Chip Shortage Fueling Record Used Car Sales

By Cee Lippens May 08, 2021 501
Vehicles are turning over on dealer lots much quicker, inventory is spending an average of only 56 days on the lot Vehicles are turning over on dealer lots much quicker, inventory is spending an average of only 56 days on the lot

This year's used car market is shaping up to be one of the hottest on record and market experts are expecting the surge to continue for the foreseeable future. It's a dramatic shift from a year ago when many car dealerships had shuttered their doors or were limited to providing service and maintenance. 

New-car sales plunged 30% from March 2020 to June 2020, the largest decline in almost 100 years. What started as a shortage of vehicles for sale due to factory shutdowns caused by the COVID-19 pandemic, continues to unfold in 2021 with a global shortage of semiconductor chips affecting auto manufacturing and many other industries.

Semiconductors were already in high demand before the pandemic, fueled by 5G, electric vehicles, smart appliances, cell phones and gadgets of all shapes and sizes. When the pandemic hit and lockdowns took hold across the globe a rise in demand for computer displays, laptops, and other work-from-home and play-from-home gear deepened the strain on chip producers. Taiwan, one of the world’s largest producers of microchips is also experiencing a water shortage that has no end in sight, and the industry may experience a shortfall for a year or two. 

The auto industry alone consumes 12.2% of semiconductors and the shortage has taken a bite out of auto production in this year's first and second quarter. The shortage is forcing auto manufacturers like GM, Ford, VW, Toyota and Stellantis to continue cutting production. GM announced around 10,000 workers will be furloughed over the spring and potentially into summer. GM is even cutting some tech from its vehicles to get them on dealer showrooms sooner than later.

“GM is building some vehicles without certain modules when necessary,” the company said in its Q1 sales report. “Those will be completed as soon as more semiconductors become available, which will help GM quickly meet strong expected customer demand during the year. GM is also targeting recovering lost car and crossover production where possible in the second half of the year.” 

Ford F-150 production at the Ford Kansas City Assembly Plant 

There are plans reopen Ford plants at the end of May in Chicago; Flat Rock, Mich.; and Kansas City that were idled this spring. The F-150, Mustang, Edge, and Transit van have all suffered production losses. Stellantis’s plant in Detroit has reduced production till the end of May, affecting the Jeep Grand Cherokee and the Dodge Durango. According to new research from AlixPartners, a global consulting firm, the auto industry is facing the loss of production of around 36 million vehicles this year through 2022.

AlixPartners is forecasting this year to be a “year of mixed-speed recovery,” with China recovering the quickest, to 23 million units; followed by the U.S., at 13.6 million; and Europe (parts of which were regarded to be hit the hardest by COVID-19), at just 14.1 million. Overall, AlixPartners doesn’t see global sales returning to recent-peak levels (2016's 17.5 million) until after 2025.

“We expect that production shortages will continue to impact new-vehicle sales for at least the second quarter and likely spill over into the third quarter,” said NADA Chief Economist Patrick Manz in NADA's "Issues Analysis of 2021 First Quarter Auto Sales" report. “The longer these production disruptions linger, the longer it will take for automakers to rebuild inventories to levels necessary to meet demand, and the less likely it is that automakers will be able to make up sales lost to both retail and fleet customers.” 

The shortages have been a once-in-a-century boon for used car dealers as buyers are turning to the used car market unable to attain a new model of their choosing. Prices are up in both the retail and wholesale markets. Wholesale used vehicle prices rose 3.74% in the first 15 days of March compared with average prices for the month of February, according to the Manheim Used Vehicle Value Index. The index hit an all-time high of 175.5 in mid-March, up 24% from a year earlier and up 8% since the beginning of 2021.

Retail used car prices are up 7% this spring. Manheim’s wholesale marketplace reports the average wholesale price for a used car was $19,094 in mid-April, which was up from $12,548 a year ago. It is among the fastest increases in decades. 

“A big comeback story of 2020 is without a doubt the recovery of retail vehicle sales, which have nearly returned to pre-pandemic levels,” said Jessica Caldwell, Edmund’s executive director of insights. "The chip shortage is wreaking havoc on new vehicle production, but we're also seeing surprisingly healthy car shopper demand, which has likely grown stronger in light of vaccines rolling out quicker than anticipated. These two factors combined are disrupting the market in a way we haven't ever really seen before.” 

According to TrueCar spring data vehicles are turning over on dealer lots much quicker, inventory is spending an average of only 56 days on the lot compared with 70 days at this time last year. This is causing the price of used vehicles to increase significantly, TrueCar reported the average listing of used vehicles on the site is up $2,300 year-over-year right now. 

A number of factors are fueling the buying frenzy, including an improving job market, employees returning to the office who were working from home, stimulus checks, and low interest rates. Inventory at the end of the first quarter of 2021 was 12.8% lower than at the beginning of the year with fewer choices on dealer lots according to NADA. Experts are forecasting the used-vehicle market will remain hot well into the summer and probably beyond as auto manufacturers continue to deal with slowed new-vehicle production and low inventory. 

 

 

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Last modified on Tuesday, 11 May 2021 12:20