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THE GOOD, THE BAD AND THE UGLY

We’re talking about salvage auctions

Column by STEVE FLETCHER

Auto recyclers rely on a steady flow of total loss vehicles from the insurance industry to secure their inventory of parts to provide to collision repairers and insurers—ideally to lower cycle time and severity and prevent further total losses. The balancing of interests in this mini-circular economy, with the policyholder in the middle of it all, is always interesting.

However, recent moves by salvage auctions and overall trends in salvage disposal are negatively influencing the ability of auto recyclers to fulfill their role. And, when one aspect of a circular industry is hampered, the entire system is affected.

Salvage auctions exist to act as an intermediary between insurers and auto recyclers. Traditionally, insurers had direct contracts with local auto recyclers to handle their salvage. Recyclers, working with their customers— collision repairers—and their own parts inventory needs, would determine which path a vehicle might take—repair or dismantle for parts. One problem with these contracts was that you had to take every vehicle acquired by the insurer, and we all know some brands are totaled much faster than others, which can overwhelm a recyclers inventory or repair needs.

The emergence of salvage auctions allowed auto recyclers to pick and choose their inventory. As the auctions increasingly went virtual—up to 100 percent so, with the pandemic—recyclers could scan multiple auctions across North America, research their part needs and use sophisticated software to generate bid amounts.

Unfortunately, most auctions are wide open to the public such that anyone with a pulse could buy salvage and either figure out how to repair or part out a vehicle on the fly. Licensed? Qualified? Honest? Nah—top dollar wins. This race to the bottom is also a race to see who can pay the most. Great for any department within an insurance company, but fewer parts available at higher costs is a downward spiral for the overall industry. Globalization doesn’t help, with as much as 30 percent of salvage going overseas to jurisdictions with fewer if any rules regarding environmental compliance or vehicle safety. That’s a long way away to order parts from and is the reverse of the trend towards localization of part supply chains. The effort auctions put in to nurturing international buyers is staggering.

And now, to fees. Auctions charge the seller and the buyer a fee for service. The major auctions are all multi-national publicly listed companies with demanding quarterly return requirements. Auto recyclers bid on vehicles based on the total amount they can pay—their bid amount plus fees. And there are a lot of fees—sale fee, buy fee, environmental fee, AuctionNow fee—and one auctions newest fee—a CARFAX report on every vehicle you buy. As auto recyclers are now buying only parts cars from auctions, these reports are virtually useless, but they do subtract from the return insurers think they are making.

As examples, for a $2,000 vehicle the fees are an extra 26 percent on top of the bid price. For a $750 vehicle—a whopping 41 percent add-on.

Salvage auctions need to exist—we aren’t asking for them to go away and return to the good ol’ days. But we used to have dialogue with insurers, repairers and the auctions, seeking to understand each other’s challenges, opportunities and expertise. A balanced meeting of all parties might go a long way to achieving greater resource efficiency and profitability for all. It all starts with communication.

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