In the US, a lemon car is one that means trouble. Accidents, flooding, transfer of ownership…
You name it. In general, it’s been through situations which are likely to reduce its value. Where does the term stem from? And how come it works so well in the Polish second-hand vehicle market?
A lemon is a car with a past. This past will usually be quite unpleasant, and the seller will do their best to keep you away from it. If you’ve bought at least one second-hand car in your life, then you certainly remember how careful you had to be. In Poland, we don’t typically call this type of vehicles “lemons”. It’s a pity, actually, since it’s a very good way to present the mechanisms that are so common in the market, and to prepare the buyers to stay alert.
Lemon car vs plums (peaches)
Faulty cars have been called lemons since the famous 1950’s Volkswagen advertising campaign which was meant to make the VW Beetle popular in the American market. At first sight, the car had no chance to succeed: it was the exact opposite of what the market offered. The 50s were the time of huge V8 engines; nothing in the car, except for its whole body, was that massive. Those dozen or so years after WW2 were also the best times for the United States; a golden era when the US was a world leader in every field, including the automotive industry.
Change was coming, though. In 1957, Russia launched the Sputnik, thus changing the balance of power in space. At the American dealers’, the customers would stare in shock at the first Beetles. After all, the memory of the Second World War and its victims was still fresh. This was the context in which the term “lemon” was used, for the first time, to describe a vehicle.
Volkswagen may not have had too much money but it did have a clever idea to use whatever advertising budget there was. Thanks to its excellent advertisement campaign, the Beetle quickly became popular in the US. This was just the beginning; in the 60s, the car would be the first choice for a number of hippies. And they were not the only buyers! It’s thanks to Volkswagen, a brand so popular in our second-hand vehicle market, that the US call faulty cars lemons.
The term was used in one of the Beetle ads. In the picture, most of the space was taken up by a photo of this cult model and a simple caption: Lemon (literally: lemon. period). Under the caption, the term was explained in a very compelling way. The text advised that the vehicle was not shipped to the USA (at the time, Volkswagen wasn’t manufacturing in the US or Mexico yet) because a fault was discovered in it. Until the fault was removed, it would not leave the production line. The motto was “We pluck the lemons; you get the plums”. We will find every smallest fault so that you can get the best product possible.
It’s important to remember the context in which this ad advertisement appeared: the US automotive market offered no imported cars. Virtually all you could buy was American made. Japanese cars would only arrive in the market some 20 years later. There was no competition that would force the manufacturers to put in some extra effort and as a result, some cars did have faults. In time, the term “lemon” was also adopted by the second-hand car market. In the context of this particular advert, lemons were vehicles in which there were hidden faults but which looked pretty on the outside. Plums were the good quality vehicles that were worth their price. We’ll get back to this later.
Cars: a market that is perfect for lemons and much worse for plums
Why should a vehicle be like a lemon? A lemon looks and smells great; you need to try it to see that it’s sour on the inside. The same applies to a “lemon” car. Just like a lemon, you can buy a car, squeeze as much out of it as you can, and then still sell it.
The concept of a vehicle which is a lemon was analysed in more detail by the American economist George Arthur Akerlof who later won the 2001 Nobel Memorial Prize in Economic Sciences. In his 1970’s article called “The Market for Lemons: Quality Uncertainty and the Market Mechanism”, Akerlof demonstrated the consequences of the buyers not knowing how to tell a lemon from a quality car. He described the mechanism in which the unawareness of the buyer comes together with a full awareness of the seller. Akerlof called this the information asymmetry. The buyer knows it’s possible to buy a lemon: pretty on the outside, useless on the inside. They know they may not be able to tell the difference.
As a result, they will not be willing to buy a car at a price that is adequate to its actual condition. This creates pressure to lower the prices in general. This, in turn, drives the sellers of the good quality vehicles (“plums” in the VW Beetle ad) away from the market. What does it all lead to? The market is dominated by lemons. If you have a plum (or a peach, as Akerlof would call a good car), you won’t want to sell it. You’ll keep it and use it instead. Alternatively, you may sell it outside the official car sales channels; your family or friends are more likely to pay a reasonable price for the car that you both know is worth it. In a situation like this, Akerlof argued, the market does not function in an effective way.
The number of transactions which benefit both the buyer and the seller is negligible. The market is dominated by lemons, and growing risk of buying one has negative effect on overall pricing of the vehicles, no matter if they’re plums or lemons. Sounds familiar, right? Even though Akerlof observed the phenomenon 51 years ago, to this day the Polish automotive market functions exactly as described.
Lemons are a very common problem here. What does it mean, practically? In the worst case scenario, the buyer unknowingly re-sells the faulty vehicle further or gets stuck with it because it’s not wanted by anyone else. An offer is placed and it lists all the car characteristics (or what the recent buyer believes in); the potential next buyer verifies it, finds out it’s a scam, and the car remains unsold.
The art of telling plums and peaches from lemons, or the mature second-hand vehicle market in Poland
How to neutralize the information asymmetry between the buyer and the seller? Akerlof suggested a few solutions such as a warranty. If the seller is willing to offer any kind of warranty, then that means the vehicle is not a lemon. Since 1970 when Akerlof’s famous paper was published, a new solution appeared that is already helping make the second-hand vehicle market more mature. What would be considered science-fiction in the 70s is now commonly used.
This solution is access to databases such as NMVTIS, Carfax or Autocheck, which are very popular in the US. The information listed in their reports greatly increases the transparency of the vehicle history; those who import vehicles from the US to Poland know how much you can find out from a history report. What can we do when we buy a car in the European market?
Vehicle history details are gathered by a number of specialized services such as autoDNA.
What do Polish drivers think of buying a second-hand car? Are they ready to pay more for a car whose history is well verified?
In a few days, autoDNA will publish “Second hand car purchase roulette is over”. We will take a closer look at how lemons work and a number of other issues which we, participants of the automotive market, should never have to see again…