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Nathaniel Fick
Nathaniel Fick
Attorney • (410) 321-6000

Volkswagen’s deception and its effect on used car dealers

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Lost in the hubbub about Volkswagen’s deception in fooling regulators about the emissions of its “clean” diesel engines is the real harm and broader economic damage of a certain group of small businesses.

Besides consumers, used car dealers are left holding the bag due to Volkswagen’s deception. That is because those small business owners made economic decisions for their businesses, unaware of VW’s deception.

The economic impacts are clear.  There is a daily cost for holding pre-owned inventory on a used car lot and used cars lose their value while sitting on a used car lot for an extended period . Profit margins for used cars begin to dramatically decline after the vehicles are on a lot for more than 30 days. Further, there are costs incurred in holding vehicles in inventory. Formulas can be used by dealers to determine the “Days in Stock Break – Even Point” which identifies the number of days a vehicle can remain in the used vehicle inventory before profitability on that vehicle hits a “break-even point.” Cars that cannot be sold in a certain time period or at a profit are wholesaled at auction or sold to another dealer.

Automotive dealers either pay cash or use debt (a “floor plan”) to finance used vehicle inventory. Regardless of which avenue a dealer uses, each day a car sits unsold on a dealer’s lot, a daily cost is associated with holding that car.

Most dealerships have a low threshold for adversity; liquidity and cash positions are affected quickly. For example, having $200,000.00 in cash tied up in ten to twelve recalled vehicles that can’t be sold can cripple a dealership. Dealers that rely on debt (floor plan) to finance their dealership have even a higher risk and less ability to withstand hardship because payments to reduce the principal amount must be made on the balance of the unsold inventory. A dealership should have no more money tied-up in inventory than is necessary. This is why dealers will sell vehicles to other dealers, even if they have to do so at a loss. Doing so eases cash considerations even though the vehicle made no profit. Excess inventory levels have negative consequences on cash flow and, on the ability to meet the cash demands of an ongoing business.

Because of Volkswagen’s Stop Sales Orders, used car dealers were forced to pull popular models from their lots and have not even had the opportunity to sell the vehicles subject to the recall to the public, other dealers or auto auction houses. Thus, dealers’ money has been tied up in inventory with no chance of a foreseeable return. If “floor planned,” the dealers have carried interest and other costs associated with holding the cars during the pendency of the recall. If the inventory was financed with cash, dealers are unable to realize a financial return on the cash tied up in the unsold Volkswagen inventory. Automotive auction houses have, likewise, been forced to carry expenses on vehicles subject to the Stop Sale Order. Finally, there is now a stigma associated with Volkswagen vehicles and the values of the vehicles have dropped. All of these damages have been caused by Volkswagen’s deceptive actions.

These small business owners, like consumers, are affected by Volkswagen’s deceptive acts and deserve compensation for their economic losses.