a Mercedes-Benz or a Lexus, for example, they can often see similar models out there on the market for almost half the price. This diminishes that value of the market in general, so if there is an entry-level, $20,000 Mercedes-Benz, it makes the aspirational $200,000 Mercedes technically worth less because it is the same brand. There is an element of exclusivity of the brand that inevitably deteriorates. It’s no different than a big-time designer going into outlet stores, it diminishes the value of that particular brand. The goal is to keep price integrity and keep values high, and that is all done by the supply and demand ratio. The only way to maintain high prices is to have a smaller supply of product than there is a demand for it.
As it pertains to the exotic market, we couldn’t help but wonder, is this the direction we see the Ferrari brand going in with some of the mass-production of newer models? We can’t say for sure, but it is definitely nerve-racking, considering Ferrari’s production is the greatest it has ever been. What makes a 1987 Ferrari Testarossa so special is there are just not that many of them out there. Contrarily, you can find a plethora of used Ferrari 458 models on the market, so you can see how people naturally gravitate toward the model that there are not as many of–it’s more exclusive. Even more worrisome, there is talk of Ferrari ramping up production even more, and potentially offering an SUV. In other words, Ferrari is doing things to broaden their customer base, which is understandable, since it is a publicly traded company and they have a stock price to worry about, but it is not necessarily a good thing for the market. Another thing to think about: The manufacturers make money when they sell their cars to the dealers, they don’t then make money again on the used car sale, aside from selling parts, so Corporate Ferrari is not as concerned with the pre-owned Ferrari sale.
The good news is, this only bodes well for older exotic cars, whether it’s an older Porsche, an older Ferrari 360, and certainly an older Ferrari Testarossa. These older cars continue to go up in value with the mass-market production of newer, more modern models, as it makes these older exotics even more special and exclusive.