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It’s a horrible time to be in the market for a vehicle. In fact there’s probably never been a worse time to shell out cash for a new-to-you ride, as a veritable superstorm of interconnected catastrophes have conspired to cut production, reduce supply and boost prices across the board for nearly every single automobile on the market.
Why Car Production Is Down
From factory closures early in the pandemic, the ongoing spread of COVID that affected workers and slowed assembly lines down, the subsequent semiconductor shortage to the war in Ukraine, it has been an annus horribilis for the automotive industry. South Africans can add in the Kwazulu Natal riots and floods which derailed manufacturing at the Toyota factory and has created a shortage of some of South Africa’s staple vehicles.
We all know about COVID and how 5-million new passenger cars were lost due to factories being shuttered as a result of lockdowns, workforces too sick to clock in, and supply chains disruptions. When these factories turned the lights back on in early 2021, they discovered, to their horror, that lead times on getting the chips they needed to build new models had been extended for six months to a year 1.
These semi-conductors are a critical component in all vehicles and run the multitude of onboard processors that control everything from a vehicle's engine controls to its infotainment system to its power-seat memory functions. This year alone automotive industry as a whole is projected to lose $210 billion due to the ongoing shortage.
Next up we have the ongoing Russian invasion of Ukraine, a country which prior to the war was one of the largest exporters of electrical harnesses for the automotive industry. Many of those factories have been obliterated by the Russians, and in turn, many Western and allied manufacturers announced their withdrawal from Russia and the closing of their production facilities.
Prior to the latest round of sanctions and the withdrawal of major car manufacturers, based merely on the logistical and supply chain problems of electrical harnesses due to the conflict, S&P was forecasting global automotive production will decrease by 2.6 million units per year for both 2022 and 2023. 2
It’s a simple calculus: fewer chips equals fewer cars. Fewer electrical harnesses mean fewer cars. Fewer factories mean… you guessed it – fewer cars. It also means that manufacturers had some hard choices to make – that being where to best use limited number of chips and harnesses available. And Adam Smith would be proud of their decision – you prioritise the models and variants where you turn the highest profit.
The end result is that Bakkies and SUVs have been prioritised over passenger cars, as the profit margins are substantially better. Higher end cars have been prioritised over budget models. Certain vehicles are simply models no longer being produced
The chip and other critical part shortages hasn’t just turned off the supply of new vehicles at the spigot — it’s also impacted the ability of manufacturers to bring new features to the market. In the case of General Motors, entire drivetrains have been taken out of the mix, much to the chagrin of their mostly American clientele who “can’t drive stick”.
Why Prices Are Up
What happens when new cars are near-impossible to find? Used cars suddenly begin looking a lot more appealing. Prices on second-hand vehicles have sky-rocketed, up as much a 41% year on year between January 2021 and January 20221, with even decade-old cars seeing their average transaction price jump by as much as 30%. 1
In simple terms it means that the 2011 Honda Jazz 1.4 you almost bought for R100 000 last year January is now selling for R140 000. It is also a year older, has an extra 38 226 Kilometers on the clock, and of course another years’ worth of wear and tear.
In the accompanying article in this week’s newsletter, you will see how some cars are now selling used for more money than they cost new a year ago.
Driving the demand are dealers and the rental industry. Dealers everywhere are scrambling to find something, anything, to stuff into the sales pipeline and keep cash flow positive, and have some cars on the floor.
But dealers seeking to bolster their inventory aren’t the only major players driving up used car prices. Rental car companies, having flogged most of their fleets in 2020 after air travel cratered and bankruptcy loomed have been hoovering up whatever vehicles they can find, sometimes dating all the way back to the 2017 and 2018 model years.
When Will Prices Go Down?
KPMG, one of the Big Four accounting firms, published a study in late 2021 on used car prices that concludes it’s difficult to predict when the market will stabilize.3 They predicted that the vehicle market will return to equilibrium by the end of 2022.
However, their analysis predated the Ukraine conflict as well as the resurgence of Covid especially in South East Asia. A more accurate estimate is “late 2023, early 2024" according to Stephanie Brinley, principal analyst at IHS Markit. 4
Analyst Carlie Chesbrough, senior economist at Cox Automotive—the company which own both Kelley Blue Book and Autotrader—agrees that the domino effect of the chip shortage will be with us for years to come. "The repercussions of 2020 and 2021," he says, "when we sold 14.5 million and 14.9 million new vehicles when we normally were having a 17-million market, means you have almost four and a half million vehicles that were wanted that no one was able to buy. That unmet demand is now in the used-car market.
"With pre-owned cars, they're three years behind on average because that's when you get the off-lease vehicles. So we already know the volume of [used] vehicles available on the market in in 2023 and 2024 is going to be substantially lower." And that means higher prices at least two more years out.4
Once again, although the data available is for the US market, the situation in South Africa is very similar, perhaps slightly worse even as the US is a bigger market and therefore gets the lions choice of the available new vehicles.
Tips on Buying a New or Used Car Right Now
Financial Advisory website Clark.com give the following tips if you have to buy a car right now 5.
Here are the summarised five tips from Clark Howard on buying a car in the current market:
As car prices are at record highs, we would suggest to new and used car shoppers that, if at all possible, it’s a better idea to wait out current market conditions rather than dive head-first into a superheated hurricane of overpriced automobiles and end up paying more for your second choice.
The good news is nothing lasts forever, and that includes both pandemics and their economic fallout. Within a year, the chip shortage is expected to end, and plants will be able to ramp up production.
If you can keep your existing car going for the next 18-24 months, by when used car prices are expected to come back down, you can reap the dividends and save a substantial amount of money.
About Start My Car
Keeping your existing car going has never been easier. At Start My Car, we stock replacement parts for all makes and models of vehicles at competitive prices and with nationwide delivery. Need a Clutch Kit for you Kia Carens in Kraaifontein? A Turbocharger for you Toyota in Twee Riviere? A Fuel Pump for your Ford Focus in Fouriesburg? Simply order on our website and we will get it there!
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