Hyundai’s New Trade-In Value Guarantee

Hyundai recently announced an innovative program: a trade-in value program which guarantees the value of the customer’s car. Here is how the program basically works:

• Buy a new Hyundai after May 1, 2011
• Perform all recommended service at a Hyundai dealer
• Between 24 and 48 months, trade-in your vehicle for a new Hyundai
• The value of your trade in will be guaranteed.

When manufacturers develop these kinds of programs, it’s interesting to think about what is going through their minds – what are the benefits to them and what is the potential cost?

On the benefit side, we can assume that Hyundai wants:

• To sell a few more cars – maybe this will be the magic trick for a few consumers.
• Drive more service business back to the dealership.
• Increase loyalty
• Quicken the purchase cycle

What are the risks? In many ways, this program is similar to a lease with a guaranteed purchase amount from Hyundai. However, it is of course limited to those who are trading for a new car.

If the actual trade-in values are equal to the market, then the program would not cost Hyundai anything. If we assume that Hyundai is projecting the trade-in values according to current market forecasts, then the expected cost of the program is probably negligible.

Of course, there is risk. For example, the controversial TARP program is actually now projected to be profitable to the federal government, but that does not mean the program was without significant risk to the taxpayer or that it did not provide significant benefits to the recipients.

For Hyundai, there is the risk that used car prices will fall sharply and Hyundai will have to make up the difference. While we are not privy to the assumptions that Hyundai has made, the risk is probably fairly small.

Even if Hyundai has overestimated the trade-in, they will make up some of the difference on the new car sale. It is not clear whether a consumer participating in this program would be able to negotiate the price of the new vehicle or have to pay the retail price.

In addition, many people will not choose to trade in their cars, purchase another Hyundai or service the vehicle at a Hyundai dealership, further limiting the exposure.

This program replaces the Hyundai Assurance program which allowed customers to return their cars if they lost their jobs. In this case, the customer simply returned the car and stopped making payments. While this program brought Hyundai some goodwill and probably some sales, customers who used this program were still left without a car (but could have erased any negative equity in their vehicles).

The Detroit Free Press estimated that the program cost Hyundai about $8 million (which Hyundai apparently disputes).

So the bottom line is that we will probably continue to see manufacturers being creative with incentives and programs which provide an insurance aspect to the vehicle purchase. The recent surge in used car prices allows manufacturers to be more aggressive in projecting the residual values of the cars they sell – and allows them to develop programs and products such as this.