Used Volkswagen Values - Insight From ADESA's Tom Kontos

Special to The Auto Channel
From Jon LeSage, Edi­tor

Used Car Mar­ket Reports

As the Volk­swa­gen diesel scan­dal widens, the ques­tion of what impact it may have on VW and Audi resale val­ues has come up this week. Kel­ley Blue Book, Black Book, and NADA Used Car Guide men­tioned early signs of price declines, but they all acknowl­edged that it’s too early to tell the over­all mar­ket impact on VW TDI mod­els and the over­all brand. I asked Tom Kon­tos, exec­u­tive VP and chief econ­o­mist at ADESA Ana­lyt­i­cal Ser­vices, for his per­spec­tives on the fun­da­men­tal issues at stake. Our dis­cus­sion moved beyond the ques­tion of short-term used car prices.

One of the mar­ket indi­ca­tors ADESA Ana­lyt­i­cal Ser­vices will be watch­ing for is dis­place­ment of vol­ume dur­ing the recall; with vehi­cle vol­ume play­ing a big role in resale val­ues. That fac­tor affected the Gen­eral Motors recall in 2014–15, Kon­tos said, cre­at­ing anom­alies in the mar­ket. GM cur­tailed sale of the new vehi­cles until a fix-it solu­tion was devel­oped for the recalls. Dur­ing the sum­mer of 2014, new vehi­cle inven­to­ries built up for the mar­ket in Sep­tem­ber and Octo­ber; a sim­i­lar trend took place with a GM deci­sion around Thanks­giv­ing to cur­tail vol­ume and to take advan­tage of the spring market.

While the 11 mil­lion vehi­cle recall of affected VW and Audi vehi­cles will be rolling out soon, only about 482,000 of them will be in the U.S., at this point. It does rep­re­sent a share of U.S. new vehi­cle sales for VW in the U.S. – nearly 25% as of last year; and there is the chance that the recalled mod­els, such as the Golf TDI, will see the effects on Golf gaso­line engine resale val­ues. The VW diesel mod­els may not be as impor­tant for VW’s resale val­ues as it was for pop­u­lar GM mod­els; but the specifics of how VW han­dles its recall with its dealer net­work will be care­fully watched, Kon­tos said.

For the com­pany and its car brands, how the automaker is per­ceived for being trans­par­ent and account­able will be as or more impor­tant as the emis­sions, Kon­tos said. Kon­tos thinks that the com­pany is tak­ing the right steps, includ­ing Volk­swa­gen of Amer­ica CEO Michael Horn’s tes­ti­mony before a U.S. House over­sight com­mit­tee. As for the Audi brand, it appears that the biggest chal­lenge for the automaker will be pro­tect­ing the VW brand. The Audi brand may not be as affected by the cri­sis as VW, with the VW mod­els being included in the West Vir­ginia Uni­ver­sity test­ing that uncov­ered the emis­sions report­ing, Kon­tos said.

As for the future of light-duty diesel vehi­cle sales in the U.S., Kon­tos thinks it’s likely to fall into two camps. For the gen­eral con­sumer who’s been con­sid­er­ing buy­ing a diesel car, it may change their minds back toward gasoline-engine mod­els. As for pickup truck buy­ers, includ­ing those look­ing at the top-selling diesel – the Ram EcoDiesel – they’re more informed about their deci­sion and may not be as con­cerned. “They’ll be more inter­ested in how it would affect torque and heavy-duty use,” Kon­tos said.

Another fac­tor to watch for will be diesel prices. Years ago, diesel prices were lower than gaso­line; diesel went up to about 50 cents per gal­lon higher than gas in recent years. Some of that had to do with the cost of fuel pro­duc­ers switch­ing over to ultra-low sul­fur diesel (ULSD) and the strong export demand for diesel. Lately, diesel has been closer in price to gaso­line, which makes it more attrac­tive to those inter­ested in diesel-engine vehi­cles. (Editor’s note: in recent weeks, the aver­age diesel price has increased and is about 20 cents per gal­lon higher than gasoline.)

Kon­tos doesn’t expect fleet seg­ments to play that much of a dif­fer­ence in VW resale val­ues. Car rental com­pa­nies and cor­po­rate fleets have small vol­umes of VW and Audi acqui­si­tions; it’s much more of a retail sales issue to look at, Kon­tos said.

Over­all, the VW recall illus­trates two other key issues that sev­eral OEMs are fac­ing in their cor­po­rate cul­tures – being #1 in the global mar­ket and being per­ceived as a tech­nol­ogy inno­va­tor. VW was #1 in global sales over Toy­ota last year, and has worked hard to reach that peak. The “clean diesel” cam­paign to mar­ket the TDI mod­els in recent years has played on VW’s image with reg­u­la­tors and con­sumer on emis­sions and fuel effi­ciency. Its mar­ket­ing cam­paign has also empha­sized com­mit­ment to engine per­for­mance (which is at the heart of Germany’s auto­mo­tive cul­ture); and being the cutting-edge tech­nol­ogy inno­va­tor in emis­sions, effi­ciency, power, con­nec­tiv­ity, and safety.

Kon­tos thinks that the com­pe­ti­tion to stay #1 in auto sales could mean that VW invests a lot in sub­si­diz­ing the brand with “cash on hood” and other incen­tives. Hyundai and Kia had to work hard on improv­ing their qual­ity images to increase sales; that led the Hyundai to increase war­ranty cov­er­age to 100,000 miles and to add edgy styling to the exte­rior designs, Kon­tos said.

The VW TDI mar­ket­ing cam­paign was very much about earn­ing “brag­ging rights” to raise the brand image and increase sales. That’s part of stand­ing out in the mar­ket and work­ing hard to increase global sales, Kon­tos said. Kon­tos is very inter­ested in how VW will be han­dling the recall; and sup­port­ing the VW and Audi dealer net­works in answer­ing car owner and shop­per ques­tions along with deliv­er­ing an effec­tive fix-it solution.