Friday, June 27, 2008

Something doesn't add up

I've heard it before, but it never adds up.

According to the National Insurance Crime Bureau (as reported today int the Columbus Dispatch), the parts stripped from a used vehicle are worth almost twice the value of the vehicle assembled. That is the reason thieves steal vehicles and strip the parts for resale.

But, if the parts are worth twice the vehicle, why isn't there a market for the parts alone? How could the vehicle be worth less than the sum of its parts, all things equal? Hmmm ...

10 comments:

ThatBobbieGirl said...

Actually, I don't have a hard time believing that. Whenver I've had to buy parts to fix anything, the price for replacement parts are jacked up. I have, several times in fact, taken a parts list and added up the cost of enough components to put together whatever countertop appliance it was I was trying to fix at the time (bread machine, convection oven, some other unreliable piece of junk). The total cost of the parts has always been significantly higher than what I actually paid for the item. So, my thought of buying a slew of cheap parts and and slapping it together myself, thus theoretically saving money because I'm buying it "LOTS of assembly required" instead of pre-assembled by some underpaid shmoe in a third-world country, came crashing down on me and my broken kitchen appliances. I wonder if there's a black market for kitchen parts? There should be for some, at least. I've got a Breadman Ultimate that I can not get parts for at all!

Jim Fedako said...

If that were true -- the the small parts were worth more than the car itself, why isn't there a market for used cars that will be junked for parts.

If you take a hard look at the photo, the tires appear to be brand new. So it may be the case that the bureau stacked the car with new parts in order to make its claim.

Otherwise, the laws of economics say, "No way."

Anonymous said...

You must be too comfy in your posh suburb. Those of us who live with used cars know about Pick-N-Pull and many other junk yards.
http://www.cashforjunkcars.net/stores.htm
They have paid me for a few of the cars I drove until they couldn't go any more. That is, they paid me cash so they could sell the parts. I'm sure they make a profit. wouldn't that be "a market for used cars that will be junked for parts."?

Jim Fedako said...

I don't doubt your sale. That is not the point of the article.

The article implies that the parts of all vehicles exceed the value of the vehicle itself. If that is the case, and there is no current purchaser of all vehicles for parts, then you have a true opportunity.

That you and others haven't done so is proof enough that the generalized statement if false.

And, if such a market existed, the value of the used car would equal the value of its parts in a very short order.

By the way, the laws of economics apply in both the posh suburbs and elsewhere.

Paul said...

Jim:

But, if the parts are worth twice the vehicle, why isn't there a market for the parts alone?

There is of course, there are junkyards (auto recyclers if you prefer) all around.

But don't you think the question is one of utility, which then leads to a supply/demand dynamic?

If I need a part for my 13 year old Suburban with 215,000 miles, the best place to get one is at the junkyard. For one thing, it's easy to find just about any part I need (because there are bound to be scads of junk Chevy trucks in the yard), and all I have to do is buy that one part. I don't have to buy an entire used Chevy truck just to get a replacement bumper for example. Nor do I have to figure out what to do with the rest of the junker after I've taken the bumper off.

At the Chevy dealer, a new bumper might cost as much as the whole vehicle is worth.

So I find utility in the fact that the junkyard exists and I know I can find the exact part I need there. The owner of the junkyard has some amount of money invested in the junker I take the part from, as well as his operational overhead. There is a good chance that we'll find a price that allows him a profit, and me to save some money versus the alternative of buying a new part.

Ultimately, the junkyard will recover what they paid for the junker plus a profit, or they wouldn't be in business. In most cases, the carcass gets picked over until nothing is left of interest, then it gets crushed and shredded and sold as scrap metal.

That's the legitimate side of the world.

There are shady body shops who, if you come in with a blue 2007 Honda Civic with a fender ding, will put the word out and before long a blue 2007 Honda Civic will get stolen, have its body panels removed, and the body shop will come into possession of a ready-to-install fender for their customer, who could easily pay a $thousand or two for the repair - far below the 'acquisition costs' for the body shop.

It's the primary reason cars get stolen as I understand it. A stolen car in one piece has lots of identifying numbers, and can't be licensed without those things coming to light.

But when you break it up into parts and reinstall them on other legitimate cars, it's not so risky.

PL

Jim Fedako said...

You are missing the point altogether.

I have two used cars. According to the article, I could scrap each and sell the parts for twice the value of my vehicles.

I could then go out and purchase two more old vehicles and do the same, ad infinitum

Like the doubling of a penny, soon I would be quite rich.

You and I know that is not likely. Why? Because the parts of all used cars are not worth twice the value of the car. In fact, the parts of no used car is worth more than the value of the car.

Read above where I noted that the tires on the vehicle in the picture looked brand new. So, sure, if someone puts (say) $1200 worth of tires on an $1000 vehicle, the parts are now likely double the value of the car at that moment in time (note that you likely can't sell those tires for the $1200 that you just paid for them since they are now used).

But, a funny thing occurs. The new tires increase the value of the car just like a new roof increases the value of the old house. So, at moment plus one, the value of the car now includes the tires. The value of the car increases to include the tires.

And, yes, when a junkyard takes in a used car, the value of the parts and pieces (and remaining scraps)have to be worth more to the junkyard dealer than the value of the car is to me -- that being the reason for the trade.

Of course, the junkyard price become the market floor for the value of all vehicles. So, the resale value of a car cannot be half the junkyard value ... both values have to approach the same or else arbitrage occurs. The market is wonderful, isn't it.

But, again, no one is going to pay me twice the Kelley Blue Book value of my cars in order to get the parts, pieces, nd scraps. It just ain't gonna happen.

Paul said...

Okay, now I understand your point.

The sentence: "According to the National Insurance Crime Bureau (as reported today in the Columbus Dispatch), the parts stripped from a used vehicle are worth almost twice the value of the vehicle assembled.", is true, but only for the chop shop who would be exposed to significantly greater risk trying to sell the car whole rather than in pieces.

I suspect that this was the point of the article - to explain why so few stolen cars reappear on the street 'under new ownership,' but plenty of stolen car parts make their way back into the legitimate world.

Anyway, fun exchange. I enjoy learning about how the brain works, and this was an interesting study in that regard. I have a few experiences (parts vs whole), which I've expanded into a generalization, and the Dispatch reported chose words and syntax that, when I parsed them, seemed to be echoing what I've already learned. So I agreed with the statement.

Your language parser was more literal on this occasion, and you caught the logic error.

Interesting exchange..

Jim Fedako said...

Paul,

Agreed.

One point I missed when responding to thatbobbiegirl was that this is always true: the value of the car to the buyer exceeds that of the seller. So, it is true that the car dealer values my car more than I value the trade-in price. The dealer expects to turn around and sell the car for a greater amount.

But, to take the Dispatch line, I would say that the car sold is worth more than the car before the sale. This is always true since noncoerced exchanges imply increased value.

But, the car dealer must face the junkyard dealer when purchasing cars. And, the car dealer must also face other car dealers while the junkyard dealer must also face other junkyard dealers.

In a free market, any profit that (say) a junkyard dealer gets from a used car will be pushed to zero as all bidders (car dealers and junkyard dealers) look for profit advantages and/or arbitrage.

In the never-attained long-run, all that is left is interest as profits tend to zero.

Of course, and as you noted, chopshop theft is a whole matter indeed.

Paul said...

Maybe pushed toward zero, but not quite to zero. There is presumably some price point when there are no sellers and therefore no market.

However, I think the notion of 'equilibrium' is a theoretical ideal which rarely exists in practice. Markets always oscillate past equalibrium, sometimes favoring the seller (when perceived supply is short), sometimes the buyer (when there is a perceived excess of supply). The higher the amplitude and frequency of the oscillation, the greater the opportunity for arbitrage.

If often wondered about why people think there is wisdom in owning gold as a 'safe haven' for wealth. In the event of a general economic collapse, gold would have utility only as a metal which can't be consumed or used to build anything useful. I could have 100kg of gold hidden in the basement, and would be willing to trade it all for a little food and water if I had no food and water and that's what a seller demanded.

I'm thinking the only metal I want to hoard is lead - in the form of ammo.

PL

Jim Fedako said...

Paul,

I think we are back to semantics.

I am using economic profit and I believe you are using accounting profit.