David R. Henderson  

Auto Arbitrage

My Conversations with Tyler an... Not Enough Women at Wikipedia?...
Hundreds of thousands of damaged cars written off as total losses following hurricanes that hit the U.S. last year are finding new life overseas.

The automobiles were caught up in floods as Hurricane Harvey pushed heavy rains and floodwater across a wide swath of the U.S. Gulf Coast in late August 2017, leaving many vehicles damaged but largely intact. Insurance companies have declared many thousands of them as total losses, leaving some to be sold for scrap and others to enter distribution channels for repair and delivery to wholesale car dealers and auto-parts salvagers as far away as Africa, the Middle East and Southeast Asia.

These are the opening two paragraphs of Erica E. Phillips, "Hurricane-Damaged Cars Moving Again as U.S. Exports," Wall Street Journal, April 5, 2018. (gated)

I know what many of you are thinking because it's the first thought that occurred to me: is this a scam to pass off badly damaged cars to unknowing buyers?

There's some good news here:

Mr. Widmer said flood-damaged vehicles generally indicate on their title that they were salvaged.

And some bad news mixed in with good news:
Still, some uninsured cars end up in the secondary market without the proper paperwork. "There are telltale signs of water damage," he said. "First of all the smell, that's a big one."

But why does this arbitrage make sense? Two reasons:
Often it costs less to repair vehicles in regions where labor is less expensive, so a car declared a total loss in the U.S. could end up back on the road. In the U.S., a car deemed as salvage can't be sold, registered or driven unless it is fully repaired and the owner obtains a new title.

So labor is cheaper elsewhere and regulations in the United States require it to be fully repaired rather than what a low-income buyer might want.

What would be great is if these cars were allowed to be sold in Cuba. A musty 2016 Buick probably beats a 1954 Chevrolet.

COMMENTS (4 to date)
Michal Grzadkowski writes:

anecdotally, a common scam in Poland in the 90s was to sell cars irrevocably damaged in floods (with misleading or nonexistent paperwork), often using cars imported from Germany

Hazel Meade writes:

I had a car that was declared a total loss after Hurricane Allison flooded Houston way back in 2002 or so. The thing is that the car still ran and was probably ok. It was more of a risk reduction. The fact that it was flooded meant that there was a high risk of some sort of damage to electronics somewhere in the car, and the fact that the seats had been soaked in flood waters meant it would probably have a permanent smell.

But the truth is other buyers and markets may not be as sensitive to risk, so it makes a lot of sense to resell the car after inspecting it and cleaning it out. Personally I believe that insurance companies know this and will declare cars total losses so they can take possession of the vehicle and efficiently route it into such a salvage program. The owner gets a new car and peace of mind, the insurance company can cut it's losses by reselling the salvaged vehicle, and everyone is happy.

Thaomas writes:

You must not know "many" of your readers. :) My first thought was that this is must be occurring even though many countries restrict used car imports to protect incumbent new car dealerships.

Jaime writes:

What if laws and regulations did not interject themselves in the sale of flood damaged cars? What if :let the buyer beware" and other common sense laws were applied sans the small print of insurance, etc.? Would flood damaged cars just be sold locally at lower prices?


Return to top