Parts prices and poor residuals leading to soaring write-offs…

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AutoWired has a very interesting article regarding the increasing number of write-offs and dangerous repairs due to poor residual values:

The cost of safety related parts such as air bags, combined with poor residual values is leading to a rapid rise in the number of late model vehicles being written off, according to research findings revealed at the recent RISC Conference. Speaking at the Conference, Bodyshop Magazine publisher and industry expert Chris Mann said that this trend is "neither economically or environmentally sustainable". Using data gathered for the parts survey: Parts: pricing models, usage & availability – which is due to be published by Plenham Limited in July – Chris Mann highlighted the extent of the problem. "The inexorable rise in write-off numbers has appalling implications for the environment, is bad for the vehicle manufacturers who typically depend upon after market parts sales for more than fifty percent of their total profits and, of course, it’s bad for the repair industry and motorists. Of even greater concern, though, is the fact that many of these written off vehicles are being bought as salvage, repaired as cheaply as possible by unscrupulous traders who have no regard for the structural integrity of the vehicle, and sold on for maximum profit.

These poorly repaired vehicles are a structural time bomb which, according to ex Cheshire Chief Constable John Dwyer, are putting the lives of both drivers and passengers at risk. Urgent action needs to be taken if unnecessary deaths and injuries are to be avoided".

Using the "typical family car" example of the Ford Mondeo 1.8 LX (one of ten volume models assessed for the RISC Report) Chris Mann pointed out that, when new, in 1996 the retail price of this model was £12,825. Safety related items such as air bags were not then included in the basic specification. The 2006 Mondeo 1.8 LX cost £15,587 but the specification now included all of these previously "extra" items as standard. After two years, the residual value of the 1996 Mondeo was £7,450 (58% of the original price) whilst in 2008 the residual value of the 2006 Mondeo was £6675 or 43% of its purchase price "We took a typical three-quarter front end impact, assuming exactly the same level of damage for both the 1996 and 2006 cars. If one ignores the safety related items that were not fitted to the 1996 model the cost of parts and the labour time required to complete the repair are similar (£3865 for the 1996 model, £4082 for the 2006 variant).

The difference in relative residual values, however, means that the repair cost for the 2006 car represents 61% of the vehicle’s residual value, compared to 52% for its 1996 predecessor and on that basis both cars are likely to be repaired. This, though, does not take account of all of the additional safety related parts fitted as standard on the 2006 vehicle, which, plus the labour time (a mere 2 hours at £25 per hour) required to fit them, adds an additional £1692 to the repair cost. Thus the overall cost of repair which, in 1998, accounted for 52% of the two-year old Mondeo’s residual value, today represents 88% percent of the 2006 Mondeo’s value – making the newer vehicle an economic write-off".

Chris Mann went on to call upon all of the mainstream vehicle manufacturers to re-examine their aftermarket parts policies and review their margins on core safety related parts. "This would benefit them as – even if margins were to be squeezed on these items – the profit they would make on all the other parts required for the repair would more than offset this, and safeguard their crucially important aftermarket sales revenue. There would be environmental gains from such a policy and the risk of motorists unknowingly driving dangerous vehicles would be radically reduced. We, as an industry have a clear responsibility to the consumer and we need to live up to this".