New Cars Down, Used Cars Up: How Supply Shortages Affect Consumer Behaviour
Have you ever purchased a product accidentally, only to be offered a mere 50% refund afterwards? Or bought something for £100, only to see the same item going for £70 elsewhere? Having value dissipate in a matter of minutes is a consistently irritating feeling, and even worse when it could have been avoidable. When consumers purchase a product, there is generally a consideration of how well its value will be retained; materials such as gold are notoriously static, whereas many other assets will have its market value evaporate the instant it is purchased. Furniture, for instance, can have its market value drop significantly once it has been used even just once. Technology prices, too, are infamously turbulent — the 2000 Power Mac G4 Cube, once dismissed as inept and aesthetically radical, now goes for prices beyond £1,000 and has amassed a cult following. The values of materials and products will depend on a plethora of factors, and the current global shortage of computer chips is, unfortunately, having a huge impact on UK consumers. A study by Goldman Sachs showed that the semiconductor shortage disrupted a whopping 169 industries in some way or another, and the production of new cars is one of the most affected. This article will examine the various aspects of the shortage on the automotive markets, the impacts they have, and what they mean for consumer behaviour looking forward.
The global computer chip shortage, as currently understood, appears to be happening for a number of reasons, but the largest is the COVID-19 pandemic. Production ossified as factories were forced to close in order to prevent the spread of the virus. Consumers relied on technology more as they worked from home and engaged with domestic recreation. Taiwan experienced its worst drought in over 50 years, mitigating the production of silicon in their facilities that use ultra-pure water. Furthermore, the COVID-19 vaccines use silicon in their vials, thereby spiking the price of the silicon used in computer chip production. As the decrease in semiconductor capacity continued, the aforementioned increased use of technology accelerated the competition between automakers and tech giants. The ‘pingdemic’ further stymied outputs. On top of these factors, political tensions with China had risen under US President Trump’s order to curb Huawei Technologies’s operations in the West. A consequence of this was the requirement for semiconductor suppliers to get extra export licenses, slowing any trade with businesses. Many of the chips were purchased before any of the restrictions were put into place too, leaving little availability of chips for those who missed out but are still in need. All of this was happening as automakers were generally not expecting the salient increase in demand for electronics and cars in Q2 2020. Ultimately, this has resulted in an ongoing disparity between the demand and supply of these computer chips (also known as ‘integrated circuits’), causing long waits for consumers interested in purchasing any number of electrical devices.
As semiconductor chips are used largely in the making of braking equipment, power steering, and infotainment systems, the production of new automobiles has dropped significantly over the course of the pandemic. Toyota is forecasting a drop in vehicle generation by 40% in September 2021, Ford’s F-150 assembly has met a hiatus, and General Motors is adjusting schedules across the US, Mexico, and Canada. There appears to be no upcoming resolution to the shortage, and a recalibration process could take months. CEO of Llamasoft Razat Gaurav stated that the phenomenon is a textbook example of the “bullwhip effect… small changes in demand, as they propagate further upstream in the value chain, the variability, and the volatility grows dramatically.” While some believe that the shortage would have happened had the COVID-19 pandemic not taken place, there is a consensus that it exacerbated the shortage massively.
The Used Car Market
As the global shortage of computer chips takes its toll, many consumers are looking away from the new car market and toward the used car market. In July 2021, research from Auto Trader showed that the average price of a used car had increased year-on-year by 12.6%; in August 2021, the figure had risen to 15.2%. This meant that the used car market had reached its 66th consecutive week of price growth! Compared to pre-pandemic levels in 2019, 2021 saw a 32% increase in customer visits to its website and an 18% increase in the number of hours customers spent researching vehicles. According to a survey by Auto Trader, 74% of respondents stated that they were open minded for a second-hand purchase if the brand new car was not available for them within their desired time frame; 46% of respondents stated that they would not be willing to wait over 1 month for a new car. There are expectations that roughly 600,000 transactions have not happened because of the supply constraints, so many of those would-be purchases are looking at the second-hand car market to avoid the wait times. Cars are usually seen as one of the most vulnerable assets to depreciation – just like the other items mentioned in the introduction of this article, new cars will lose chunks of their market value instantly after a purchase. 2021, however, has seen a remarkable divergence from that trend – in July, two-year-used cars retained 80% of their Recommended Retail Price. Director of data and insight at Auto Trader, Richard Walker, stated that there is a huge opportunity for retailers and some positive trade margins available.
Nonetheless, concerns remain over inflation; it was noted in July by the Office of National Statistics that the price rises of second-hand cars was a significant contributing factor behind UK inflation levels. While the first 4 to 5 months of 2021 did not see significant supply chain issues in the UK, they began kicking in soon after, striking both consumers and executives by surprise. Despite the used car market compensating for the new car market’s drop in production, some consumers are unfortunately delaying purchases for another few months in hopes that costs will equilibrate. The interest in cars (both used and new) will likely continue – Walker cites a general aversion to public transport services, an increase in ‘unintentional saving’ over the pandemic, and a collective positive sentiment toward car ownership, as reasons behind a remaining demand. Used car prices are also expected to continue; Cap HPI’s head of valuations Derren Martin posited that because there is unlikely to be any boon in car stock in the near future, prices are unlikely to drop. Philip Nothard, insight and strategy director at Cox Automotive, expects things to calm down around the winter of 2021 as furlough schemes finish and the Government recoups its loans. Automotive aftermarkets around the world are expected to return and even thrive in the next few years, with positive forecasts expected in Indonesia, Ireland, and the US. The remainder of 2021 will continue to affect new production and push the spotlight onto the used car markets.
While consumers will continue to face price hikes in the used car markets, there remains an opportunity for SMEs in the industry. Those in the automotive sector looking for access to silicon and production facilities, however, will have to weather the storm for the remainder of 2021. Prices for more luxury-oriented vehicles have seen greater comebacks, with Jaguar XK and XKR rising 51.6% and 27.6% respectively. Sports cars, large premium cars, and SUVs are all enjoying an increase in demand. The Mazda MX-5, Nissan 370Z, and the Audi RS 3 are all placing well in terms of their market values. Citroen and DS Cars, though, are having a not-so-prosperous time – not every car will reap the benefits of the increased desire for used vehicles. It is also important to note that the region consumers are from will affect their tastes: the London Emission Zone (ULEZ) imposes a daily charge for non-compliance, rendering older diesel cars such as the BMW 320d less attractive to prospective buyers. It is therefore important for London-based consumers to recognise that older, diesel cars are still well sought after in other regions of the UK, despite people in the city rushing to sell their non-ULEZ-compliant vehicles. Sales of such vehicles are down around 10% in the capital. It is also worth noting that online retailers will need to keep up with dealerships in competing to secure fresh stocks, which could explain why some commodity prices continue to fluctuate. Micro-mobility services, also, are running beyond pre-pandemic levels, and should continue to increase.
In sum, the COVID-19 pandemic (as well as some other factors) rendered the supply of silicon-based computer chips unable to account for the demand; geopolitical and biological tensions halted production facilities and made access to silicon incredibly difficult. With the remaining supplies already purchased, dealerships were forced to stop the production of new automotive vehicles. Consumers, unwilling to wait months for a car, turned their eyes onto the second-hand car market as a way of obtaining a vehicle. However, as the replacement of stock becomes unavoidably expensive, the prices for used cars will continue to increase. Customers should expect this trend to continue lest some unrecognised panacea emerges before the end of 2021. SME owners should capitalise on positive trade margins and the boon in demand. Ceteris paribus, supply-demand dynamics should return to normal for the winter of 2021 or the beginning of 2022 – until then, we must stay the course.