Automotive Briefing Report
April 12, 2021
Twelve months — and counting — through a pandemic era has done far more than simply disrupt normal business operations for the automotive industry. As a result, various stakeholders are revisiting fundamental assumptions that have been in place for years. The stress caused by uncertainty in the market has created a demand for a new level of transparency — driven by digital channels of engagement. This trend is structurally changing relationships among lenders, dealerships and consumers.
Moving deeper into 2021, we expect to see continued challenges in the automotive industry including inventory shortages in both new and used vehicles, as well as supply chain disruptions. Lenders will have to access the best, most accurate and current information to achieve important business objectives. Analyzing the changing risk landscape to make smart decisions about loan portfolios will emerge as an important competitive factor among lenders in the months and years to come.
Higher Quality Data Available
For many years, lenders relied on standard VIN decoders which offer partial—and sometimes incorrect—data about vehicle features and packages. In many cases, these limitations led to imprecise valuations for specific vehicles and resulted in costly oversights and missed opportunities. In the salad days leading up to March of 2020, a highly profitable market could absorb these inefficiencies. The situation today, however, is different.
Today, two major developments are unfolding: 1) a significant evolution in industry relationships across the value chain is making more data available to the automotive community of interest; and 2) dramatic developments in technologies — such as artificial intelligence, machine learning and big data analytics — that capture insights from disparate sources.
These two trends inspired J.D. Power to make significant investments in its data-gathering and analytical capabilities, which have manifested themselves with the addition of ALG and ChromeData to the J.D. Power family. The increased amount of data and advanced analytical tools leveraging AI technologies have resulted in a new J.D. Power offering called VIN Precision+.
VIN Precision+ unlocks the full 17-digit VIN code and erases blind spots associated with traditional VIN decoding. This solution is a robust and intelligent resource that vastly improves lenders’ ability to engage in:
• Risk mitigation: Lenders can now know beyond all reasonable doubt that they are lending the right amount of money based on a detailed understanding of the features and content associated with vehicles they are underwriting.
• Portfolio valuation: As individual loans become part of the broader portfolio under management it is imperative that they can optimize capital allocations.
• Repositioning and remarketing: As vehicles in the portfolio complete their lifecycle and return to the aftermarket for auction, they can ensure that their assets are valued correctly.
Better Data = Better Profitability
VIN Precision+ is having a significant — and positive — effect on portfolio valuations. It has provided lenders with the edge they need to weather future disruptions that are expected to emerge in the market — especially as forbearance programs and other economic activities expire. Two real-world scenarios that demonstrate how important accurate data is for lenders include:
• Vehicle Audits: J.D. Power compared a portfolio analysis using standard VIN decoding to VIN Precision+ results for a lender with a portfolio of approximately 500,000 vehicles. The standard VIN decoding estimated that portfolio to have a value of $10.3 billion. The more granular VIN Precision+ analysis revealed a 1.8% difference in the portfolio valuation. This resulted in a $180 million discrepancy. This is not an insignificant number for a sector with tight margins in which every percentage point counts.
• Future-Proofing Loan Practices: Lenders using standard VIN decoding practices often receive inaccurate — or incomplete — information on a specific vehicle’s package and trim options. In an experiment with a lender, a vehicle was randomly selected for a J.D. Power audit using VIN Precision+. The lender had valued the vehicle at approximately $40,000.00. The VIN Precision+ analysis revealed that it was only worth $35,000. Replicated, this inaccuracy would have a significant negative effect on the overall portfolio value. In this case, the portfolio was valued at $15 million less than the lender had originally calculated.
The ability to capture and analyze granular data offers lenders an opportunity to run their business with a much higher level of confidence — and profitability.