When it's the car buyer who's being beaten

Chris Jellie. Photo / Brett Phibbs

Buying a second-hand car is fraught - especially when you're competing for a bargain against someone you can't see. David Fisher investigates a car yard where the sales staff placed their own bids to drive auction prices higher.

At The Auto Co, TradeMe was an open book. It is the country's prime marketplace for second-hand cars and the Penrose car yard had a lot filled with vehicles it needed to shift.

Director Masashi Umeoka was confronted with the same issue as every car dealer.

Former salesman Chris Jellie explains: "You need to go on TradeMe every day, see what new cars are listed, how much is being bid."

TradeMe had all the information needed by car traders, but it was ordered for shoppers browsing for cars. It was not there to help the car industry run its business.

Mr Jellie said the car yard had a secret weapon - a computer program designed for Mr Umeoka.

The type of programme is called a "spider" - it automatically trawls the internet site harvesting bits of data. The data would be delivered to Mr Umeoka in spreadsheets, seen by the Herald. They showed which TradeMe users were in the market for a car and how much they were willing to pay.

It would show how many bidders might be chasing one particular model - and at what point they pulled out.

It meant The Auto Co would drop into the market a similar vehicle which its own sales staff would push up to the bidder's previous lowest offer. Then, much like having a baited hook, they waited for a bite.

Bidding probed

In the search for profit margins, TradeMe's bidding system became too much of an attractive opportunity for Mr Umeoka's sales team.

The Commerce Commission moved against the company and in May it pleaded guilty to 13 charges under the Fair Trading Act.

It was fined $42,000 and paid compensation of $122,000 to customers after being found to have placed false bids in at least 530 online car auctions between June 2011 and July 2012.

The investigation came after a complaint from TradeMe, which was concerned about "shill bidding" on the company's $1 reserve auction - a magnet for the bargain-hungry consumer. It emerged that the company used about 7000 bids placed through 21 accounts to inflate the price of the cars sold through its auctions.

Mr Umeoka offered the compensation early in the investigation process and always said he did not know the practice was illegal.

He told the Herald this week he "personally was not involved in the daily activities around the $1 reserve auctions on TradeMe".

"I was not charged or convicted of any wrongdoing."

He did confirm data-mining the website for information.

"It's true the company monitored what cars were selling and for how much using a computer programme rather than by printing out information from each auction."

Mr Jellie's insider account reveals a sophisticated operation through the use of the "spider" which allowed the The Auto Co to understand the marketplace better than other car yards. Where competitors might spend the morning trying to build a picture of TradeMe sales, The Auto Co had a spreadsheet detailing who was bidding for what - and when.

One spreadsheet shows details for what appears to be all 52,000 vehicles selling on TradeMe over a 24-hour period. Another shows bids placed on The Auto Co's own auctions - including those in which it accidentally "won" its own auction.

As an example, Mr Jellie said, The Auto Co would know when a 2003 Nissan Avenir had sold for $7650 and that the three bidders pursuing the car were genuine.

"He would then take a similar Avenir from stock and list it on the TradeMe $1 reserve auction, have his people pump it up to say $7500."

Once at that level, The Auto Co could have confidence there were genuine buyers looking for that type of car - and give them an opportunity to carry on the "auction" they had just lost, at the slightly lower price.

Emails provided by Mr Jellie show it wasn't just The Auto Co auction it would bid on. In some cases, it bid competitors' cars out of the price range in which it wanted to introduce its own vehicles.

In one email, a staff member tells another he has just bid on auctions run by Online Vehicle Auctions Ltd (Oval), a company also warned for shill bidding on TradeMe.

"I've just bid on Oval's Vitz and Colt in an attempt to bring the price up," one tells another in March 2010. The other exclaims "So did I!"

Tight market

"It's a market full of characters," says TradeMe security chief Jon Duffy about the world of car dealers. "We hear that margins are super-tight."

With a tight market, the auction company has to stay alert to the shifting ground that is profit. The Auto Co case took shill bidding to a level previously unseen.

The practice isn't new to TradeMe. Before The Auto Co, warnings were issued to Oval and Repo Cars.

Mr Duffy said other large "high-profile" dealers had their accounts frozen for similar practices.

But The Auto Co took the number of false bids in the last Commerce Commission case - 344 bids on 39 auctions - and blew it out to at least 7000 bids in 530 auctions.

The company's TradeMe Motors site has 100,000 vehicles for sale at any one time - about 64,000 cars, 30,000 motorbikes and 3000 trucks.

TradeMe says June statistics show 715,000 visitors - "roughly 21 per cent of the active New Zealand internet population".

It makes up 16 per cent of TradeMe's total revenue.

As a large market place, TradeMe attracted those who sought to exploit its systems.

It provided programming tools for developers to build applications which would interface with its systems.

"We're a big website. We have a lot of data. People are no doubt interested in pulling down the data for their own commercial purposes," Mr Duffy said.

Sometimes those purposes exceeded the conditions attached to the tools.

Once a fortnight, he estimated, TradeMe would detect spiders trawling its website and take action to shut them out.

There was a similar awareness of shill bidding - although The Auto Co case redefined the extent to which customers were being misled.

"Fundamentally it undermines the marketplace," he said. "If you can't rely on the auction being honest then why would you shop in the marketplace?"

Low margins

The Auto Co accounts show how tight business could be. On some vehicles in the $1 auctions, the company would make only $100 from a sale. Occasionally, it would make significantly more - raising questions about the buyer who would pay thousands more for a vehicle than a dealer ever expected to get.

Imported Motor Vehicles Industry Association chief executive David Vinsen said dealers were looking for profit wherever they could find it.

"TradeMe has created a national marketplace," said Mr Vinsen.

It had its good and bad points - on the down side, models and years of cars would have a similar price all over the country.

"The lowest price becomes the norm," he said.

The industry suffered the fate of all dealers, he said. It offers an easy villain - "there is a latent animosity towards people making a profit out of your goods".

The deregulated industry could lead to dealers setting up business and collapsing in short spaces of time.

Car dealers needed about $600 and a reasonably clean recent criminal record to get a licence, and no requirements to have a fixed place of business. Cash buyers - once the Holy Grail - are of little use to the modern car yard.

An "integrated dealer" will make a small profit on the car sale - and then a percentage on signing up a buyer on finance, and again signing them up for insurance. It means there has never been a better time to buy a car - or possibly a worse time.

The business is "brutal", said Clive Matthew-Wilson, editor of the car buyers' Dog & Lemon Guide.

He said consumers faced an environment in which the person selling them their expensive vehicle needed to do so quickly, and without full focus on value.

"They are thin margins and it is a numbers game. There's no money in selling one car or 100 cars. There's a lot of money in selling 10,000 cars."