THE FOREIGNER IN USED CAR BUSINESS

                                Candy Lim Chiu
                 Graduate School of Eco...
law of business cycle, if you cannot be the inventor of a car, you can be the seller of the
car just to be part of the bil...
promotion to Chief Engineer in 1893, a month later Ford builds his first experimental
engine. In June 4, 1896, Ford conduc...
showed the following market characteristics (Chen 2004): (1). Large business volume
and has formed effect of scale. Volume...
invested capital from used cars is far superior to that of new cars (NADA, 2002).
In Europe, the used car market is well e...
Table 3: Total Japan’s Used Car Export from 1997-2005
Year             1997      1998      1999     2000       2001     20...
traded. This lead to rejection of his hypothesis that the used pick-up truck market is a
market for lemons, which would ha...
Porter and Sattler (1999; 3) stated that, “the used market performs a valuable function
for consumers and the manufacturer...
boxes, to which push-button mechanisms are connected via cords. Buyers will just
tapped buttons on console to place bids. ...
negotiations between the owners and potential buyers.
The winner bidder and seller in KAA Kyoto Auto Auction are entitled ...
the world, a person can enjoy his business too much. After the bidding, he was proud to
hold his receipt of the winning ca...
less amount as a deposit and then a balance on completion of purchase at auction or
when the car is ready for shipping. (5...
base freight vehicles with a capacity of 3t to 4.5t.
6t base or 8t base freight vehicles with a capacity of 4.6t or greate...
C&F: The freight is pre-paid without marine insurance.
         CIF: The freight is pre-paid with marine insurance.
Contai...
sold the used cars and found it to be lucrative business. Used car lot called the outdoor
display area made more attractio...
they discover a problem with a car before leaving the auction site, the sale can be
nullified. Dealers are notified of a f...
Independent used car lots deal in all makes, models, and years of cars. Old cars in poor
condition are called “lemons.” De...
necessary mechanical repairs are made to make sure the new owner will have no
problems.
In the Philippines, reconditioning...
expensive. The majority of the used car advertising is in newspaper. Most of the used
car businesses, small advertising bu...
Toyota     Lucida/Emina – 2000              4,960   Mitsubishi    Space Gear – 2004      7,560
           Noah – 2004     ...
Japanese, who have for a time, altered the map of the world’s automobile industry. In
the near future, Japan will do the s...
market in developing and third world countries, there’s always room for affordability of
motor vehicles, the opportunities...
www.gov.ph/news/default.asp?i=9247.
Grubel, H. G., 1980. International trade in used cars and problems of economic
      d...
income distribution. Energy Economics 27: 25-58.
The American Chamber of Commerce of the Philippines, Inc. 2005. Statement...
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THE FOREIGNER IN USED CAR BUSINESS

  1. 1. THE FOREIGNER IN USED CAR BUSINESS Candy Lim Chiu Graduate School of Economics, Kyoto University Room 208 Syatorudohaitsu, Sakyo-ku Yoshida Nakaoji-cho 1, Kyoto-shi, Japan 606-8313 candyonthecover@yahoo.com ABSTRACT This study unveils how used car businesses bring about to foreign traders in a foreign land and how used cars are bought, sold, and traded is a story that this research describe comprehensively. It reports on the empirical investigation of the perspective of used car businessmen as to their actual experiences and beliefs in engaging to used car business. These viewpoints were elicited during face to face, semi-structured interviews lasting between 1.5 to 2 hours accompanied by intensive visits to used car auctions in Japan and used car businesses in the Philippines. The businessmen illustrated the actual happenings within used car auction companies in Kyoto and Osaka, Japan and the business of buying and selling of used car from traders in the Philippines until the customers can drive home his dream car. Keywords: Used Car, Trader, Auction, Private Sale, Japan, Philippines INTRODUCTION Used car industry is a never ending talk of the town especially motoring journalist have been lashing the used car industry and citing safety concerns. However, does anybody give a little importance on a used car that has been formerly drove by one of the reader of this study, trade-in for a new one and left the poor thing in the hands of a new owner or in a recycling division where it will tear-off the whole thing into pieces of dust. And does anybody care about the history of used car market that was started by Henry Ford before he introduced the ever popular mass production of automotive industry in the world. Researchers tend to focus more on the market, trade, used car as lemons, scrappage rate, and opposing views regarding used car. The automotive society owes a great deal to independent businessmen, who risked everything they owned to get into the car business. The early pioneers had accepted the 1
  2. 2. law of business cycle, if you cannot be the inventor of a car, you can be the seller of the car just to be part of the billion dollar business. Used car traders were visionaries who were able to peek into the unrecognized market and see the vast availability of land and road criss-crossing within and beyond the borders. They always were able to figure out how to make a sale. It has traditionally taken only a modest amount of money to get into the used car business. This study unveils how used car businesses bring about to foreign traders in a foreign land and how used cars are bought, sold, and traded is a story that this research describe comprehensively. It reports on the empirical investigation of the perspective of used car businessmen as to their actual experiences and beliefs in engaging to used car business. These viewpoints were elicited during face to face, semi-structured interviews lasting between 1.5 to 2 hours accompanied by intensive visits to used car auctions in Japan and used car businesses in the Philippines. The businessmen illustrated the actual happenings within used car auction companies in Kyoto and Osaka, Japan and the business of buying and selling of used car from traders in the Philippines until the customers can drive home his dream car. It shows how fascinating the business of used car of Japan and Philippines, expose how used car are bought, sold and traded describing behind daily events, explaining everything from Nintendo joystick use in Japanese auction companies to kick tyre process of buying a used car until the customers sign the contract and drives-off home his dream car. This study is for everyone who wondered what’s with used car, who started it, why it has been the buzz of the town, how traders play the game inside the auction house, or how to remarket a junk and made it as a goldmine. This study illustrates the story behind these questions. It reports back from Japan and Philippines to reveal used car businessmen are playing and making a billion dollars worth of industry. It buffers the myths surrounding some of today’s biggest controversies on used car importation that buzzing the world and shed light on how used car shape our day-to-day lives, often without our knowing it. The truth about used car business world is shown in a true delight. LITERATURE REVIEW Overview of Used Car Business in the World In 1891, Henry Ford became an engineer in Edison Illuminating Company and after his 2
  3. 3. promotion to Chief Engineer in 1893, a month later Ford builds his first experimental engine. In June 4, 1896, Ford conducted secret test of his car on the streets of Detroit. Ford self-propelled vehicle known as the Quadracycle, a water cooled, four stroke, two cylinder engine made about four horsepower with a top speed of 20 miles per hour (MPH). In order to finance the building of his second car, Henry Ford sold his car to Charles Ainsley of Detroit for US$200. Later, when Ainsley sold that car to bicycle dealer A.W. Hall, it becomes the first used car of record (Genat 1999, 105). Historically, trade in used cars was limited to high-end vehicles such as antiques, limited edition or vintage cars that were sold to restricted market of the affluent people. The nature of used car business, more used cars than new cars have always been available, and as more new cars were invented and released in the market each year, the inventory of used cars continually grew. How these cars are bought, sold, and traded is a story that continues today. The reasons why used car are trade: (1). Automotive industrialized countries like America, Europe and Japan tend to protect their own industry and businesses for continues consumer’s demand for new cars, (2). Owners may sell their old cars in exchange for cash than holding for years, (3). Owners may also sell it as a trade-in for new cars to escape the inconvenience of maintaining the old one, (4). Changes of owner’s preferences due to trends and wants, (5). The quality and models deteriorate with age over time, so owners may sell it to update to their preferred quality, and (6). Fuelled by developed countries’ increasing sophisticated used car market and a hunger for cheap, reliable vehicles in developing countries. The start of used car dealership in US, “Mad Man Earl Muntz made his start in life in the mid 30’s as a used car salesman in Illinois. In the early 40’s, Muntz moved his operation to Glendale, California. This was the beginning of the most colorful, outrageously successful merchandising promotion in the used cars. In 1941 during the war in Los Angeles, he became the biggest used car dealer in the world. By 1947, Muntz had continued in his command of the used car market, but had taken on the largest Kaiser-Frazer dealership in the US. In 1947, he sold US$72 million worth of new and used cars” (www.americansportscars.com/muntz.html). So the auto-export revolution is taking shape. International trade is not limited to new products only but a wide variety of used and refurbished goods that are sold beyond the borders especially used cars. In the US and Europe, there are three used cars sold for every new one (Zaun and Singer 2004) while in Japan, the export of used Japanese cars are on massive scale began in the 70s. The used car market in America, Europe and Japan has entered the matured period and 3
  4. 4. showed the following market characteristics (Chen 2004): (1). Large business volume and has formed effect of scale. Volume of used cars in developed countries is more than the volume of new cars. In mature auto market, the average vehicle discard cycle is about 8 to 12 years, but the average of vehicle renew cycle is less than 4 years. (2). Lower price and balance of supply and demand quantity in the market. In the 21st century, cars have become an essential transportation for the people in different levels with different demands. (3). The systems organize well and promote the market to be developed. Used car market in the developed countries is fully established. Governments formulate laws that would protect the interest of its own domestic car makers and consumer’s rights. In America, the annual sales volume of American used car is already 2.5 times of its new car sales volume. Human auctioneers in the US take three minutes or more to sell a car in a face-to-face system resembling a cattle auction (Zaun and Singer 2004). In 2001, total used unit sales including franchised dealers and private transactions reached a record of 42.6 million used cars compared to 17.2 million new cars. (see Figure 1). Figure 1: Record Number of Used Car Sold in US Source: The Manheim Used Car Market Report (2002). According to Webb (2002), “we believe it will be a decade long expansion of the used vehicle market. Indeed, with demand increasing on the strength of US household formation growth, and scrappage rates continuing to decline, we project that the used vehicle market will add 600,000 transactions per year, or six million additional transactions by 2010.” Used vehicle net profit rose to US$230 per retail unit – 50 percent more than was earned on a new unit because used car inventory costs less on a per unit basis and turns faster than new vehicle inventory, used car dealers’ return on 4
  5. 5. invested capital from used cars is far superior to that of new cars (NADA, 2002). In Europe, the used car market is well established in all European economies. Sales of used cars reached 5.5 million units by 1992 and continues increased from 6.2 million units in 1993 to 7.9 million units in 1995 with 27.4% increased compared to new cars with 5.6% increased within the same year. Table 1: UK Car Sales Volume Trends 1993 to 1995 Millions of Cars 1993 1994 1995 % Increase 93-95 Used Cars 6.2 6.9 7.9 27.4 New Cars 1.8 1.9 1.9 5.6 Total 8.0 8.8 9.8 22.5 Source: Office of Fair Trading (1996). In 1995, the United Kingdom has 135 per thousand the highest level of used car sales per head of population among the major European countries. The next country was Germany, with 91 per thousand. This compares with 71 per thousand in France and the lowest of 21 per thousand in Spain. In 1996, there are about 24.2 million cars on the road in the UK, and on average about 1.9 million new cars and about 7.9 million used cars are sold each year (ADT Automotive's 1996 Used Car Market Report). Table 2: Value of the Used and New Car Market from 1988 to 1995 Billion 1988 1989 1990 1991 1992 1993 1994 1995 Used 26.41 26.6 28.5 21.85 22.61 25.46 26.03 31.35 New 30.59 31.35 31.16 25.65 23.94 25.27 26.6 28.31 Total 57 57.95 59.66 47.5 46.55 50.73 52.63 59.66 Source: Office of Fair Trading (1996). Note: Exchange rate used for conversion US$1.00 = BRITISH POUND 1.90. In Japan, the year sales volume of Japanese used car has continuously surpassed its new car sales volume for many years. As stated by Zaun and Singer (2004), Japanese used car exporting lies a booming US$2.7 billion industry. The value of used car shipments from Japan for the first nine months of 2003 rose by 30% to US$ 2 billion from the same period of 2002. Used car exports from Japan are expected to top a record of 1 million vehicles in 2003, according to the Japan Used Motor Vehicle Exporters Association (JUMVEA). That’s about the number of new BMW’s sold worldwide last year. One Tokyo auction operated by USS Co., the industry leader, moves 10,000 cars a day or one every four seconds. 5
  6. 6. Table 3: Total Japan’s Used Car Export from 1997-2005 Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 Total 429,331 468,200 460,034 482,975 512,856 606,559 712,968 837,782 940,552 Units Units (+/-) - 38,869 -8,166 22,941 29,881 93,703 106,409 124,814 102,770 Percentage - 9.1% -1.7% 5.0% 6.2% 18.3% 17.5% 17.5% 12.3% (+/-) Source: Japan Used Motor Vehicle Exporter Association (JUMVEA) (2006). Used Car – Lemons are Peaches Too Used goods are obviously problematic, since they are, after all, used. Buying a used car has always been a gamble. A lemon could cost the owner a fortune in repairs, turning an inexpensive car into a headache. So why do cars lose so much of their value as soon as they are sold? Akerlof’s theory – “most cars traded will be the lemons and good cars may not be traded at all. The argument is compelling, even in the absence of supporting evidence. Even almost new-cars might continue to be traded. His insights do not depend for there validity on the used car market. There are circumstances when the symptoms of market for lemons will not emerge: that they are historically contingent on consumer attitudes and on the institutions of trade and trust. Used car quality had two attributes: one is mechanical reliability and durability, the other is the effect of newly introduced models on the perceived value of existing stock” (Offer 2005; 5). For further elaboration of Harford (2005; 116-117), “If life deals you lemons, make lemonade. How can we make lemonade out of Akerlof’s lemons? To return to Akerlof’s original example of the market for secondhand cars, both buyers and sellers have an incentive to try to fix the problem: sellers want to get a decent price for their peaches, and buyers want to buy peaches. If inside information is wrecking the chance of a mutually beneficial deal, both sides will want to find a way to bridge the information gap. Michael Spence argued that the person with the information might be able to communicate it in a way that the person without the information could trust. Joe Stiglitz looked at the problem in reverse and explored ways in which the person without the information might uncover it. Akerlof showed that inside information could reduce people’s ability to trade that made both sides better off. Spence showed a way of making those trades possible but also found that the social cost of doing is be too high. Spence and Stiglitz both showed that you can make lemonade from Akerlof’s lemons but that you cannot get rid of the bitter aftertaste.” Based on the study of Bond (1982), is that trucks that were purchased used required no more maintenance than trucks of similar age and lifetime mileage that had not been 6
  7. 7. traded. This lead to rejection of his hypothesis that the used pick-up truck market is a market for lemons, which would have required used trucks to show significantly more maintenance. However, it should be noted that the failure to find an overabundance of lemons in the used market is inconsistent with the commonly expressed notion that cars and trucks are traded when they become ‘too costly’ to maintain. At the time an automobile is designed and built, the manufacturer determines a large number of features that affect the pattern of breakdowns and the nature of repairs that occur over the car’s life. During each period consumers demand vehicles while manufacturers supply new vehicles. Consumer purchase new vehicles from manufacturers and trade used cars among themselves and with the scrap sector, which buys used cars and sell it to consumers who demand for used cars. The vehicles, both new and used, purchased by consumers in one period then become the stock of used cars available in the next period (Berkovec, 1985). Today’s cars are built to last longer, and that translate into less risk with a used car. Based on the study of Parks (1977, 1979), the average life of a standard car ranges from about 10 to 14 years in developed countries up to more than 40 years in developing and third world countries. There are many factors that may affect the lifetime of a car: technical traits of a car as well as economic determinants. The quality of used cars has improved each year for the last 6 to 8 years, thanks to improved new car quality (Linn - NIADA 2002). As shown by Davis (2000), cars built in the last decade seem to be more durable than those from prior vintages. Economic determinants slowing the depreciation include low income, high car prices and high fuel prices. Moreover, a low wage level can decrease repair and maintaining cost of cars significantly and can therefore lead to low depreciation rates (Sen 1962). Used car is typically a genuine bargain because the principal enemy of a new car is depreciation. The biggest advantage is the price drop up to 50 percent of the new ones, where buyers are getting the most value for their money especially a well-cared car offers a real value to the second owner. Cars are not investments they are depreciating assets. On average, all vehicles depreciate 35% to 40% of their value in the first year. Some vehicles get depreciated as much as 40%. The second year isn’t much better, as they disintegrate another 20% or so in value (Wykoff 1989). If you paid $20,000 for a new car, then after two years of driving, it may be worth $13,000 and you lose $7,000 by way of depreciation. Used car buyers also avoid the immediate depreciation associated with new car purchases. Others buy a used car because they are able to drive a prestigious brand, even if it’s a few years old. 7
  8. 8. Porter and Sattler (1999; 3) stated that, “the used market performs a valuable function for consumers and the manufacturers. The availability of low quality, low price goods permits low valuation consumers who would otherwise not participate in the market to own the good, albeit perhaps a clunker. A market for used goods permits higher valuation consumers to trade in their older vehicle for a newer one. If the secondhand market did not exist, these consumers might instead scrap their used car, or refrain from trade and hold their vehicle for a long period. The used market allows high valuation consumers to maintain ownership of their preferred vintage or quality.” Grubel (1980) argued that the removal of barriers to free trade in used cars would lead to substantial welfare gains for developing countries. Panagariya (2000) added that free trade of used car will give more benefit to India. In addition, the bulk of gains were due to an increase in product variety and benefited predominantly low income consumers Clerides (2004). Gains of similar magnitude are likely to accrue to consumers in other countries that have been on the receiving end of international trade in used car. Based on Paterson (2005) in Afghanistan, during the conflict period, vehicle became popular as a form of small scale investment after other assets such as real estate and agricultural land became insecure. Japan Auction of Used Car In year 2005 and 2006, flocks of foreigners assembled into a huge car park where cars, vans, sports utility vehicles, sports cars and pick-up trucks number in hundreds and in thousands are exposed for customers viewing and to smell the virgin leathers. The experience is more fascinating than entering a motor show. Bidding is schedule to begin at 11 AM or 12 Noon, but for at least an hour or two before, many foreign traders are prowling the auction lot, looking for cars to bid on. They have all the time for checking their desired model cars. The competition in bidding is fierce, few glances are exchanged among dealers recalling the past battles for cars won and lost. The modern bidding setting resemble to playing a Nintendo game as foreigners conceive with delight. At Osaka Nissan Auto Auction Co., Ltd., the bidding room is large with nearly 56 rectangular tables lined up in row, behind each table a total of 168 seats and more seats are available at the backside while KAA Kyoto Auto Auction, the bidding room has 144 seats and spaces are allotted also at the back. Pictures of vehicles and auction sheets are flashed on 4 to 5 meter of white screen affording everyone at least one good angle of view, while under the tables were small electronic 8
  9. 9. boxes, to which push-button mechanisms are connected via cords. Buyers will just tapped buttons on console to place bids. According to Zaun and Singer (2004), Arai Auction Bayside is equipped with prayer rugs facing Mecca in one corner for the Muslim buyers of used car. The auctioneers provide the details of each used vehicles. Listed on specification sheets are the manufacturer, year (Japanese dating system or American dating system is used), options, mileage, specs, grading and cars’ conditions. The gradings will be conveyed in Roman numbers or alphabetical order from poor shape to new ones. If a car had been in an accident, no number is used or sometimes graded in different numbering. Information specific of a used car is placed inside each car and later shown in the video screens along with images of the cars. Larger computer printouts with the most important condition for all cars to be auctioned-off is listed in order of bidding appearance on stapled computer printouts. These are placed in front of each chair in the bidding room by the auction staff. The bidding tends to be a largely quiet affair. Current owners decide on the opening bid prices. Sometimes, especially when the owners are not present, the prices at which they are willing to sell are preloaded into the auction house's computer system. Otherwise, there is a computer operations room next to the bidding room. From there, the owners could direct the auctioneers to push an ‘agree to sell’ button when and if bidding prices reach desired levels. Signaling the start of the bidding process is the word ‘START’ projected in a white rectangle on the bidding screens. On the screens, colored flashes accompanied the action. When the amount hit the point where the owner was willing to sell, the word ‘START’ disappeared and the white rectangle turned red. Bidding could continue, however, when the red rectangle changed to a green one, the last bid had been made. The car would sell at that price. The push button environment requires a certain amount of caution among the dealers. Carelessness of pushing the button can cause a successful bidder a car he did not want. And if the bidder tend to back-out, he will be required to pay a sum of money averaging from US$400 to US$800. One curious bidding habit appears to be the bane of dealers. Owners sometimes place bids on their own cars to create the illusion that the bidding is more competitive than it actually is. Since a sale would not occur until the owners directed that the red light be displayed, they had no fear of buying a car they already own. When vehicles fail to sell, the START light goes blank and the next vehicle is displayed. But this doesn't mean that the unsold vehicle cannot be sold on the same day. At the rear of the room is a special table where auctioneers can arrange for direct 9
  10. 10. negotiations between the owners and potential buyers. The winner bidder and seller in KAA Kyoto Auto Auction are entitled with Japanese wine or known as O-Sake with 3 cars sold or won from bidding equals to one O-Sake and for 5 cars equals to 3 O-Sake. In Osaka Nissan Auto Auction Co., Inc., for every 3 cars sold or won ten bottles of O-Sake for the morning and special bidding time while 5 bottles of O-Sake for afternoon bidding. What a prize for a winning bidders extra excitement to be motivated to bid more. For now, the auction houses are limited to dealers only, not the general public. Dealers pay significant yearly membership fees to each auction house they attend. The auction houses have been pressuring dealers to maintain the number of vehicles they put up for sale. Consequently, the level of vehicle quality has declined with older and more damaged vehicles being brought in. As this also hurts sales, no effort is spared to increase buyer interest. If the bidding has stopped on a vehicle and the red light has not appeared, sometimes there is a pause. A voice on the speakers entreats the audience with the words "Mo sukoshi " (Just a little bit more). This lets buyers know they are too close to the owner's selling price and it's too soon to give up. Every week, thousands of used cars are sold in auction like these. Japanese used car dealers tie-up with auctioneers to unload their stocks. For example, a Mazda dealer may have number of trade-in cars that cannot be sold for a period of time, then will tend to live the selling of the used cars to auctioneers. If it doesn’t work at the first auction, Mazda dealers will try again at other auctioneers until it will be sold. For the last undertaking, if it didn’t sold, the dealer will tend to put the used cars in the recycling division and break-down the whole vehicles for used engine and parts to be sold again. The Foreigner at Used Car Business The used car business isn’t the type of business that most people will engaged into. However, used cars are something most people want to have as value for money and for the businessmen used cars are goldmines from the junkyard. New car business has many services to sell a customer; the used car business has only one product, the used car. No parts to sell, no oil changes, and no accessories meant the dealer had only the car on the lot, and the customer either bought the car or looked elsewhere. In KAA Kyoto Auto Auction, Mumtaz, a Pakistan used car businessman in Osaka City. Mumtaz, one of thousand used car traders in Japan who specialize in exports, often bids from half a dozen to dozens of cars a day from several auctions by clicking a button on a joystick, and without ever kicking a tyre. It’s been a lifestyle, there’s nowhere else in 10
  11. 11. the world, a person can enjoy his business too much. After the bidding, he was proud to hold his receipt of the winning cars with his 6 bottles of O-sake. Showing the list of cars with a big smile on his face and openly gave his business card with an invitation to pay him a visit with free lunch or dinner on his part, as he is willing to foretell his story. A man with a thousand dreams, who find his interest in the land of automation. Some traders in the Philippines are not formerly in the car industry, they are employees in a company, taxi drivers, laborer, and entrepreneurs for many years. Most of them left their former occupation due to the boom of used car market. Now they sell at least 30 units a month from 5-year old Japanese cars less than US$5000 to sports cars from US$20,000 or more. Business has been so good to traders they spend most of their time dealing with customers. And now some drives the top of the line luxury brands, which they bought brand new. Used car market in developing countries is flexible trading (Chen 2004). In the Philippines, buying and selling of used cars take place through personal trading, store trading, dealers trading and auction trading. Committing capital to used car inventory is a decision any used car traders must make. This investment of capital is more crucial for the small used car businessmen than it is for the large new car dealer, who may be able to better weather the slow periods. The small operator must turn cars over quickly to stay in business. A 30 day inventory of cars is optimum. Anything more than that can be fatal and anything less is a bonus. Moving cars quickly is the name of the game. Winning this game depends on how well the used car businessman executes three objectives: appraisals, reconditioning, and sales. Used Car Process of Traveling from Japan Japan has been a rich source of used cars for many years and each day thousands of people buy a used car direct from Japanese car auctions. Process of buying used car in Japan: (1). Identifying the type of car to import – (sub/compact cars, sports cars, sports utility vehicle (SUV), minivan, full-size van, station wagon, pick-up trucks, buses and vintage cars), (2). Identifying a suitable Japanese exporter (dealers or auctioneers) for quality, value for money, and assurance, (3). Negotiable a price range – three exchanges will take place in prices: a. supply price which producer charges and exporters pay, b. world market price which exporters and importers trade, and c. domestic price which importers charge and final consumers pay. (4). Pay a deposit - Some exporters require you to pay 100% upfront with by bank transfer before the car is bought at auction or ready for shipping.   Others require a 11
  12. 12. less amount as a deposit and then a balance on completion of purchase at auction or when the car is ready for shipping. (5). Purchase a car. (6). Pay for balance of car and transportation. (7). Track shipping progress. (8). Receive shipping/import documents. (9). Obtain Ministry of Agriculture and Forestry (MAF) clearance. (10). Pay shipping costs. (11). Pay Goods and Service Tax (GST). (12). Uplift car from import. (13). Arrange Vehicle Identification Number (VIN) allocation and the Land Transport Safety Authority (LTSA) clearance. (14). Arrange registration and warrant fitness. (15). Arrange insurance (Traders, 2006). Inspection procedures on used car in Japan: (1). An inspection site, time and date are assigned by the Japan Auto Appraisal Institute (JAAI), the vehicle should be present to the specified site at the specified time. (2). The inspection is carried out by JAAI inspectors according to the Exporting Used Motor Vehicle Inspection Standards. (3). The inspection covers the functionality, equipment, and interior and exterior appearance utilizing the inspection machine, manual tools, etc. (4). In principle, the inspection is carried out without disassembling the vehicle. However, disassembly may be involved in the inspection process. In this event, the applicant must conduct the disassembling work under the supervision of the inspector. (The cost of disassembly must be born by the applicant). Inspection certificate written in English is issued for vehicles that pass the inspection. Inspection Criteria: (1). Functionality: to ensure safe driving in compliance with the safety regulation. (2). Exterior appearance: no dimples or bumps that require plate work extending over an area greater than a quarter of the affected panel, corrosion must be repaired, and any rusted or exposed surfaces must be painted. (3). Interior appearance: the interior must be tidy without any excessive staining, the size of any damage to the seat covers, interior walls, sealing, etc. must not exceed 10 cm for a passenger car, or 30 cm for a commercial or freight vehicle. (4). The windshield has no cracks or breakage greater than 1 cm, wiper blade scratches must not obstruct the visibility of the driver. (5). The engine and other parts under the hood must be clean washed, rusted parts must be painted with chassis black. (6). Tires must be in compliance with the safety regulations, and (7). Others, as per the requests of the importing country. Table 4: JAAI Inspection Fee including Tax Category Fee (US$) Passenger, commercial or freight vehicles with an engine size of 660 cc or smaller 61.25 Passenger or commercial vehicles with an engine size of 61 to 3,000 cc; or freight 78.75 vehicle with a capacity of 0.3t (excluding light vehicle) to 2t (including 2t base vehicles with a capacity of 4t or smaller, and 4WD jeep style vehicles) Passenger or commercial vehicles with an engine size of 3,001 cc or greater, or 4t 96.25 12
  13. 13. base freight vehicles with a capacity of 3t to 4.5t. 6t base or 8t base freight vehicles with a capacity of 4.6t or greater. 109.38 10t base freight vehicle 118.13 Ordinarily designed buses with a capacity of 29 passengers or less 109.38 Ordinarily designed buses with a capacity of 30 passengers or more 118.13 Price of a certificate 26.25 per copy Source: Japan Auto Appraisal Institute (JAAI), (2006). Note: Exchange rate used for conversion US$1 = 120. Used Car at the Hands of a Philippine Businessmen The journey of used car from one country to another is extremely a major turnover. Since July 2005, Japan motor vehicle exporters must be registered shippers and obtain an export certificate for every shipped vehicle. The Deregistration Certificate or Export Certificate, a certificate that used as evidence that the vehicle meets the standard required in an importing country issued by the Ministry of Land, Infrastructure and Transport (MLIT) in Japan. It guarantees the used car is legal and safe, and was acquired and exported, through services of an authorized member of the trade. Export certificate is required for custom clearance and to exit Japan, as well as for custom inspection at entry, and registration purposes in the destination country. All relevant documentation is forwarded via special courier (EMS/UPS) to shipment consignee, usually 7 to 10 days after vessel departure from Japan. The Completion Inspection Certificate, some vehicles that were driven unregistered in Japan won’t have deregistration certificate or export certificate, but will probably have a completion inspection certificate. The following Japanese characters must be in the head of the document, in this sequence: 完成検査終了証 (kan-sei-ken-sa-syu-ryo-syo) How to calculate the shipping fee: Cubic Meter (m3) = Length (m) x Width (m) x Height (m) Shipping Cost = Cubic Meter (m3) x Freight Cost (US$) In the case of Cost, Insurance and Freight (CIF) price, the seller will place insurance on the vehicle while it is shipped until it reaches a port of the country. The insurance only covers the total loss of the vehicle. The client pays the Free on Board (FOB) of the vehicle. The shipment process is accompanied by shipping documents such as invoice, deregistration certificate and bill of lading. Terms of Trade: FOB: The freight must be paid for at the port of discharge. 13
  14. 14. C&F: The freight is pre-paid without marine insurance. CIF: The freight is pre-paid with marine insurance. Containerization is a system of intermodal freight transport cargo transport using standard ISO containers that can be loaded and sealed intact onto container ships, railroad cars, planes, and trucks. Most containers for used cars today are of the 40-ft (12.2 m) variety and are known as 40 foot containers. This is equivalent to 2 TEU. 45 foot (13.7 m) containers are also designated 2 TEU. Two TEU are equivalent to one forty-foot equivalent unit (FEU). Players of Used Car Business in the Philippines The used car market in the Philippines was characterized by strong retail demand and an ample supply of attractively priced wholesale inventory. Used cars are sold in three different types of shops: traders, auctions and private sales based in the center of cities or large sites dedicated to this trade often located outside city centers. The latter are sometimes spread over large areas and divided into lots with small offices surrounded by the vehicles on sale. Each business in the market has its own name and is owned by individuals, family businesses or business partnerships which register with the authorities, rent the land or which they are based, and, generally speaking, sell cars on behalf of importers or small private owners. These traders may also own some of the vehicles they sell, which they either buy from importers or individuals bringing deliveries, or they buy direct. Buying vehicles direct is a cheaper option than setting up as an importer of vehicles from abroad. Traders / Dealers / Retailer There is no way to overstate the importance of the trader’s role in the used car industry. Traders are the touch point with the customer. There represent a vast network of relationships that entail both competition and cooperation. Dealers are the primary source of vehicles reentering the marketplace, and dealers or their representatives are the only buyers at auction. Dealers in the Philippines are categories into two: (1). Typical used car dealer with an average of 3 to 5 cars on the lot. (2). Auto Mall with more than 5 cars park on the lot. Dealers were clustered in one location to attract more customers from different areas to come to one place to shop. Used car dealer has two principal ways to generate revenue: (1). Sell used cars and (2). Provide services. Service contributes the lowest percentage of revenues, but it attracts customers for assurance to buy a used car. The used car dealerships were converted auto repair garages. In many cases, the repair shop acquired a used car, refurbished and 14
  15. 15. sold the used cars and found it to be lucrative business. Used car lot called the outdoor display area made more attraction for the Filipino customers. The architecture and location of used car business were simple lot with a large gate or door facing the street, which was used as a vehicle entrance and exit. Space was allotted in the front for offices and for the display of 3 or more used vehicles and services or reconditioning at the back. The used car lot should provide favorable conditions for the customer to examine the car’s overall appearance and allow the features and details to be inspected. To inspect the car properly, at least 3 feet of space in front of the car, 4 feet in the rear, and 6 feet on each side, or at least 450 square feet of space allotted to each car in the showroom. This space enables the prospect to comfortably walk around the car and open the hood, doors, and trunk. The goal of any used car lot is to have the fewest number of barriers blocking the potential customer’s view of the cars. Auctioneer Philippine used car auctioneers is in the business of auctioning, reconditioning and processing used cars. They get a fee putting them through the auction and for a certain administrative functions; fee for actually selling the car, and fee for reconditioning the car at various levels. That’s where the revenue streams come from. In auctions, professional used car buyers have inspected the items before hand on which they are bidding. It is a one-shot deal, when used car is sold at auction, the title changes hands quickly and decisively. Auctions appear to be best suited for the distribution of used car. They provide an excellent device for quick liquidation. In the broadest of economic theory, they are not necessarily efficient, but when transactions cost are considered, the case of efficiency may be made because the goods can be transferred quickly and cheaply. Cars sold at auction were usually in need of some repair. They were often cars that had been repossessed and were being sold by the finance company. Others were used cars taken in on trade by other dealers who wanted to dispose of them quickly. The final group of cars found at auctions are former fleet cars, including former taxis, police cars, municipal pool cars, and often rental cars. Auctions are important in the sale of used cars because, in addition to providing dealers with a ready source of automobiles, problems often associated with transactions between individuals or even dealerships are eliminated by the auction company. That is, auction provide a valuable service in protecting the buyer and often the seller in automobile transactions by handling the transfer of money and title and taking care of other administrative chores. Auctions provide dynamic trading floor where competitive bidding is fast-paced. Dealers attend auctions knowing that transactions are safe. If 15
  16. 16. they discover a problem with a car before leaving the auction site, the sale can be nullified. Dealers are notified of a forthcoming auction of used cars at their nearest auction site and also the type and possible makes of the cars to be auctioned. Cars are available for inspection before the sale commences, but once the bidding starts, the auction line moves at a rapid rate with almost three cars being sold every minute. With the capability of running simultaneously multiple auction lines at a single site, it is possible to wholesale hundreds of cars in a single day. The bidding process starts for each automobile with an initial floor price. Once a final bid is accepted, the car becomes the property of the dealer who must then make arrangements to pay the auction company and to transport the car. If only a few cars are purchased, the dealer may use staff to drive the vehicles to the lot; on the other hand, commercial transport companies are also available. In any case, unless the dealer is purchasing a special order vehicle for a customer, these purchased cars will be placed on the used car lot with the anticipation of a sale for a profit. Private Sales Private sale, mean more money for the used car seller than receive in trade-in or by selling the used car to the dealer. Dealer will at best, only pay a wholesale price, whereas engaging to a private sale will come closer to a retail price. Personal liability is the most serious disadvantage when selling a used car. The moral and legal duty of telling to the customers what is wrong with the vehicle, make the customer understand to sign papers to that effect. Proper documentation that will legally transfer title and protect from personal and financial liability is a must (original receipt, certificate of registration, deed of sale from the lawyer, go to Land Transportation Office (LTO) for change of ownership). Determine the fair-market value after all repairs before proceeding in doing the repair. Pricing the used car using ‘old 10 and 10 rule’, first take the average of 10 asking prices, then deduct 10% from that amount, plus the cost to repair anything that would prevent the vehicle from being in top shape and that will be the price of the used car. Most of the private sellers of used car advertise in newspaper ad or on the net such as Buy and Sell with the advancement of technology. To Recondition or Not To Recondition How does traders sell used car in the Philippines? In the Philippines, vehicles drive on the right side of the road with left-hand steering regulation to follow, the mode of selling a used car is to recondition especially used cars coming from Japan with right-hand drive. Every used car dealer is in business to turn cars over quickly for a good profit. 16
  17. 17. Independent used car lots deal in all makes, models, and years of cars. Old cars in poor condition are called “lemons.” Dealers who handle these cars make necessary repairs to make the cars salable. One way of ensuring a better outcome and avoid the hassle of policies is by strategically moving to commit reconditioning the use cars. Reconditioning the used cars before selling to the market is a great way to induce more Filipino consumers and make a sale. A car dealership and its dilemma: A. Non-reconditioned: • The dealer doesn’t have to spend any money on the car and the consumer still buys it. • The consumer won’t buy because it is better not to buy than buy and have to spend his own money for reconditioning. B. Reconditioned • The dealer needs to spend money on the car for the consumer to buy. • The consumer will buy because he doesn’t have to spend money for reconditioning personally the car. Reconditioning is made conditionally, meaning it’s a must to do it. By choosing to commit to recondition the cars, people know that they can go to the shops they want and find what they looking for a quality used car. Once a used car is taken in, it must be reconditioned before being put on the lot. The dealer wants this process to happen as quickly and as inexpensively as possible. The sooner the car is on the lot, the sooner it can be sold. And every dollar saved in reconditioning is an additional dollar in the dealer’s pocket. As one used car dealer stated, “appearance sells them, but mechanical reconditioning keeps them sold.” Auto restoration or reconditioning can be as simple as a good washing, paint touch-ups, removing scratches, cleaning, doing windshield repair, oil changes, engine checkups and inspections on the cars or as complex as a complete engine rebuild. Keeping a used car clean is important, because it’s the first impression the customer has of the car and of the dealership. The first step in used car reconditioning is a thorough washing, which includes removal of seats and carpet. The ashtray, glove box, and trunk must be spotless, and the engine compartment gets a complete steam cleaning. Any trailer hitches or unique accessories added by the former owner must removed. If left in place, this type of non-standard equipment will raise unnecessary questions in a prospective buyer’s mind. The final steps in the reconditioning process are body and mechanical repairs. Often a used grille or hood is a sufficient replacement for a used car and will save the dealer money. A reputable used car dealer can’t afford to sell a car that is unsafe to drive. All 17
  18. 18. necessary mechanical repairs are made to make sure the new owner will have no problems. In the Philippines, reconditioning is a major reengineering. Used cars converted their steering to left-hand drive, it should consider the manner of conversion such as wiper orientation, photometry of headlamp beam pattern, door positioning on the left side, and rear/side mirror placements. Cars should be safe for road use in the Philippines. Reconditioning the cars is a great way to bring more people in and eventually make a sale. The used car dealers has this difficult decision to make in the first place, not only because of the issue of the customer’s preferences, but because this costs the dealer extra money to restore each car. But if the dealer doesn’t recondition, the consumer won’t buy because it’s better for him to not buy the car than to buy and have to spend his own money later. So to recondition is more beneficial for the dealership, because then the consumer will buy. Every aspect of car restoration is either done in the body shop attached to the dealer, or actually on the lot. This not only is convenient and less costly for the dealer, since cars are not moved off the lot, but also shows the customers and the public in general that the dealer does recondition the cars. Remarketing the Used Car in the Philippines Used cars can be remarketed in many ways, vehicle’s condition, age, owner and type are all factors in determining how it will be remarketed. While some vehicles, change hands only once in their lifetime, others can be remarketed many times, by many players, within a year. Appraisal is the process used to determine the trade-in value of a used car. The amount of profit or loss in an automobile sale hinges on the appraisal. The inspections are broken down into the following categories: body, chassis, engine and interior. The body is checked for any visual damage or repair work. Overlooking a poorly repaired fender that need to be redone might kill any potential profit. On smaller independently owned used car lots, the owner will do all the appraising and just run through a mental check list and then go on gut instinct. Price discrimination, the most overuse remarketing strategy of a used car salesmen. The strategy of evaluating each customer as an individual and charge according to how much he or she is willing to pay and it takes a lot of effort to make a sale. Self- promotion is what being a used car business is all about. The cost of advertising is 18
  19. 19. expensive. The majority of the used car advertising is in newspaper. Most of the used car businesses, small advertising budget are allotted for local ads. These ads need to be cleverly written to get the most impact in the fewest amount of words. The idea is to get a prospective customer interested enough to come by the lot. Once there, the used car salesmen will work their magic. Used car trader always expects satisfied customers to return, and to tell their friends about his reliable, trustworthy cars. Prices of used cars are not easy to come by. In many countries market prices of used vehicles are reported in magazines or special publications (widely known as blue book). In the Philippines, there’s also a magazine called Car Finder. With the advent of internet, list of websites are also been utilized. One of the best marketing tool for used car is the lot on which the used cars are parked. A well-stocked lot provides a constant advertisement for the used car business, similar to the way an attractive indoor new car showroom that provides enormous sales for dealers. A well-planned used car lot can increase customer traffic and the turnover of cars. Used car display become the silent salesman attracting customer to stop in and walk around. Where once there were a few cars on each lot, now, at times, the used cars outnumber the new ones. You can find used cars for sale on every street corner. The competition today is in seeing which lot can have the best looking, most wanted used car. According to one of the traders (2006), “I offered impressive models of used cars, thank God, I never been zero-out, I always made a sell my units in the yard always sold.” Used car businessmen rely more in attractive pricing than do the lots associated with large new car dealers. They are located along the same street where they must compete with big signs for the attention of customers. In used car sales, the condition of the car does the selling. Filipino shopping for a used car usually have a specific budget and a car in mind. Table 4: Prices of Imported Used Car Models in the Philippines Brand Model Price (US$) Brand Model Price (US$) 19
  20. 20. Toyota Lucida/Emina – 2000 4,960 Mitsubishi Space Gear – 2004 7,560 Noah – 2004 6,800 Pajero – 1998 12,960 Hi-Ace – 2002 7,360 Mini Pajero – 2002 6,800 Land Cruiser – 2004 7,560 Delica – 2003 4,500 Estima – 2002 5,400 Sports Gear – 2002 5,000 Prado – 1994 6,400 Eclipse – 1998 4,200 Previa/Lucida – 2002 4,760 Nissan Montero – 1997 11,600 Townace – 2003 4,800 Terrano – 2004 9,760 Hi-Lux Runner Surf – 5,800 Serena – 2001 4,800 2002 Surf – 2002 6,760 Mistral – 2004 8,560 Mazda Bongo – 2002 5,000 Largo – 2004 5,160 Miata – 1996 8,600 Preairie Joy - 2004 11,700 Isuzu Bighorn – 2002 8,900 Caravan – 2002 5,200 Trooper – 1998 8,560 Patrol – 2001 23,000 City Bus 45 Seater 15,600 Safari – 1993 8,760 Axiom – 2002 6,800 Honda Odyssey – 2000 6,300 Mu 4x4 – 2002 6,360 Step wagon - 2000 11,000 Lexus 450 LX – 2005 25,600 Accord – 1997 6,360 Source: Subic Bay Traders of Used Car (2006) and Car Finder (2006). Note: Exchange Rate Used for Conversion US$ 1 = PHP 50. Filipino customers have a habit of inspecting used car onsite before buying. This reflects a long-standing belief of the customers that it is natural for used cars to have uneven quality. This act of confirmation is called “kick-tyre” where the standard practice is that the customer selects a prospective car from the dealers stock, tries it out in various ways like kicking the tyre, opening and shutting the door, starting the engine. Once a successful negotiation has been carried out, delivery of used cars is instant. The payment may be fully paid in cash but some companies offered 50% as down payment and another 50% in check within 10 days and only then customer signs the contract and drives-off home with the used car. CONCLUSION The early 20th century saw the rise of used car traders from the three major automotive industrialized countries (Europe, Japan and United States) and spread its influence around the world capturing the developing and third world market who consistently yearning to make their nation transform towards motorization. The car-hungry people embrace the entrance of used cars in their country. Stimulating the economy in the small and medium-sized business sector and making tight income people induce to buy the cars that they are dreaming to have. Not so long ago, new car industry has been regenerated by the challenge from the 20
  21. 21. Japanese, who have for a time, altered the map of the world’s automobile industry. In the near future, Japan will do the same thing with its rise for used car market that will shake-out the international competition. The Japanese openness for foreigners to be major recipient of their used cars can expect to enjoy a modestly healthy period of further growth, continuing profitability and degree of geographical concentration will expand. Under these conditions, foreign markets would inevitable be flooded, although they will face the continuing danger of either possible import controls in their major export market. Used car are born to be believe as necessary evil but as the development of the Japanese used car market to the world tends to suggest that the demand for used car is a paramount important for all. Developing countries like the Philippines, urbanization and industrialization are proceeding, and demand for cars will increase substantially in the longer term. Japan used cars will continue to supply the less developed countries for political as well as commercial reasons, and at present foreign used car businessmen attempted to establish their own industries. In fact, it seems to be the rule that where there is an infant market with some growth potential, a business pursue usually follow closely. Although the market and industrial structure is not mature, the Philippines has already developed alternative lifestyles by being dependent on the motor vehicle with the presence of used car. Precondition for the growth of a used car market in the Philippines. A number of factors which can inhibit or encourage the growth of a viable used car market: • The open automotive market in the Philippines encouraged the rise of used car sector in the Philippines. • The experience of demand from Filipino buyers from all walks of life made the used car sector more attractive than the new car industry. • Used car pricing is so attractive to Filipino buyers who no longer consider owning a new car as a major goal. • More choices of models of middle and high-end cars that encourage Filipino buyers to leapfrog the car segment by choosing a larges, more expensive cars. • Improved new cars quality translates into highest-ever used car quality. • Ability of used car businessmen to adapt with left-hand drive condition of Philippine road by reconditioning the whole vehicle that yields to profit. • Mass merchandising of used car in advertisement ads as well as in the internet is already been a practiced to encourage more Filipino buyers The success in used car business is truly based on the openness of the automotive 21
  22. 22. market in developing and third world countries, there’s always room for affordability of motor vehicles, the opportunities are still vast towards the pursuit of profit. The main point of the study is that knowledge intensive automotive industries like Japan with proper utilization of recycle resources will become more central in the world economies, for this reason this will be there key to economic prosperity and wealth generation. The plausible truth is the possibility that while Japanese still competing with the world’s car manufacturers they will also seek a path of co-existence in the used car sector. REFERENCES ADT Automotive's 1996. Used Car Market Report. Akerlof, George A. 1970. The market for lemons quality uncertainty and the market mechanism. Quarterly Journal of Economics, 84: 488-500. Berkovec, James 1985. New car sales and used car stocks: A model of the automobile market. The Rand Journal of Economics, 16 (2): 195-214. Best Japan Car. http://www.bestjapancar.com/documents.htm Bond, Eric W. 1982. A direct test of the lemons model: The market for used pickup trucks. The American Economic Review, 72 (4): 836-840. Chen, Ching Kuo 2004. The study of expendiency and benefit for consumers who procure vehicles from second-hand vehicles vendors in a propensity of asymmetrical information of supply/demand market – by way of examples of the market in Taiwan and Japan. Unpublished Master’s Thesis. National Zhong Shan University. www.etd.lib.nsysu.edu.tw/ETD-db/ETD-search/view_etd? URN=etd-0831105-094829 Case Study: A Car Dealership and Its Dilemma. http://econweb.tamu.edu/turocy/econ489/econ489-sample2.pdf Clerides, Sofronis, 2004. Gains from trade in used goods: Evidence from the global market for automobiles. University of Cyprus and CERP Mimeo. Czaga, Peter and Barbara Fliess, 2005. Used Goods Trade: A Growth Opportunity. OECD Observer. Davis, S., 2000. Transportation energy databook (20th ed.). Oak Ridge National Laboratory, Oak Ridge, TN. Genat, Robert 1999. The American car dealership. Osceola, WI: MBI publishing Company. Gov.ph 2005. Subic export of used vehicles to Thailand. 22
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