You may have recently looked to order a new car and found lead times are out to 6 or more months. Similarly, you might have then thought to look at getting a used car instead and found the prices are astronomically high with fast-moving stock. What is happening out there; Is it COVID? Are more people driving now? Are fewer cars being made? Well, it’s a little from all columns.
In simple economic terms, the new car market is suffering from a limited supply for a variety of reasons and purchasers are looking to switch from new to used cars. Used cars have a limited supply so any major demand pressures like we are seeing now quickly result in increased prices. Certainly, cars on lease and finance are often being extended, due to long lead times on new vehicles, which is keeping a usually steady supply of good quality used cars out of the market.
So why is the supply of new cars shortening?
Production
As COVID hit in 2020, there was a sharp downturn in new car sales as many factories around the world shut down, reducing new car production. While new car demand has rebounded in 2021, it takes some time for factories to re-open and start rolling cars off the factory floor. One of the major issues with this re-opening is that when the factories closed, producers of semiconductors (which are used to drive many electric components in modern cars) shifted their production to support the booming personal electronics industry (think of how many laptops and Xbox consoles were needed with the world all working from home). This is not helped by the fact that the personal electronics industry is more profitable than automotive for the semiconductor producers and is even leading to cars arriving in Australia with fewer options than advertised, to be sold ‘as is’ or with a requirement for completing the cars being placed on dealers and local aftermarket suppliers.
The worst drought in 50 years in Taiwan has caused production to halt at their semiconductor plants (which require large amounts of water), factory fires in Japan, and blizzards in Texas all led to temporary plant closures affecting global supplies.
Government incentives
As COVID hit in 2020, the Australian Federal Government released the instant asset write-off to help get businesses out spending. This was subsequently extended and put more demand into the car industry until the end of the last financial year. You can read more about this here.
Cheap Money
Borrowing money for new and used vehicles is much more affordable. Through COVID, banks have altered their risk profiles and lending criteria have become stricter, however, we are still seeing substantial increases in approvals and lending in 2021.
COVID Transport pressures
While hard to exactly gauge, anecdotally we are hearing people are moving away from using public transport due to possible COVID exposure, instead looking to purchase vehicles as a means of personal protection on their daily commute.
Used car market impact
As all of the above factors are pushing buyers into the used car market, we are seeing some resale values as high as 50% over and above what vehicles were selling for in early 2020. If you have a car you want to sell, now is the time to do it.
The only way to gauge when the market will return to normal (ie when supply will at least equal demand again) we need to look at the above factors individually. Presumably, COVID transport pressures will alleviate as the vaccination levels lift and people’s confidence returns to share public transport again. The cheap cost of borrowing will remain with us for some time as the economy tries to restart and rebuild from the various COVID pressures but it will be interesting to see what the impact of new responsible lending reforms might have this year. The instant asset write-off finished on 30 June 2021, so that impact should no longer be felt. By far and away, the key component of this unusual market is when will supply of new vehicles return to normal and, more specifically, when will computer chip supply return to normal?
Taiwanese semiconductor supplier TSMC said it expects supply will remain tight well into 2022 before it frees up in the second half of the year. The CEO of Intel, the leading supplier of computer chips in the US, said that the shortage would take “a couple of years” to free up. Japan is also opening up its borders to attract foreign semiconductor producers to its shores, which might be quite attractive to TSMC and the current drought conditions and further lift production, but presumably, that will take some time to get off the ground.
It’s worth noting that this is a global supply issue so there is certainly a lot of pressure to get production back to where it needs to be to meet demand.
So it appears that we may be stuck with long lead times and high used car values until mid to late 2022, but the interesting thing to watch will be how the automotive industry reacts as the market prepares to come back to earth.
To chat with our Fleet Consultants about making sure you are ahead of the game on new car supply, click here or call us on Ph:1300 273 359