Reevaluating Used-Car Valuations: Is It Time for Change?

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SIMON BROWN: I’m currently speaking with Kriben Reddy, the founder and CEO of Kredo Mobility. Thank you for joining us early this morning, Kriben.

The second-hand vehicle market is indeed expanding at a faster pace than the new vehicle market. One crucial aspect of this is vehicle valuations.

Let’s start with your first question: How are vehicles valued in South Africa’s second-hand market today?

KRIBEN REDDY: Good morning, Simon, and thank you for having me. There’s a single source that provides an industry guide, offering valuations based on specific makes, models, and variants of vehicles associated with certain model years – including the year of introduction and the year of discontinuation. Between these years, a trade and retail value is generated for that specific derivative.

The methodology used to establish these trade and retail values is primarily rooted in historical data. Sales activities related to that particular derivative are recorded and analyzed over a past period to help ascertain or forecast how the vehicle might depreciate in the current month or up to a couple of months ahead.

SIMON BROWN: Understood. You referenced a two to three-month forecasting period, which indicates a short-term focus. In today’s age of the internet and artificial intelligence, how advanced is this valuation process? Or does it still lag behind the latest technological advancements?

KRIBEN REDDY: Exactly. To be forthcoming, that’s where a significant gap exists. Traditionally, sales data was collected manually from dealerships; dealers would record their sales figures and transmit that data into a central database, frequently through manual means.

Over time, this process has transitioned to more electronic methods. However, using lagging sales data means the market has shifted rapidly. The volume of sales has diminished significantly over the last 10 to 15 years, particularly following the global financial crisis—we saw that period as the peak of the motor industry in South Africa.

Therefore, we have to consider volume as a factor, alongside the quality of the data being fed into the system.

You are correct. In real terms, dealers currently access a variety of data points or datasets to evaluate what a vehicle should be worth when buying or pricing for sale. There are multiple online sources available.

A dealer may utilize a marketplace to assess the current availability of that particular derivative in the market. If they need to buy or price a vehicle while already having several in stock, or if that specific model is widely available in their area, their pricing will adjust significantly accordingly.

The challenge is that traditional valuation models have not adequately incorporated these real-time dynamics into their pricing equations.

SIMON BROWN: Initially, I was focused on purchasing a second-hand vehicle or considering a trade-in. But there’s a broader implication related to insurance that necessitates having a reliable price point that evolves accordingly; otherwise, individuals risk being under- or over-insured for a given vehicle.

KRIBEN REDDY: Absolutely. There’s a wider conversation to be had across the entire ecosystem. When you look at the roles of insurance, banking, dealerships, and consumers, it’s clear that these industries are operating quite independently, relying on differing data points to meet their varied requirements.

Take dealers, for instance, who navigate buying and selling based on these data analytics. It resembles a stock-exchange model, with dealers being particularly sensitive to fluctuations, as they could face significant consequences from overpaying or underpaying—impacts on their margins and inventory turnover are paramount.

Regarding your point about insurance—this became apparent during COVID, with the supply chain issues impacting new vehicles due to semiconductor shortages. Certain used vehicle values spiked by as much as 30-40% during that time.

Many consumers likely found themselves in precarious situations because they had purchased vehicles before COVID, with their valuations at that time differing greatly from the replacement values utilized by insurers and banks. Therefore, in the event of a total loss, the chance of being underinsured was considerably high due to these discrepancies.

Additionally, throughout COVID, we observed that even within the banking sector, dealers were purchasing used vehicles for 30-40% more than what the traditional retail value indicated according to a guidebook, leading to questions from banks regarding why financing for those vehicles was 30-40% higher. This issue sparked notable contention.

Ultimately, during COVID, banks relaxed some of their financing models to accommodate this overage. However, it highlights the significant problems when real-time economics and data aren’t utilized effectively.

SIMON BROWN: You mentioned earlier that there is a dominant player in this market space. Is there an influx of new players or innovative systems emerging, or is the sector somewhat stagnant? Are we observing advancements chipping away at the dominance of this key player?

KRIBEN REDDY: Yes, absolutely. The barriers to entry are quite substantial. A dominant player has been established for over 60 years. While the printed book has been phased out, the fundamental model and outputs haven’t changed; they merely transitioned from print to digital, resulting in almost identical outcomes. Thus, the barriers remain quite extensive.

Nevertheless, there are indeed innovations surfacing in this space. One of the significant challenges related to adoption is gaining customers. Whether the customer is a dealer, bank, or insurer, the effort is to engage them with complementary or alternative services—it’s not about outright replacement.

There remains a space for traditional valuation models that provide consistent, predictable vehicle values. In contrast, banks and insurers are more focused on the future value of a vehicle, balancing the inherent risks against the real-time needs of dealers.

Data accessibility has improved; there’s greater consistency and standardization in the aggregating online data for vehicles. So yes, we are experiencing innovations, but the high barriers still impose challenges to ensure widespread acceptance throughout the ecosystem.

SIMON BROWN: I appreciate your point that it doesn’t have to be an either/or scenario—it can be a blend.

We’ll conclude our discussion here. Kriben Reddy, founder and CEO of Kredo Mobility, thank you for sharing your insights this early in the morning.

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