Manheim 2013 UCMR

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Market

Report

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18th Edition

$250


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MarketReport

U.S. Auto Industry Continues Growth DespiteEconomic UncertaintyOvercoming economic uncertainty and the lingering effects of the Great Recession, the U.S.automotive industry in 2012 produced accelerated growth and profitability for dealers and otherkey industry players. New car sales exceeded expectations by 1 million units, rising to 14.5 million.Used car sales, meanwhile, rose to 40.5 million units, a 5% increase from a year ago. Wholesale

prices remained at historically high levels, and the rental industry earned record profits.

At the heart of many of these positive developments was the smart use of technology, includingdigital tools that allowed retail customers to make more informed choices, wholesale sellersto remarket their inventory in multiple forums simultaneously, and wholesale buyers to makeinventory management decisions anytime, anywhere from the palm of their hands.

2 A Note From Sandy Schwartz,Manheim President

3 Year in Review and Outlook Once again, the auto industry performed well against a volatile

economic backdrop. With wholesale supplies increasing andcredit availability likely to remain good, used vehicle dealersshould see increased sales again in 2013.

8 The Remarketing Industry Wholesale prices remained at historically high levels,

and volumes declined only slightly. Issues such as vehicletransportation, wholesale financing, and emerging technologiesall played a role in buyer and seller performance in thewholesale market.

13 Dealers Pent-up consumer demand led to 40.5 million used vehicle sales

in 2012. Certified Pre-Owned sales rose 6% to a record 1.84million units. Q&A with NADA Q&A with NIADA

20 Rental The rental industry had record profits in 2012 as lower per-

vehicle revenue per day was offset by higher fleet-utilization,low depreciation costs, and reduced inventory-funding outlays.

24 Leasing Lease originations increased for a fourth consecutive year,

reaching 2.5 million units in 2012. Meanwhile, off-lease volumesdipped to a cyclical low of 1.5 million units.

28 Repossessions Repossession volumes remained virtually unchanged in 2012, but

the recent growth in loan originations and the easing of lendingstandards will likely lead to increased repossessions in 2013 andbeyond.

32 Commercial and Government Fleets With an increase of 7%, new vehicle sales into commercial fleets

rose for the third straight year. Reversing a four-year slide,government fleet purchases increased by a modest 2% in 2012.

35 Salvage The salvage market dealt with tight supplies, strong demand,

and higher prices. Buyers of total-loss units had to work harderto find units that were competitively priced and allowedenough margin to turn a reasonable profit.

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It seems like every January, we reflect on the events ofthe previous 12 months and say with conviction, Theresnever been a year quite like that one. Well, 2012 was noexception.

Despite natures wrath culminating in the devastationof Hurricanes Isaac and Sandy and the political turmoilsurrounding budget debates and tax policy, the automotiveindustry continued its steady climb out of the depths of theGreat Recession. And no segment of our industry has shownmore resilience than the used car market.

This year, we are proud to bring you the 18th edition ofManheims Used Car Market Report, which offers insightsand observations about the used car industry, and takes alook at all of the different ways that remarketing continuesto become more efficient and responsive to the needs ofbuyers and sellers.

Changes continue to come at an accelerating pace in our

industry, but Manheims goals remain constant: to providea trusted marketplace for buyers and sellers, in which theyfind ease doing business. We do this by providing an arrayof products that allow wholesale participants to appraise,finance, buy, sell, manage, and transport their inventory inthe most efficient ways possible.

Important useful innovations are being made in a varietyof digital products, but it is in the area of mobile access smartphones, tablets, etc. that we are seeing the fastest

growth today. Dealers are taking advantage of thesetechnologies to research, buy, and sell vehicles from thepalm of their hands. Last year, nearly 10 million visits weremade to the Manheim marketplace from mobile devices, up140% from 2011.

Mobile access of another sort bringing the auction tothe seller has also taken off in the past year. ManheimsSimulcast Everywhere brings the auctioneer and liveauction environment to the sellers location, a significantdevelopment that allows sellers to remarket vehicles faster

and allows dealers to search larger inventories and bid onmore vehicles earlier in the remarketing cycle. Thanks toproducts like Simulcast Everywhere and other tools thatexpand and enhance buying and selling opportunities,our industry is evolving into a multiplatform model whereinventory will be broadcast across all competitive platformssimultaneously.

For all of the positive change that our industry isexperiencing, it is important to remember that thefundamentals remain solid. Marketplaces that enhancetrust, transparency, and confidence still attract, and satisfy,the greatest number of customers. And in the process ofefficiently redistributing vehicles while also establishingtheir true value in the marketplace, auctions provide theright mix of products and services needed to enhancecustomer confidence.

I look forward to continuing improvements in the used carmarketplace in 2013. I also look forward to interacting withothers in our industry, and learning more about how we atManheim can help you succeed.

Sincerely,

Sandy SchwartzPresident

[email protected]

A Note From Sandy SchwartzManheim President

SandySchwartzPresidentManheim

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Housing: An Unprecedented Drag NowBecomes a Stimulant

The Great Recession, which was concentrated in the financialmarkets, was precipitated by, and then acutely felt in, thehousing industry. Easy credit led to a housing bubble, which,when popped, led to underwater homeowners and a wave offoreclosures and short sales. That, coupled with a decline in theequity markets, reduced household net worth by $12 trillionbetween the peak in the third quarter of 2007 and thetrough in the second quarter of 2010.After walking away from more than a trillion dollars in mortgagedebt (through foreclosures and short sales), household net worthis once again closing in on its all-time high. And debt-to-incomeratios are at their lowest in decades in the household sector.Nevertheless, until recently, home sales and new construction haveremained dormant, at best. That is in stark contrast to all previousbusiness cycles when housing and autos moved in lockstep.

Finally, however, there are signs that housing has made a

turnaround. The overhang of foreclosures has begun to clear,rent-to-payment ratios and cheap money have brought investorsinto the market, and now, with a modest rise in home prices,traditional buyers have been enticed back. Given that householdformation rates are beginning to keep pace with the growthin employment, home construction (and the multitude of jobsit generates) will now join in the recovery. And, given the highleverage ratios entailed in home financing, the modest rise inhome prices now under way will quickly push household networth to its pre-recession high.

Employment Grows, But Remains Far From PeakIn 2012, net employment gains averaged 153,000 per month,virtually the same rate of increase that was experienced in 2011.Last years growth was clearly a disappointment since many wereexpecting monthly gains of 175,000 or more, and it is generallybelieved that gains more like 200,000 per month are needed toprovide a self-reinforcing recovery. Even larger gains are neededto significantly reduce the unemployment rate.

Year in Review and Outlook

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-450,000

-350,000

-250,000

-150,000

-50,000

50,000

150,000

250,000

2002 2004 2006 2008 2010 2012

Average Monthly Change in Employment

Source: Bureau of Labor Statistics

New Vehicle Sales and New Home Sales

8

10

12

14

16

18

20

0.2

0.4

0.6

0.8

1.0

1.2

1.4

New Home Sales New Vehicle Sales

Jan-77 Jan-83 Jan-89 Jan-95 Jan-01 Jan-07 Jan-13

Source: Automotive News & Census Bureau

NewHomeSalesinMillions

NewCarSalesinMillions


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Given that a total of 8.8 million jobs were lost from the peakin January 2008 to the trough in February 2010, total U.S.employment, even after 27 consecutive months of gains, is still4 million short of the previous peak. Add in population growthduring this time and you quickly realize there are now many fewerpaychecks to feed, house, and clothe many more people. And,fundamentally, we know that employment is the primary driver ofvehicles in operation and vehicle miles of travel (VMT). Thosetwo factors, in turn, determine the underlying rate of demand fornew vehicles.

U.S. employment and vehicle miles of travel each peaked atapproximately the same time (employment in January of 2008and VMT in November of 2007). Both have now been below theirprevious peaks for the longest stretch ever more than ve years.This suggests to us that the run-up in new vehicle sales was verymuch frontloaded during this recovery and that, for the sales gainsto continue, other sectors of the economy will need to join in.

Credit Markets Spur Vehicle Sales

No industry has benefited more from the unfreezing of the creditmarkets than new and used vehicles. Although the immediategoal of Federal Reserve actions was to lower long-term rates andsupport the mortgage market, it was auto financing markets thatenjoyed the rst boosts. The search for yield with safety drewinvestors into the asset-backed securitization market for autoloans and leases. And it also created new capital flows to dealersinvolved in the self-financing market.Lenders, whether they be prime or subprime, enjoyed a record-

low cost of funds. They passed those savings on to dealers, whodid likewise for their retail customers. Subprime customers, whowould have been rejected a year ago, received approvals in 2012 and at a lower APR. Buyers found they could borrow more, forlonger terms, and that is exactly what they did.


Mar-11

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-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

Vehicle Miles of Travel Employment

Apr-08

Nov-07

Sep-08

Feb-09Jul-09

Dec-09

May-10

Oct-10

Percent Change From Previous Peak

Source: U.S. Department of Transportation & BLS

Auto Credit Outstanding

$500

$550

$600

$650

$700

$750

$800

$850

$900

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: Federal Reserve Bank of New York

Millions


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New Vehicle Sales Continue Their Rise in 2012New vehicle sales in 2012 reached 14.5 million units. This was fully1 million units higher than what the consensus forecast called forat the beginning of the year. The fact that sales surprised to theupside explains how inventory levels were kept in check duringthe year. Although the days supply rose at year-end, new vehicleinventories (on a 12-month rolling basis) have remained below 60days for 33 consecutive months, the longest stretch ever.

Disciplined new vehicle inventory management in 2012 explainsmuch of the strength in wholesale used vehicle pricing during theyear. As such, it is a welcome fact that the consensus forecast forsales in 2013 points to around 15.5 million, since that is a salesrate that was almost achieved in the fourth quarter of last year.

Used Vehicle Retail Sales Top 40 Million in 2012

Used vehicle sales finished 2012 on a strong note with dealershaving a 17% increase in sales in December, according to CNW.

For the year, dealer used vehicle retail sales rose 5%. Althoughdealers faced margin pressure throughout the year, fasterinventory turns, operating efciencies, and strong F&I incomekept used vehicle operations very profitable.

With wholesale supplies increasing in 2013 and credit availabilitylikely to remain good, used vehicle dealers should see increasedsales again in 2013. But, of course, economic risks remain. Forexample, although the temporary avoidance of the fiscal cliff wasa positive, the fact remains that 77% of all U.S. households willface higher taxes this year relative to 2012. Thats a result of the

loss of the temporary 2 percentage point reduction in the payrolltax. To be sure, no one expected the payroll tax holiday to beextended (and it wasnt great economic policy); but that doesntmean that households now experiencing a $75 to $100 loss inafter-tax monthly income wont alter their behavior. Furthermore,with businesses having shifted bonuses, stock options, and specialdividends into the latter part of 2012, economic activity this yearmay exhibit an abnormal seasonal pattern.

0

5

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15

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25

30

35

40

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50

4

6

8

10

12

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18

20

1976 1980 1984 1988 1992 1996 2000 2004 2008 2012

New Used

New Vehicle Sales vs. Used Vehicle Sales

Source: Automotive News & CNW

Millions of units

NewVehicleSales

UsedVehicleSales

9

10

11

12

13

14

15

16

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Cash-for-clunkers

Supply

disruption

New Car & Light-Duty Truck Sales

Source: Automotive News

Millions of units Seasonally Adjusted Annual Rate - 3-Month Moving Average


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Wholesale Prices and Processes Enter a New EraWe have long suggested that wholesale used vehicle prices haveentered a new era where markets are comfortable with relativelyhigher valuations. Thats because the bad practices of the past thatdestroyed residual values (like excessive lease subvention, heavyincentives, short rental cycles, and high dealer inventories) havebeen stopped.Remarketing processes have also entered a new era. Gone is thebright-line distinction between in-lane and online. Simple multiple-platform selling is quickly becoming simultaneous multiple-platform selling. The term channel management lost its cachetwhen the channels lost their boundary lines. Even the distinctionbetween retail and wholesale has blurred. New entrants into anold industry are now expected, and sometimes even welcomed,even as they bypass what used to be considered the rules.Certain truths remain, however. Foremost, open and transparentcompetitive bidding with equally knowledgeable players remainsthe truest form of price discovery. And, buyers and sellers need a

trusted marketplace built on efficiency that effectively transfersvehicles to their optimal owners.

Cliffs and Ceilings Create Confusion and CautionThe fiscal cliff (expiration of the Bush-era tax cuts andimposition of automatic spending cuts) was precipitated by theinability of Congress to reach a budget deal in the middle of 2011,but it did not attract 24/7 media coverage until the waning days of2012. The resulting uncertainty, however, put many businesses on

hold throughout 2012. Executives delayed hiring and investmentdecisions because they did not know what the rules of the gamewould be in 2013 and beyond. As a result, employment growthwas slow, and capital spending lagged the recovery despitebusinesses having record levels of cash and facing historically lowborrowing costs.

Some improvement in this situation should occur in 2013 underthe assumption that even a bad budget deal is better than no

deal. Given that the last-minute mini-deal to avert the fiscalcliff allowed the 2-point reduction in the payroll tax to expire,some pullback in consumer spending might be seen in thefirst half of 2013. That, along with some delays in incometax refunds, may cause growth in early 2013 to disappoint.After all, almost all observers believe that the deal to avoidthe fiscal cliff will knock off more than 1 percentage pointfrom GDP growth. As such, it is all the more important thatthe pickup in housing and business spending that we foreseeactually occurs.

In closing, we can again quote from last years Review& Outlook:

Tis year, our chief threat is

once again ourselves. Although

our debt and deficit issues need

not and cannot be solved

in the short term, there is alimited window of opportunity

to rationally address the issue.

Failure to do so will simply make

the necessary choices harder

and the easy alternatives all the

more harmful in the long run.

Yes, in 2013, our economic fortunes will once againbe overly inuenced by policymakers by both their actionsand their inactions. And, since another year has passed, thatlimited window of opportunity has gotten smaller. Whenit comes to sovereign debt issues, great nations are givengreater grace periods, but not blank checks.


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The Remarketing Industry

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Auction Volumes Set To Grow in 2013

Estimates of NAAA-member auction sales in 2012 range fromdown 2% to virtually no change. Thus, total sales were in therange of 7.5 million to 7.7 million units. Dealer consignmentvolumes rose more than 5%, but that was offset by an 8% declinein commercial consignment.

Looking ahead to 2013, we believe auction volumes will increaseby 5% to a level of approximately 7.9 million units. With closeto 10 million units sold in 2003, compared to 7.5 million in 2012,

the surface-level decline of 25% could be alarming to some. Itis critically important, however, to understand the underlyingfactors that contributed to those high volumes in 2003. They werethe result of prior years when leases were written with inflatedresiduals, loans were made to subprime borrowers who simplypassed a mirror-test and were given a loan-to-value ratio of150% or more, incentives were dispersed willy-nilly to attractbuyers, and manufacturers used rental car companies as a reliefvalve for excess production. While these practices supported newvehicle sales at the time, and boosted auction volumes shortly

thereafter, they were destructive to the health of the autoindustry. In fact, they brought two manufacturers to bankruptcy.

Looking ahead, we believe industry growth will be built onsolid business practices. Leasing is being done right, lendershave become more aggressive, new vehicles are being sold withan upfront profit, and inventories are being kept in check.

We expect used vehicle inventory from all sources will increasein 2013. Off-rental supplies will grow by more than 200,000units, with a greater-than-ever mix of diversified inventory. Off-

lease supplies will increase by close to 200,000 units, driven bythe earlier rise in lease originations from the trough of 2008.Repossession volumes will grow by approximately 100,000 units.And dealer consignment will grow for the fourth consecutiveyear in concert with the continued growth in both new and usedvehicle retail sales.

Manheim Used Vehicle Value Index Declines by1% in 2012

Wholesale used vehicle prices, as measured by the ManheimIndex, increased in the fourth quarter of 2012 as HurricaneSandy reduced supply and increased demand in the market.Although full-year prices softened for the first time in threeyears, they remained at historically high levels.

Three segments saw year-over-year price increases with mid-size cars and pickups having the biggest gains, at 2.0% and2.6%, respectively. Van prices were nearly flat, posting a 0.2%price increase, and compact cars had the greatest annualdecline at 2.8% from 2011.

Age of Vehicles Sold at Auction MovesHigher in 2012Vehicles from seven or more model years prior accountedfor more than 38% of total sales. Thats up dramatically

from less than 18% a decade ago, and reflects the fact thatdealer consignments have been growing at the same timecommercial volumes have declined. It also reflects the salescycle; we first saw the decline in auction share accountedfor by 1- and 2-year-old models immediately following therecession; but last year that decline moved into vehicles fromthree model-years past.


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Transportation: Keeping Our Industry Moving

Over the past several years, buyers have grown comfortablebuying units from a wider geographical area. As a result,they have become more reliant on transportation solutionsthat streamline business processes and maximize profits.The average distance between buyers and the vehicles theypurchase is about 190 miles for physical sales. Online buyers,however, reach much farther for inventory, with Simulcastbuyers averaging 439 miles and OVE.com buyers averaging552 miles.

Companies that move vehicles between sellers, auctions,and buyers are being recognized more and more ascritical business partners. Similarly, marketplace playersare working to provide tools and processes that betterintegrate transportation to help both buyers and sellers.Tighter integration allows these players to give buyers amore complete picture of the total cost of a vehicle duringbidding by including estimated transportation costs. Afterthe sale, vehicle information can then be provided directly to

transporters to help simplify communications between buyersand transporters.

An example of this tighter integration occurred this year,when Manheim acquired Ready Auto Transport. The twocompanies had long partnered to provide online shopperswith a full-service transportation solution. This partnershiphas created an open marketplace for shippers andtransporters to directly connect and negotiate for routes,the 1Dispatch platform.

Wholesale Financing Remains Plentifulfor Dealers

As the used vehicle industry has expanded and dealers acquiremore of their inventory from sources outside of trade-ins,

the availability of wholesale financing has become increasinglyimportant. Inventory-secured financing (as opposed to the use ofgeneral lines of credit or personal funds) enables dealers to expandtheir operations while maintaining liquidity. Wholesale financingplans, which can be geared to the particular needs of a dealer,can also make the settlement and titling process more efficientat both the wholesale and retail levels. As has been the case withretail financing, the unfreezing of the financial markets in recentyears has been very beneficial to both borrowers and lenders. Inparticular, the asset-backed securitization market is providing aready flow of funds at low-risk premiums, which is only fitting for

an industry that generally runs with portfolios that are 99% current.

As an example of the industrys adapting to a growing marketwith changing needs, Manheim Financial Services (MAFS) andDealer Services Corporation (DSC) formed a combined wholesalefinancing company in 2013. Consistent with the industry at large,executives at both companiesnoted increasing dealer demandfor tools that provide leading-

edge technology, mobile and digital tools, and greater wholesalecredit availability. The combined company is expected to provideindustry-leading access to wholesale credit lines and enhancedtechnology solutions to streamline dealers financial operations.

Brian Geitner, president of NextGear Capital, noted that in 2012,the company saw a significant gain in new customers as well asan expansion in the dollar amount and utilization of existingcredit lines.

Looking ahead to 2013, we expect that wholesale financing will

remain plentiful for dealers, allowing them to take advantageof the anticipated rise in auction volumes. These gains should beenabled through the increased use of technology to efficientlybuy, sell, manage, and finance inventory. We anticipate thatadditional process and technology enhancements will be broughtto market to ease the transactional burden for all dealers in


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sales channel, bringing the power of a physical auction andauctioneerdirectly to the seller. Using a standard electrical outlet and afew pieces of equipment, a physical auction environment canbe recreated in any conference room, dealership office, oralternative location nationwide.


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2013. Both borrowers and lenders should be aware, however,that todays record-low interest rates mean that relatively smallincreases could produce outsized shifts in their margins.

Technology in the Automotive Wholesale Industry

The facilities, processes, people, policies and tools that havefor decades facilitated the exchange of vehicles in the auctionindustry are experiencing new growth opportunities throughtechnology innovations. Buyers and sellers are using a growing

set of tools to buy, sell, and manage inentory. While the value oflive, competitive bidding remains the core of the auction business,technology is increasing efficiencies and expanding sale andpurchase opportunities.

Auctions and dealers continue to invest in technology to optimizeremarketing strategies. For nearly 75 years, auctioneer-ledsequential bidding helped buyers and sellers achieve real-timevalues. This remains the primary channel through which usedinventory is remarketed today, despite a growing number ofalternative channels.

Today, used vehicles can enter the marketplace throughseveral different methods. In addition to traditional channels,such as physical auctions, sellers can use third-party servicesto electronically image, inspect, and list inventory on one, ormultiple, online platforms. Manheim recently launched a thirdentry method, myMobileListing, where sellers can use a guidedapproach to collect images and condition information, andthen generate a whole-number AutoGrade. The increasedtransparency will help digital buyers have greater confidence in

buying units without a traditional condition report.

Sellers can present their inventory for sale using multiplesale formats, including listed-bid 24/7 auctions, time-boundonline event sales, buy-it-now listings, and live bid sales. In2012, Manheim launched a new auction platform, SimulcastEverywhere. Buyers and sellers alike have adopted this new

Manheim Digital Statistics for 2012

> In 2012, more than 125,000 customers logged in each month

to Manheim websites and apps, representing a 6% increase

over 2011.

> In 2012, Manheims independent auction partners sold 40%

more vehicles on OVE.com, compared with 2011.

> Manheim received nearly 10 million visits to its mobile

website, iPhone and Android apps in 2012. The iPhone and

iPad accounted for 57% of mobile visits, and Android devices

accounted for 42%of mobile visits.

> More than a quarter of all Manheim sales came from

Simulcast or OVE.com in 2012, representing a 4 percentage-

point increase over 2011.


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Throughout all sales channels, condition reports continueto be a critical tool for buyers, especially for vehicles sold viadigital channels. Our studies have shown that a vehicle witha condition report is five times more likely to sell via a digitalchannel than is a vehicle without a condition report.

Mobile applications have served as the foundation for severalindustry-leading technologies. Manheim launched a mobileplatform in 2010, which was primarily used as a research toolwhere dealers used VIN scan technology to retrieve MMR

values at the dealership, auction, or distribution center.

In 2012, Manheim partnered with Nissan/Infiniti to launchthe industrys rst mobile-enabled grounding tool. Dealersare able to use a smartphone or tablet device to processthe grounding transaction utilizing a paperless process.Customers are able to sign all lease documentation viathe smartphone or tablet device and receive an emailconfirmation receipt of the entire transaction.

In 2013, Manheim will support the ability to bid and buyin a Simulcast sale via a mobile device. This feature is thenext in a stream of significant investments in the Simulcastproduct line to expand capabilities for live sale boadcast ofvehicles in any location to buyers using any type of browseror device, taking the price-setting mechanism of live-bidsales anywhere.

Remarketing: A Case of Continous Improvement

Recent trends in the industry include:

Multiplatform Selling

Historically, sales events occured at a specic time and place and often at a physical auction location. Sellers wouldsend their inventory to the marketplace with the greatestbuyer reach, and buyers would attend sales that attracted

the largest inventory. Auctions won by attracting thatinventory, and the marketplace was insulated by a lack oftechnology and high barriers to entry. Over the past 10 years,technology eliminated those barriers to entry. Units can nowbe bought and sold worldwide using technology to search,evaluate, and buy vehicles 24/7. In fact, Manheims OVE andSimulcast platforms are now facilitating purchases from morethan 120 countries.

Looking ahead, our industry is quickly evolving to a

distributed model where inventory will be broadcast acrossall competitive platforms simultaneously. Some sellers havealready adopted this approach by posting used vehicles onmultiple platforms via home-grown or third-party-poweredsolutions. These solutions are often built upon a first bidwins methodology where the platform that secures the firstbid is able to sell the vehicle to the highest bidder. In thisscenario, the other platforms are asked to deactivate andremove the listing. Such a process is not optimal for eitherbuyer or seller. Many buyers prefer to purchase vehicles fromplatforms that simplify their experience and provide research

tools and transparency to ease their purchase risk. Similarly,sellers want to achieve the highest retention for their units,irrespective of the remarketing partner they use.

Our industry has begun a move to adopt standard processeswhere sellers can post units simultaneously in multiplemarketplaces and buyers can place bids facilitated throughan independent platform that will distribute bids to allmarketplaces. In this scenario, high bids would be updated


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immediately to ensure that sellers always achieve the highestmarket price for their vehicles, and that buyers have access to agreater selection of inventory on the platform that combines atailored customer experience with research tools to facilitate atransparent exchange.

Anytime, Anywhere, Any Device

In 2012, nearly 10 million visits were made to the Manheimmarketplace with a mobile device, growing nearly 140% from2011. In fact, one in three visitors to Manheims digital properties

in 2012 used a mobile device. The Pew Internet Research Centernoted that nearly one in two American adults have a smartphone,with those ages 18 to 49 driving that percentage to more than60%. Microsoft reported in 2012 that mobile device Internet trafficwill eclipse traditional desktop Internet traffic by 2014. Participantsin our industry have mirrored these trends, demanding solutionsand tools that allow them to research, manage, buy, and sellinventory on any device, whenever and wherever they wish.Mobile listing tools, mobile-enabled Simulcast platforms, andmobile research tools will see continued growth in 2013.

Inventory vs. Trust and Confidence

Historically, industry players differentiated themselves by focusingon which auction company or Internet platform had the mostinventory. These laurels were built upon inventory exclusivityagreements where sellers were bound to post inventory in a singlemarketplace. Our earlier view of multiplatform listings will reducethe dependence on this approach, giving rise to a new point ofdifferentiation. Marketplaces that provide buyers with trust andconfidence tools will attract a growing customer base. These tools

will include enhanced condition report solutions, certificationprograms, next generation mediation, transactional guaranteeproducts, and increased transparency on marketplace participants.

Analytical Decision-Making To Buy, Sell, and Manage Inventory

In 2011, vAuto launched its Provision service, which blends

the resources of AutoTrader and Manheim to provide acomprehensive inventory solution that addresses the keyquestions of what cars to stock, what to pay, and whereto find them. Provision and other Inventory ManagementSystems (IMS) combine market data and technology tooptimize each dealers inventory mix and facilitate the vehiclesearch and bidding process. Dealers using these systems areable to mitigate purchasing risk, moving away from thetraditional golden gut and toward a fact-based approachwhere data powers their decision-making process.

Dealers are not the only marketplace participants using datato make smarter decisions. In 2012, Manheim Consultingprovided more than 100 account reviews for commercialand dealer clients. During these reviews, many customersprovided their entire wholesale remarketing data set to theManheim Consulting team and asked for an independentperformance review. In many cases customers discovered thatthey could make data-driven decisions on where to distributeauction-bound inventory, moving away from their traditionalbusiness-as-usual approach and leveraging analytics to

determine auctions that delivered the highest retention fortheir inventory.

Increased Focus on Simplifying the Customer Experience

Our industry is no different from the macro-consumer viewat large. We all demand and seek simplification when buyinggoods and services. We expect that new solutions andprocesses will be developed to simplify customer experiencesat physical and digital auctions, and other remarketingindustry segments. This may include the proliferation and

exchange of data among wholesale and retail platforms,vehicle and transactional information that is customized,relevant and delivered to the customer on multiple devicesand platforms, and a simplified account settlement processwhere current-day technology facilitates payment andcheckout via kiosk or mobile device.


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The recession, and the related reduction in credit availability,pushed annual used vehicle sales, which are inherently verystable, from a pre-recession high of more than 44 million unitsto just 35.5 million units in 2009. Thus, the normal churn inthe market (used vehicle retail sales as a percent of vehicles inoperation) was lowered to unsustainable levels, which createdpent-up demand. So, as the availability of retail financingimproved (and total employment made modest gains), the levelof retail used vehicle sales climbed back to 40.5 million in 2012.Importantly, recent sales gains have been accompanied by strongdealership profits. Thats true whether the dealer was a large-

volume, high-end luxury retailer selling manufacturer certifiedpre-owned units or a small Buy-Here, Pay-Here operator.

Franchised Dealers Remain Focused on Used Vehicles

In 2012, franchised new car dealers enjoyed their third consecutiveyear of double-digit growth in new vehicle deliveries. That,coupled with attrition in the dealership count, meant that thenumber of new units sold per dealership reached an all-time high.

Nevertheless,franchised dealers did not lose focus on their usedvehicle operations simply because of booming new vehicle sales.In fact, with wholesale supplies remaining tight, many dealersconsidered the provision of used vehicle inventory throughtrade-ins to be the most important function their new vehicledepartments played in 2012. Total used vehicle retail sales byfranchised dealers increased 8% in 2012 to 15 million units, theirhighest level since 2005.

CPO Sales Reach Record Level in 2012

In 2012, manufacturer CPO sales rose almost 6%, to reach arecord 1.84 million units. With the help of a revamped programthat extended the basic warranty and increased financingincentives, Ford Lincoln/Mercury CPO sales surged by 30% in2012. GM, because of a significant reduction in potentially

Dealers

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10%

12%

14%

16%

18%

20%

22%

24%

26%

1976 1980 1984 1988 1992 1996 2000 2004 2008 2012

Ratio of Used Vehicle Sales to Vehicles in Operation

Source: R.L. Polk and CNW Marketing Research

11

12

13

14

15

16

17

18

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Used Vehicle Sales by Franchised Dealers

Source: CNW Marketing Research

Millions of units

Used Vehicle Sales:40.5 Million

CPO Sales: New Record

A Big Year for Dealers

New Units Sold per Dealership:All-time High

Dealer Consignment Auction Volume:Record 57% Share

2012


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certifiable units and the wind-down of the Saturn, Pontiac, andHummer programs, had a 3% decline in CPO sales. But, with salesapproaching 275,000 units (excluding Cadillac), GM remained thesecond largest CPO program behind Toyota, which had CPO salesof 330,000 units in 2012.

Increased supplies from a growing off-lease portfolio and greatermarketing effort pushed Hyundai CPO sales up 45%, while KiaCPO sales more than doubled. Also notable in 2012 was the18% increase in CPO sales for Volkswagen. In the luxury segment,Mercedes was the leader with CPO sales of more 80,000 units,

up 7% from 2011.

With the supply of potentially certifiable units growing in 2013,for the first time years, total CPO sales will surely rise again.Indeed, the 2 million mark will be quite reachable.

Franchised Dealers Broaden Their Offerings

As has been the trend in recent years, many franchised dealers

in 2012 built or bought separate used vehicle lots to handleinventory that did not quite match with the offerings on theirfranchised lots, which had become increasingly skewed tomanufacturer CPO units. By offering a wider array of ages andprice points, franchised dealers were able to retail a greater shareof the trade-ins they received. The increased volume allowed themto more effectively spread overhead costs related to technology,capital costs, and marketing. In addition, Internet marketingsites such as Autotrader.com enabled franchised dealers to bettermerchandise out-of-brand vehicles since visitors more often searchby make and model rather than specific dealerships.

Independent Dealers Post Modest Rise in Unit Sales

Independent dealers also had a good year in 2012, even though,as suggested earlier, their franchised dealer counterparts becamemore direct (and better) competitors. Indeed, the biggestimpediment to increased independent dealer sales in recent yearshas been the reduced flow of vehicles from franchised dealers

0.0

0.5

1.0

1.5

2.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

CPO Sales

Source: Automotive News

In Millions

10

11

12

13

14

15

16

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Used Unit Sales by Independent Dealers

Source: CNW Marketing Research

Millions of units


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Dealers

to them as new car dealers kept more of their trade-ins to retailthemselves. As evidence of this, note that independent dealersaccounted for a greater share of all auction purchases in 2012,even though their increase in retail sales (+2%) was substantiallyless than for franchised dealers (+8%).

The reduced flow of vehicles from franchised dealers createdrobust auction bidding from independent dealers and, thus,strong wholesale pricing. As a result, retail margins werecompressed. But, with the availability and cost of both retail andwholesale financing the best they have been in years, the margin

compression was offset by a faster inventory turn and reducedoperating expenses.

Buy-Here, Pay-Here Dealers Faced a Challenging 2012Finding inexpensive units that can run the term of the notewithout a major repair has always been a challenge for BHPHdealers. Furthermore, with shortages in the wholesale market anda rise in commodity prices, the task of holding down inventory

acquisition costs became even more difcult in 2012. Dealerswho did not want to take on the added risk of providing longer-term loans for larger amounts were forced to sacrifice volume.Nevertheless, BHPH dealers still accounted for more than 14% oftotal financing in the used vehicle market in 2012.

Tax refund season, which is the biggest selling period for BHPHdealers, was less than robust in 2012. In fact, for the first time inmany years, both the number and dollar amount of individualincome tax refunds declined from the previous year. The dollarsthat did come arrived in a lumpy fashion, which made it difficult

for BHPH dealers to maximize inventory turns.

Another challenge facing BHPH dealers in 2012 was subprimelenders buying further down the credit scale, thereby picking upcustomers who previously would have used their services. Add allthese factors together and you get a situation where BHPH dealerswere forced to put more money on the street, for a longer periodof time, with a lower down payment, and to a customer with ariskier credit profile. Not exactly an ideal situation.

In 2012, franchised new cardealers enjoyed their third

consecutive year of double-digit

growth in new vehicle deliveries.

Tat, coupled with attrition

in the dealership count, meant

that the number of new unitssold per dealership reached an

all-time high.


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Dealers

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CARMarketReport

On the plus side, however, BHPH dealers enjoyed greater access tocapital whether it be for wholesale nancing or for selling notesat a discount. That, coupled with what is always robust underlyingdemand for their services, meant that BHPH dealers who did agood job on the collection side had a profitable 2012.

BHPH sales in early 2013 might be lowered because many dealerswho used down-payment deferral programs from tax preparationservices to pull sales into November and December of last year.In addition, tax refunds in 2013 will once again be delayed andprobably small.

Succeeding on Reduced Margins

Used vehicle retail gross margins for the top seven publicly tradeddealership groups have trended down in recent years, and that isnot atypical for the industry as a whole. One thing we can be sureof is this: Although the pace at which margins decline over timevaries with economic conditions, those margins rarely widen backto their previous levels. And, as average margins narrowed, the

range of grosses on individual transactions clustered increasinglytoward the norm.

Thus, to succeed, dealers have had to become more efficient andincrease inventory turns. In addition, lacking home-run (high-gross) deals means that dealers can ill afford the outsized lossescaused by buying the wrong car at the wrong price. So, what hasalways been a time-consuming task nding, evaluating, andpricing inventory acquisitions had the potential to become all-consuming for the used vehicle manager. Fortunately, technology-enabled tools, such as a vAuto and Auction Genius, allow

managers to quickly search pre-sale lists across multiple platforms,retrieve vehicle history reports, and obtain data on current pricingand supply dynamics in their market areas.

Simply put, analytics have allowed dealers to better answerthe questions of what to buy, what to pay, and where to buy.Technology has enabled them to come to those answers moreefficiently. Combined, they have enabled dealers to prosper intodays margin-compressed world.

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

75,000

80,000

85,000

90,000

95,000

100,000

105,000

Average Mileage for Dealer-Consigned Vehicles

Source: Manheim Consulting

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

2007 2008 2009 2010 2011 2012

Used Vehicle Retail Gross Margin

*KMX shifted forward one month to correspond with calendar quarter Source: Company filings

Sales-weighted average for KMX ,* AN, PAG, SAH, GPI, ABG, and LAD


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Dealer Consignment Dominates the Auction Lanes

With commercial consignment volumes down for the fourthconsecutive year, and dealer consignment up for the thirdconsecutive year, the share of auction volume composed of dealerconsignment vehicles rose to a record of 57% share of auctionvolume in 2012. With demand for used vehicles high and supplylow, franchised dealers and others who in the past bought onlyfrom the commercial consignment lanes became active bidders ondealer cars. This had the virtuous effect of bringing truer marketpricing to the dealer lanes, which in turn stimulated furtherconsignment growth.

It also meant that selling dealers had to adopt new remarketingpractices. For instance, since all Manheim dealer consignmentsales are now Simulcast, the importance of the condition reporthas increased. And, of course, the condition report is critical in anypure online selling venue. In 2012, the percent of dealer vehiclesoffered with a condition report rose to more than 26%, up from20% in 2011.

That percentage will jump higher in 2013 as Manheim enhancesmyMobileListing, which allows dealers to easily self-prepare andupload a condition report for vehicles on their lots. In addition,Manheim has offered its trademarked Insight ECR process tothird-party providers for mobile off-site inspections in an effort toprovide standardization to the industry.

Dealers

$7,000

$7,500

$8,000

$8,500

$9,000

$9,500

$10,000

$10,500

$11,000

$11,500

$12,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2010

2011 2012

Average Auction Price for Dealer-Consigned Units


0%

10%

20%

30%

40%

50%

60%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012e

Dealer Consignment as Share of Auction Volume

* 2012 is a Manheim Consulting estimate based on both

internal and industry sources

Source: National Auto Auctions Association Surveys, 2002-2011


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David Westcott will become chairman of theNational Automobile Dealers Associationat the 2013 NADA Convention and Expo inFebruary. He is the owner of David WestcottBuick GMC Suzuki in Burlington, N.C., andwas the 2012 vice chairman of NADA. Herepresents North Carolinas franchised new-car dealers on the NADAs board of directors.

How would you describe business conditions for franchiseddealers in 2012?

The economy continued to improve, led by stronger sales ofboth new and used vehicles. Low interest rates on auto loans,an aging fleet of vehicles on the road that need to be replaced,and exciting new vehicles on display at U.S. auto shows areall positive signs for the auto industry. Paul Taylor, our chiefeconomist, predicts that new-car sales in 2013 will be better than2012, up nearly 1 million cars and light trucks. The theme of the2013 NADA convention is Momentum. Im optimistic by nature,as are most car dealers.

Can you give us your perspective on how digital technology has

changed both acquiring used car inventory and remarketingused vehicles?

Transparency has increased in all stages of the car buying andselling process. Consumers have information on what dealers areselling vehicles for on both a regional and national basis. Dealersalso have many digital tools to give them insight on what topay in the wholesale market. The NADA Used Car Guide offersguidance on both short-term and longer-term price performancefor virtually any used vehicle. This helps give dealers guidanceon what price to pay at auction and the depreciation they canexpect for vehicles in their inventory. Use of mobile devices,

such as smartphones, iPads and other tablets, continues togrow. NADAs mobile or digital platforms provide AuctionNetdata through an agreement with the National Auto AuctionAssociation.

How have franchised dealers responded to the shortage of usedvehicles and the need to control inventory?

We have seen faster turn rates and asking prices in line withmarket demand. As far as obtaining inventory, the use of onlinechannels is more prevalent, and dealers are also contacting their

customer base, informing them of deals on new vehicles aswell as what their trade-ins are worth. Dealer investments intheir used-vehicle operations have changed dramatically overthe past decade, particularly as they relate to technology.Dealers now purchase used inventory online and can have alisting, along with photos, posted to the dealership websitewhile the vehicle is en route. Dealers are also using third-party data to identify vehicles that sell best and whichunits have lingered on the lot for too long, and are settingused-vehicle prices based on what has taken place in theirrespective markets.

Certified Pre-Owned sales broke all-time records in 2012. Whyhave franchised dealers been able to sell so many CPO vehicles?

Market demand has driven CPO sales. Several factors havemade this possible: (1) Better-quality vehicles across the boardhave made CPO models more attractive; (2) Manufacturersand dealers have done a great job marketing CPO vehiclesas an extension of their lineup compared to new, instead ofviewing CPO as cannibalizing new sales; and (3) Affordability.Surveys indicate that most CPO buyers are actually new-vehicle intenders. CPO vehicles offer the assurance of a newvehicle at a lower price point, including coverage through

factory warranties, which is very important in the currenteconomic environment. The NADA Used Car Guide alsoprovides values for qualified, manufacturer-CPO vehicles atthe time of sale.The market today is driven more by data than ever before,and weve heard about NADAs data plan with J.D. Powerand Associates. Please share some of the details.NADA and J.D. Power and Associates have created analliance that helps improve the flow of actual transactionalaggregated data and how its used to improve the accuracy

of used-vehicle valuations. NADA members receivevaluable reports that benchmark their operations againstthe competition as well as month-over-month for theirdealership. Currently, about 9,500 dealers participate, andtogether NADA and J.D. Power have a goal to increase thissample size. NADA uses the data internally to help its analystsvalue vehicles. The data is used in the NADA 20 Groups, bythe Dealer Academy, on Capitol Hill, and when we speak withthe automakers. Its a game-changer for us.

Q&AWith NADA Chairman David Westcott

2013USED

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Chris Martin became president ofNIADA in June 2012 at the associations66th annual convention. The son ofdrag racing hall of famer Buddy Martin,Chris is the owner of E-Z Auto inFayetteville, N.C., and is an NIADACertied Master Dealer.

How would you describe business conditions for independentused vehicle dealers in 2012?

In a word: challenging. We continued to endure high wholesaleprices, increased compliance and regulatory issues, a sluggisheconomy, and a tight commercial banking environment.However, I am extremely excited about 2013. It looks like wewill see inventory prices soften slightly; we didnt fall off thefiscal cliff, and retail finance sources started to get considerablymore aggressive as we came to the end of 2012.

Given your background in finance, what are your thoughtson how the small used vehicle dealer stays profitable in thisenvironment?

When I said that finance sources have started to loosen, I was talkingabout third-party indirect financing for our retail customers. If yourbusiness has a need for operating capital or you are considering thepurchase of a fixed asset or real estate, it is currently more difficultthan I can ever remember to get this type of financing. We have allhad to work harder and make some very tough decisions since thefall of 2008. Unfortunately, I dont see this changing dramaticallyin the next year; but I am hopeful that things will slowly improve.Simply adapting to your market as it experiences change wont beenough anymore. To excel in our industry, it will be a must to getahead of your market and stay ahead of the market. Whether it

is technology, locating inventory, compliance, legislative changes,nancing, personnel, or any of the other issues we deal with, NIADAwill be there providing its members with the training and educationto stay ahead and not just adapt.

Do you see NIADA members buying more of their inventory indigital auctions, and how has the way they use digital sourceschanged over the last couple of years?

Fortunately, NIADA does an outstanding job of keeping itsmembers aware of changes in technology and how those changes

Q&AWith NIADA President Chris Martin

affect their businesses. Because of this, I certainly think youwill continue to see those dealers who keep up with newtechnology stay one step ahead of their competition. Thereare so many great new tools out there that make you abetter buyer and a better seller. Additionally, digital auctionshave made so many improvements over the last severalyears from condition reports to working multiple lanesand auctions at one time; I am sure auctions will continueto improve their digital offerings, and you will be at adisadvantage if you are not using them.

How are independent dealers coping with the relative

shortage of used vehicles?

The dealers who are thriving in this environment are theones using technology and developing relationships withnew buyers and sellers to deal with the supply shortage.Technology is allowing us to work multiple auctions and fleetsources from our desks while we have outside buyers lookingfor supply through auctions and other channels.

You have described independent used car dealers as thebackbone of the auto industry. Why do you say this?

Independent dealers totally permeate the automobileindustry. There are roughly 35,000 independent dealersnationwide. We range from mom-and-pop businesses tofranchisees to multiple-location dealer groups. We injecta tremendous amount of capital into our economy by:buying and selling vehicles at auction; buying cars fromand selling cars to individuals, businesses, and dealers(franchised and independent); financing vehicles forcustomers; financing vehicles through banks and financecompanies; financing our inventory and real property;purchasing and providing cars and parts to recyclers;advertising through every medium available; and offering

and using thousands of tools and products provided bythousands of vendors to serve businesses and customersevery day. The independent dealer is vital to the autoindustry in every segment. That is why I believe theindependent dealer is the backbone of the auto industry.


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2005 2012Avis/Budget 1% 60%Hertz

31%

86%

Risk Vehicles

Rental Industry Revenues Approach $24 Billionin 2012

Total rental industry revenues reached a record $23.6 billionin 2012, up nearly 4% from 2011. Strong growth in off-airportrental activity, combined with more modest (but steady) growthin the on-airport segment, propelled a significant increase inrental transaction days. Total revenue growth, however, waskept in check by competitive pricing that reduced average rentalrevenue per day. Nevertheless, higher fleet utilization rates, lowfleet depreciation costs, and reduced inventory funding costsresulted in record rental industry profits in 2012.

New Vehicle Sales Into Rental Rise by 11% in 2012

The number of new vehicles purchased by rental car companiesincreased 11% in 2012 to 1.55 million units. This was the highesttotal since 2007, but still well below the 2.1 million new unitssold into rental in 2005 and 2006. Given the shift from programcars to risk units (and a longer average service life for risk

vehicles), rental car company purchases of new vehicles will notreach 2 million units a year again anytime soon. In 2012,new vehicle sales into rental were front-loaded into the firsthalf of the year, with sales through June accounting for 60%of full-year purchases.

The Japanese nameplates that had supply disruptions in 2011 asa result of the earthquake and tsunami had the largest year-over-year percentage increases of sales into rental in 2012. Over thepast decade, the mix of manufacturers and models comprisingthe rental fleet has become more representative of new vehicle

sales overall.

For individual rental car companies, the shift toward a morediverse fleet was even more striking since, in earlier times, someof the companies had major supply agreements with only one ortwo manufacturers. The greater mix of models available in theoff-rental supply has had several implications for remarketing.Most important, it has helped protect residual values since onerental company is no longer forced to sell large numbers of any

Rental

2013USED

CARMarketReport

70,000

90,000

110,000

130,000

150,000

170,000

190,000

210,000


2010 2011 2012

New Vehicle Sales Into Rental by Month

Source: Bobit Business Media

$1.9million

AVAILABLEVEHICLES(TOTALVEHICLESINTHERENTALFLEET)

COST$15,108(AverageWholesaPrice/RiskUnit)

REVENUES

$23.6BIL

LIONTOTALIN

DUSTRY

$0

$5

$10

$15

$20

$25

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

U.S. Car Rental Market Revenue

Source: Auto Rental News 2013 Fact Book

In Billions


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one model at any one point in time and, oftentimes, mostly inone color white. The wider mix of vehicle models available asoff-rental units has, however, required that rental car companies(and their auction partners) work harder to ensure specificvehicles get exposed to the dealers most interested in thatparticular product.

Risk Units Account for a Growing Share of aGrowing Fleet

The total number of vehicles operating in rental fleets increasedto 1.857 million units in 2012, according to Auto Rental News.This was just shy of the peak of 1.861 million units operatedby rental car companies in 2006. Consistent growth in rentaldemand has meant that fleet utilization rates have risen inrecent years even as the fleet size has grown.

Hertz reports that 86% of its fleet was composed of rentalrisk units in the third quarter of 2012, up from 70% a year agoand only 31% in 2005. At 60%, Avis/Budget has the smallest

share of its fleet composed of risk units; but that percentage isup from only 1% in 2005. Enterprise, Dollar/Thrifty, and mostsmall rental car companies operate fleets that are almost 100%risk units.

Competitive Pricing and Consolidation

In 2011 and 2012, average rental revenue per day trendeddown, despite industry consolidation and periods of high

vehicle utilization rates. According to industry participants,price increases in the rental industry normally stick only whendriven by increases in eet costs and, recently, eet costs havebeen at record low levels. In 2013, fleet costs will likely rise; butpricing power over rental rates might not. Consolidation in theindustry should have a marginal impact on pricing, since Hertzwill be better able to differentiate its premium and value brands.But, brands such as Fox, U-Save, and Sixt are looking to take somemarket share from the Big Three (Enterprise, Hertz, and Avis).

Rental

Recon ROI Recognizing the increased importanceof reconditioning in todays marketplace, ManheimConsulting studied which units returned the greatestReturn on Investment (ROI) per dollar of reconditioning

investment. The study found that the greatest returnoccurs when reconditioning units with a grade of 2.7to 2.9 such that they achieve a final grade of 3.0 orhigher. Manheim analysis indicates that the averagecost to increase grade by 0.3 points is less than $150.Additionally, the study revealed the repairs that hadthe most impact on grade included major body panelrepair/replacement, interior repair, windshield repair,bumper cover, and hail damage repair.

Fleet Size

(in thousands)

Revenue

(billions)

Revenue

per Unit

2002 1,643 $16.43 $10,000

2003 1,617 $16.46 $10,177

2004 1,665 $17.64 $10,593

2005 1,714 $18.91 $11,034

2006 1,768 $20.41 $11,544

2007 1,861 $21.49 $11,545

2008 1,813 $21.49 $11,853

2009 1,637 $20.05 $12,245

2010 1,629 $20.59 $12,640

2011 1,761 $22.74 $12,913

2012 1,857 $23.63 $12,722

New Vehicle Sales Into Rental by Year


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002 2011 2012

All others

Kia

Hyundai

Mazda

Nissan

Toyota

DCX

Ford

GM

Distribution of New Vehicle Sales Into Rental byManufacturer



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Car-Sharing Melds With Traditional Car Rental

Although car-sharing services satisfy a very different set ofbuyer needs and demands than traditional business and leisurecar rental, the major rental car companies have recognized theadvantages of entering this market, which is now estimated tobe a $400 million business in the U.S. Hertz and Enterprise haveseparately branded car-sharing services, and in early 2013, Avismade an offer to purchase Zipcar, the worlds largest car-sharingnetwork, with more than 770,000 members and approximately

11,000 vehicles. Although small relative to the $24 billioncar rental business, car-sharing is believed to have significantgrowth potential. And car rental companies believe there aresynergies to be had through technology-sharing and greaterfleet utilization. For example, car-sharing often experiences itspeak demand on the weekends, whereas that is a slack time fortraditional rentals, especially on-airport rentals.

Strong Used Vehicle Prices Lead to LowDepreciation Costs

Wholesale pricing for rental risk units sold at auction wasexceptionally strong throughout the past three years. In 2012,the average auction price of rental risk units sold at auctionshowed a pattern very similar to 2011 in other words, recordstrength. In 2010 and 2011, part, if not most, of the pricingstrength could be attributed to low supplies. In 2012, it couldnot. The availability of off-rental units increased dramatically inthe first half of 2012, yet prices remained strong. Attribute thatto strong retail demand and, relatedly, the absence of programunits that rental risk units used to compete with.

Strong wholesale pricing pushed monthly depreciation costsfor rental car companies to very low levels in 2011 and 2012.In 2013, depreciation costs will likely increase as wholesalevalues level off and rental car companies face higher up-frontacquisition costs. Remarketing efficiencies will be key to keeping

fleet depreciation costs in check. Interestingly, all threepublicly traded rental car companies report very similarmonthly fleet depreciation costs, despite having differentremarketing strategies and channel usage.

Rental Car Companies Grow Digital Remarketing

Rental car companies have been quick to adopt, as wellas develop, innovative technologies and strategies toremarket end-of-service units. The reasoning is simple eet depreciation is a major determinant of companyprofitability. When it comes to upstream remarketing, therental car companies have some unique advantages anddisadvantages. On the plus side, rental car companies arelong-established sellers in the wholesale market; theirend-of-service fleet is large, it is concentrated in relativelynarrow mileage and price points, and often it needs onlymodest reconditioning. The disadvantage that rental car

companies face in selling upstream is that their time pressuresare acute, and they certainly do not want to marshalunproductive units. As such, the companies have beenstrongly supporting strategies that better enable them to pre-offer units soon after they go into service as rental units.

Rental

2013USED

CARMarketReport

$9,000

$10,000

$11,000

$12,000

$13,000

$14,000

$15,000

$16,000

$17,000

$18,000


2009 2010 2011 2012

Average Auction Price Rental Risk Units



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Rental

Rental car companies often have fleets that are so concentratedin a particular geographic area that they surpass the demandof local buyers. In the past, this meant physically moving carsto the buyers. Today, there is greater emphasis using on digitalremarketing to bring remote buyers to the cars.

In 2012, 31% of all Manheim auction purchases of rental riskunits were made online, up from 22% in 2011. For these onlinepurchases, the average distance between buyer and car was 439miles, with 43% of the purchasers located more than 500 milesfrom the vehicle. For in-lane purchasers, the average distance was

only 190 miles, with only 17% located more than 500 miles away.

Overall, the member auctions of NAAA remarketed 42% of therental vehicle supply in 2011. With replacement levels expected torise in 2012 and 2013, the number of off-rental units, albeit withhigh mileage, will also increase.

20,000

25,000

30,000

35,000

40,000

45,000


2009 2010 2011 2012

Average Mileage Rental Risk Units


$100

$150

$200

$250

$300

$350

$400

2005 2006 2007 2008 2009 2010 2011 2012

Monthly Depreciation Expense Per Vehicle

Source: Company filings and Manheim Consulting estimates

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

Total Wholesale Supply: Off-Rental


Millions


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20122.5 million

20091.1 million

2010

1.8 million

20112.1 million

Increase in LeaseOriginations

New Lease Originations Increase 16% in 2012

The number of new vehicle leases written in 2012 increased to2.5 million, up from 2.1 million in 2011 and substantially up from1.1 million in the trough year of 2009. Why this dramatic shift?In recent years, the projected future residual values used in leasecontracts have risen to reflect strong past price performance inthe wholesale market, more disciplined new vehicle marketingby manufacturers, and better end-of-term remarketing practices.Higher residuals made leasing a more attractive product fromboth the customers and the lessors viewpoints. Furthermore, in2012, as was the case with retail lenders, lessors enjoyed greateraccess to capital at historically low costs.

Lease penetration rates for GM, Ford, and Chrysler productshave all risen back to double-digit levels after falling to thelow single digits in 2009. Hyundai/Kia vehicles have also shown

significantly higher lease rates in recent years. This is reflectiveof product offerings that have moved upscale, greater access tolease funding through their captive finance arm, and a historyof strong residual performance. In the luxury segment, leasepenetration rates have always been more than twice the level ofthe overall market.

Leasing

2013USED

CARMarketReport

2009 2010 2011 2012

Chrysler 3.0% 8.5% 12.6% 11.1%

Ford 5.4% 9.8% 15.3% 16.8%

GM 2.1% 9.1% 13.3% 14.7%

Honda 19.1% 29.2% 29.5% 28.5%

Toyota 15.9% 24.6% 19.4% 18.4%

Hyundai / Kia 1.9% 10.9% 15.3% 17.3%

BMW 50.9% 48.4% 46.9% 46.4%

Mercedes-Benz

46.4% 51.9% 53.8% 54.2%

Total Industry 13.2% 19.1% 20.1% 20.5%

Lease Penetration Rates by Manufacturer

Source: J.D. Power and Associates

ManufacturerPenetration Rates

GM

2012 14.7%2009 2.1%

FORD2012 16.8%2009 5.4%

CHRYSLER2012 11.1%2009 3.0%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

New Lease Originations


Millions


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Off-Lease Volumes Set for a Multiyear Rise

As a result of the past pattern in new lease originations, totaloff-lease volumes hit a cyclical low of only 1.5 million units in2012, down from an all-time high of nearly 3.5 million units adecade earlier.

It is uncertain as to how many of the off-lease units will make itto auction as opposed to being bought by the grounding dealeror lessee. It is a safe assumption, however, that the share goingto auction will be low relative to earlier years. Thats becausecontract residuals are still in tune with market values and agrowing number of captive finance companies have put in placeboth carrot and stick incentives to encourage grounding dealersto buy end-of-term units. So, as noted last year, the message todealers is clear: You want to be that grounding dealer.

Lease Pull-Aheads Continue To Work Well forDealers, Lessors, and Customers

With wholesale vehicle values at record levels, dealers andlessors have found it an ideal time to pull customers out of theirleases early in order to secure both a new sale and a needed

Leasing

Projected future residualvalues used in lease contractshave risen to reflect strong

past price performance inthe wholesale market, moredisciplined new vehiclemarketing by manufacturers,and better end-of-termremarketing practices.Higher residuals madeleasing a more attractive

product from both thecustomers and the lessorsviewpoints.

Total Off-Lease Volumes

1.0

1.5

2.0

2.5

3.0

3.5

4.0

New Lease Originations Off-Lease Volumes

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E


Millions of units


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on end-of-term units in 2008 to record profits in 2011. And,strong gains on lease returns continued in 2012. There is noaggregated data on the performance of all lease portfolios;but the graphic below, which depicts the results for FordCredit and Ally leases, is not atypical.

Ironically, these swings in end-of-term gains and losses are

often built into the current leasing business model. Thatsbecause projected residuals are heavily influenced byhistory. Thus, the losses incurred in 2008 resulted in overlypessimistic residual forecasts for vehicles put out on leasethat year. And, when those vehicles came back to marketin 2011, wholesale pricing was at an all-time high. Swingsbetween gains and losses are also amplified by the fact thatlease return rates are strongly and inversely correlated toused vehicle values. When wholesale prices were at theirlow in 2008, lease return rates were often well above 80%.As wholesale values reached new highs in 2011 and 2012,

return rates fell to 50% or less.

Data from Ford Credit shows that the spread between actualcontract residuals and projected ALG residuals has declinedsomewhat in recent years, but remained relatively constantprior to that. This proves that in the last cycle, the swing

Leasing

2013USED

CARMarketReport

Nissan Grounding In 2010, Manheimpartnered with Nissan to launch an enhanced lease-termination and vehicle grounding platform. The initialdeployment included solutions to capture signatureselectronically and to enable electronic funds transfer, aswell as dedicated customer care support. 2012 broughtfurther enhancements, including a Manheim-developedapplication called RPM Mobile which allows all Nissan

and Infiniti U.S. dealerships to complete a lease returnusing a mobile phone or tablet. The employee simplyscans the Vehicle Identification Number and pulls thecustomers information onto the screen. The customerconfirms information on the screen and electronicallysigns a return receipt, which is immediately importedinto Nissans lease return systems. Dealers can also usethe app to sell the car back to the customer if desired.

piece of used vehicle inventory. Customers, meanwhile, arepleasantly surprised to find that they can get into a newvehicle for the same, or lower, monthly payment.

As such, we expect the high level of pull-ahead programsand dealer-initiated early terminations to remain strong in2013. Beyond the lessors desire to cement customer loyaltyand the dealers desire for quality used vehicle inventory,pull-aheads can help quicken the trade cycle. The economicsof monthly payments make 24-month leases a difficult sell,but it is possible to put customers in a 36-month lease and

then pull them out after 30 months.

End-of-Term Residuals: From Big Lossesto Big Gains

Lease remarketers are accustomed to cyclical swings in theirportfolio performance. Recently, they went from large losses

-$4,000

-$3,000

-$2,000

-$1,000

$0

$1,000

$2,000

$3,000

$4,000

2007 2008 2009 2010 2011 6 mos.2012

Ford Credit Ally

Ford and Ally End-of-Term Gains

Source: SEC filings


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Leasing

between end-of-term losses and end-of-term profits was theresult of market forces and inaccurate residual forecasts. It wasnot the result of changes in the level of subvention.

Off-Lease Remarketing Continues To ShiftOnline and Upstream

All captive finance companies, as well as the major independents,have at least one Internet upstream platform that offers end-of-term vehicles to an ever-widening audience of dealers priorto sale at physical auction. The technology, platforms, and toolsavailable for electronic remarketing of off-lease vehicles haveimproved significantly in recent years.

Securities and Exchange Commission filings show that GMACsInternet sales of off-lease vehicles first exceeded sales at physicalauctions in 2007. In 2011, the ratio was almost four Internet salesfor every one sold at auction. Likewise, sales on Toyota DealerDirect accounted for 63% of all Toyota off-lease sales in the scalyear ending March 31, 2012. Most of those sales were to the

grounding dealer.

Given that demand for off-lease units continues to grow atthe same time that potential supply remains low, the share ofsales accounted for by online and upstream channels will surelyincrease further. In addition, captive finance companies willcontinue to improve the processes that enable them to protectresidual values, enhance brand image, and provide profitopportunities for their dealer networks.

When leasing is done right, it is a financial product that offers

benefits to consumers, dealers, manufacturers, and lessors. Inrecent years, leasing, for the most part, has been done right. Itwas targeted to customers with good credit who like to trade ona regular cycle, and projected residuals were not overly inflated.

40%

42%

44%

46%

48%

50%

52%

54%

56%

2007 2008 2009 2010 2011 6 mos.

2012

Contract residual ALG residual

Contract vs. ALG Residuals

Source: Ford Credit Auto Lease Trust 2012-B

2006 2007 2008 2009 2010 2011

Auction

Physical 44% 39% 38% 25% 18% 16%

Internet 38% 43% 47% 57% 60% 61%

Sale to grounding dealer 12% 12% 10% 11% 12% 12%

Other (including sale to lessee) 6% 6% 5% 7% 10% 11%

Ally End-of-Term Disposition

Source: Ally SEC filings

Distribution of Ally (GMAC) Off-Lease Sales in U.S.(percent)

For calendar year ending December 31

2007 2008 2009 2010 2011 2012

Toyota Dealer Direct

To grounding dealer 36% 41% 33% 42% 43% 58%

Not to grounding dealer 13% 7% 8% 10% 11% 5%At Auction 51% 51% 59% 48% 45% 37%

Toyota End-of-Term Disposition

Source: Toyota Financial Services

SEC filings

Distribution of Toyota Financial Services Off-Lease Sales in U.S.(percent)

For fiscal year ending March 31


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Auto Lenders Enjoy Greater Access to Funds

The increased availability of retail financing was the major forcebehind the rise in new and used vehicle sales, strong wholesalepricing, and growing dealership profits in 2012, and in thatsense it was the story of the year. Auto lenders had tremendousaccess to funds as the auto-backed securitization marketattracted investors in search of any sort of yield in a near-zerointerest rate environment. In total, more than $90 billion inauto-backed securitizations were sold in 2012, up from $68billion in 2011 and only $36 billion in 2008. By issuing short-termnotes, auto-backed securitizations attracted monies from moneymarket funds and corporations with cash-heavy balance sheets.Google, for example, shifted part of its $40 billion cash hoardout of Treasuries and into securitization deals from Honda andHyundai. Similarly, private equity bought into existing, or helpedestablish new, lenders in the subprime auto lending arena.

In addition to increased issuance, auto ABS funding in 2012came at reasonable terms, and spreads that reflected theoverall strong performance of these instruments, even in

times of recession. That superior performance is the resultof overcollateralization, strict reserve requirements, and aterm structure that is consistent with the underlying capital.In addition, the indirect lending model, in which the vastmajority of these loans were originated, incorporates a strongprofessional, and mutually beneficial, relationship between thedealership F&I ofce and the underwriting lender.

Auto Lending Trends in 2012: Higher LenderConcentration, Lower Credit Scores, and Lower

Credit Risk

Lender concentration in loan originations is much greater inthe new vehicle market than it is for used vehicles. The top fivelenders accounted for 40% of all new vehicle loans in the thirdquarter of 2012, according to Experian. The top five used vehiclelenders, on the other hand, accounted for only 21% of the loans

Repossessions

2013USED

CARMarketReport

$0

$5

$10

$15

$20

$25

$30

2007 2008 2009 2010 2011 2012

Auto ABS Issuance by Quarter

Source: Securities Industry and Financial Markets Association

Billions

REPO VOLUMES

2009: 1.9 Million 2012: 1.3 Million 2015e: 1.7 Million

RISE IN NEW AND USED VEHICLE SALES!

GROWINGDEALERSHIPPROFITSStrong

wholesalepric

ing


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Wells Fargo 7.3%Ally 3.9%Capital One 3.8%Chase 3.6%Santander 2.7%All Others 78.7%

Top Five New Vehicle Lenders by Market Share

Source: Experian Automotive

Third Quarter 2012

in that segment. Likewise, research by Experian has documentedthe importance of Buy-Here, Pay-Here (BHPH) financing in theused vehicle market. In the third quarter of 2012, BHPH financingrepresented 14.3% of all the loans made in the used vehiclemarket.

Experian data also confirms that the lengthening of used vehicleloan terms continues. In the third quarter of 2012, the averageloan term on a used vehicle was 60 months not substantiallydifferent from the average term of 64 months on a new vehicle.Loans of three years or less represented only 10% of the used

vehicle finance market.

Although all types of lenders were buying deeper and broader,the changing nature of borrowers and the true makeup of creditscores continued to keep auto loan delinquencies exceptionallylow. Households increased the priority they placed on makingauto payments relative to other monthly obligations. In addition,the very nature of the Great Recession created many householdswith significantly lower credit scores, but with the ability tomake future monthly payments. For example, through a recordnumber of home foreclosures and short sales, homeownerswalked away from almost $1 trillion in mortgage debt overthe past three years. Many of those households did not suffera significant, if any, loss of income. So, in 2012, they wereborrowers with lower credit scores, but better payment-to-income ratios. As such, one should expect the delinquency ratesto be lower than simple credit scores would suggest. And theyhave been.

Repossession Volumes Will Grow Modestly in 2013

In 2012, repossession volumes were virtually unchanged fromthe prior year. The number of vehicles repossessed is a functionof the number of contracts outstanding, their aging, and theirstatic pool loss performance. Those forces combined to produce arecord number of repossessions in 2009, and then a steep declinein both 2010 and 2011. The peak-to-trough swing was from an

Repossessions

Toyota 9.5%Ally 8.1%Honda 7.5%Ford 7.5%Chase 7.1%All Others 60.3%

Top Five New Vehicle Lenders by Market Share


Third Quarter 2012

Super prime

Prime

NonprimeSubprime

Deep subprime

Risk Distribution of Used Vehicle Loans Third Quarter


18.7%

19%

16.7%13.5%

32.1%


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estimated 1.9 million units in 2009 to 1.3 million in 2011, for adecline of 32%.

Given the recent growth in originations and an easing in lendingstandards, repossession volumes will likely grow in future years.But, as noted earlier, households have increased the priority thatthey associate with making their monthly car payments, and assuch, delinquencies and default rates will be lower than theyotherwise would be for any given set of economic circumstances.In addition, the strength in wholesale used vehicle pricing (acondition which we think will persist for some time) has meant

more borrowers have positive (or only slightly negative) equity intheir vehicle loans and, thus, are less likely to default. These twofactors, which substantially reduced repossession rates in 2009and 2010, will keep repossession volumes from returning to their2009 peak anytime soon.

Repossession Remarketing Struggles To MoveSubstantial Volume Upstream and Online

Lenders are always focused on converting repossessed units intocash as quickly as possible. Although the biggest stumbling blockto a quick sale often lies outside the control of the lender orauction (such as state laws that dictate the process of collateralcollection and liquidation), auctions and lenders have beensuccessful in streamlining the processes that they do control. Still,there are several hurdles to overcome when remarketing repounits upstream. The most critical factor is to ensure that unitsare listed on a platform that aggregates a large buyer base andis governed by transparent policies that protect both buyer andseller. First, units must be quickly inspected, usually by a third

party, for posting online. The condition report is critical to helponline buyers assess the condition of the repossessed unit andmake a smarter buying decision.

Repossessions

2013USED

CARMarketReport

0%

1%

2%3%

4%

5%

6%

7%

8%

9%

10%

Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12

Auto Index Bank Card Index First Mortgage Index

Credit Default Rates

Source: S&P / Experian

4%

5%

6%

7%

8%

9%

0%

1980Q2 1984Q2 1988Q2 1992Q2 1996Q2 2000Q2 2004Q2 2008Q2 2012Q2

Financial Obligation Ratio

Source: Federal Reserve Board

of disposable personal income

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

Number of Repossessions


Millions of units

e

e


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Understandably, third-party inspection companies can struggleto staff inspectors at many repo satellite locations due to theunpredictability of recurring volume. This creates an artificialdelay in the upstream listing and posting process, which in turn,can contribute to a higher propensity of the repossessed unitincurring additional lot damage while waiting on an inspection.The cost of timely and accurate inspections continues to erodemargins for both dedicated repo remarketers and third-partyremarketing companies. Emerging seller-initiated mobile listing

applications such as Manheims myMobileListing tool, may easethis burden in the coming months.

Additional process challenges occur when selling units upstream,as many repossession agent locations are not staffed to supportvehicle pickup and release functions. Many of these facilitiesare not designed to facilitate post-sale transactional processes,including vehicle pickup. Many repossession lenders haveadopted a hybrid approach, listing units for sale while in transitto a physical auction location, or using a midstream listingapproach where repo units are posted for sale in recurring online

event sales prior to running in a physical lane. This strategy hasproved to be very successful for many dedicated repossessioncompanies, third-party remarketers, and larger institutionallenders.

Finally, it should be considered that repossessed units aretypically remarketed with no r

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