“Chips shortage” drives the popularity of used cars, and misunderstandings and prejudices are hidden behind the “value retention rate”

Abandoning the misunderstandings and prejudices caused by traditional algorithms, under a more scientific calculation system, not only German brands will benefit, but also consumers and major participants in the used car market.

The chip crisis has become the biggest "gray rhino" in the auto market this year.

As the global chip shortage intensifies, the automotive industry chain and value chain have also triggered a series of chain reactions. The most significant impact on the consumer side is the slow delivery of new cars due to insufficient production capacity, as well as the general price increase and soaring popularity of the used car market.

Especially in the context of insufficient supply of new cars, the used car market is becoming increasingly hot. Based on the relatively strong consumer demand, more car buyers are beginning to turn their attention to used cars.

The Manheim Index, which is used to measure the trend of used car prices, shows that the US used car price index has continued to soar this year, and after September, it has hit the highest monthly increase since April. In the Chinese market, the used car business is also booming, with the used prices of popular models generally rising, and even dealers buying back used cars at the original price.

In this macro market environment, the residual value of used cars, or the "residual value rate" that the industry talks about with great relish, has once again attracted attention. Cars are large items that consumers use for a long time, so those with higher residual value rates are naturally more popular in the used car market.

At present, the algorithm for calculating the value retention rate is to divide the price of a used car by the suggested price of a new car. The greater the discount of a new car, the lower the value retention rate. In fact, such an algorithm cannot directly reflect the true value retention rate of a car. Behind the "value retention rate" lies the misunderstanding and prejudice that the industry has always had.

 Misunderstood “Second-hand Car Value Retention Rate”

The value retention rate is an important data for consumers to use as a reference for car purchases. Models with high value retention rates are more likely to become "hot buns" in the used car market. Because of this, whether at the market level or at the consumer level, the value retention rate of used cars has become a key indicator that directly affects consumer decisions.

There is an established formula for calculating the value retention rate.

In order to ensure the uniformity of the value retention rate, many evaluation agencies have always been accustomed to using the method of "used car price ÷ new car official guide price" to calculate. However, this calculation method has its limitations.

Why do you say that?

Due to the need to add configurations, the terminal transaction price of some brands is often higher than the official guide price. In this way, the high value retention rate is not an objective and true reflection. On the other hand, the time interval between the official launch of some models and the start of terminal discounts is actually very short. Considering the complexity of the discount price, it is inevitably unfair to copy the above formula.

In a nutshell, the manufacturer's suggested price is not the real value of a new car. The terminal price of a new car is the real value of a new car, and the value retention rate should be calculated based on the terminal price of a new car. So, what is the correct calculation method for the value retention rate?

Value retention rate = second-hand car price ÷ new car terminal transaction price.

Let’s use data as an example:

Car A has an official guide price of 200,000 yuan, a terminal transaction price of 160,000 yuan, and a second-hand car price of 100,000 yuan; Car B also has an official guide price of 200,000 yuan, a terminal transaction price of 180,000 yuan, and a second-hand car price of 100,000 yuan. According to the traditional calculation formula, the depreciation rate of both cars is 50%.

In fact, the depreciation of Car B is obviously higher than that of Car A.

If calculated reasonably, the value retention rate of Car A is actually around 60%, while the value retention rate of Car B is around 55%.

 Uncover the truth, German cars are not inferior to Japanese cars

There is a phenomenon that is worth our consideration.

Japanese cars have always ranked high on many value retention lists, and the value retention rates of many best-selling models have always been higher than those of their German and American competitors in the same class.

The main reason is that Japanese cars have low manufacturer's suggested prices and small discounts, so if calculated based on the manufacturer's suggested prices, the value retention rate is higher. On the contrary, German cars have high suggested prices and high discounts, so if calculated based on the manufacturer's suggested prices, the final calculated value retention rate is often lower.

Because of this, the value retention rate should be calculated based on the terminal transaction price, which is more reasonable. According to the real value retention rate algorithm, the value retention rate of German models has increased significantly, and the value retention rate gap between many Japanese and German cars will be significantly narrowed, or even equal, and the value retention rate of Japanese cars is no longer high.

The editor of "Auto Commune" also recently visited several car dealers in Shanghai and Guangzhou. These front-line sales generally reported that if calculated according to a more reasonable value retention rate algorithm, that is, "used car price ÷ new car transaction price", the value retention rate of Volkswagen's, especially FAW-Volkswagen's, has actually been relatively stable and has a higher value retention rate.

A dealer manager told the editor of Auto Commune that taking the FAW-Volkswagen Bora and Dongfeng Nissan Sylphy of the same level as examples, both cars are hot products in the used car market, and the official guide prices are almost in the range of 100,000-150,000 yuan. "The maximum discount for the Bora is now 40,000 yuan, and the Sylphy is about 20,000 yuan. If we use the real value retention rate calculation method, the used car value retention rates of the two cars are actually almost the same."

Why is FAW-Volkswagen so remarkable in the field of value retention?

On the one hand, thanks to the excellent product value of German cars themselves and the characteristics of "high suggested price and high discount" introduced above, the final calculated value retention rate according to the manufacturer's suggested price is naturally among the best.

On the other hand, it is also related to FAW-Volkswagen's forward-looking deployment. Since last year, FAW-Volkswagen has launched the "price value strategy", which is user-centric and follows the rhythm of the product life cycle. By adding high-demand and high-value equipment for users, it enriches product equipment and improves product value and value retention rate.

An insider of FAW-Volkswagen told Auto Commune that since the launch of the "price-value strategy", all new models released from last year to date have comprehensively improved their product value and hard-core strength in accordance with the new strategy. New cars including the Golf family, CC family, Lanjing, and the 2021 upgraded version of the Sagitar have made new breakthroughs in the field of value retention rate.

A salesperson who has been engaged in second-hand car transactions in the Yangtze River Delta region for a long time said that the value retention rate of FAW-Volkswagen's second-hand cars in recent years has been outstanding, especially since last year, when the value retention rate of many models has been remarkable. "Many second-hand cars that are about three years old can maintain a value retention rate of about 75% to 80%. If compared horizontally, this result is already very good."

It is worth mentioning that since FAW-Volkswagen regained the top spot in domestic sales, its sales base and market leadership have become increasingly prominent. In addition, the value retention rates of its heavyweight models such as the Golf family, Lanjing, and Sagitar have continued to increase, and its dominance in both the new and used car markets is also increasing day by day.

From a higher perspective, if we abandon the misunderstandings and prejudices caused by traditional algorithms and adopt a more scientific computing system, the people who will benefit the most are actually the consumers and more major market participants.