“Perfect storm” in automotive industry puts used car market in driving seat

Cox argues that a full quarter on, the challenge of boosting new car production to meet pent-up demand while supply chains faltered in the wake of a global pandemic is a challenge yet to be solved. Global car supply has dropped significantly due to manufacturers trying to adjust to new ways of working, mend broken supply chains and source the materials necessary for new car production.

Philip Nothard, insight & strategy director for Cox Automotive (pictured above), said: “We’re witnessing a perfect storm for the automotive industry. Most in the industry know about the shortages in semiconductors, aluminium price rises and rubber and plastics shortages. But additional issues such as manufacturers shifting their R&D and manufacturing capabilities towards EVs, and the implications of the Brexit transition period and delays are less discussed.

“To get around the challenges and the reliance of technology in vehicles today, manufacturers are refocusing the available materials towards their most popular and profitable models for the time being – EVs, hybrids and higher-margin vehicles such as SUVs and even their commercial vehicle divisions where there is increased demand, in favour of cheaper, less profitable and smaller city cars.”

Global outlook

These are issues for the automotive industry around the world. Offering a view from the US perspective, Jonathan Smoke, chief economist, Cox Automotive, said: “In early June, new supply continued to contract as new inventories were down 64% year-on-year, with days’ supply down even more. The supply chain challenges worsened in the spring, and combined with robust, stimulated demand brought supply to new lows.”

The effects of the lack of new car supply are being felt most by fleet and rental market companies who, in the face of very limited new product, are extending contracts and continuing to utilise the vehicles they already have rather than apply their typical vehicle replacement strategies.

Used car market booms

As a result, used car market trends are currently proving to be highly significant. Nothard noted: “Arguably, the used car market has never had this much influence on the industry as a whole. Buyers are flocking towards used cars with money to splash after a largely inactive year, and dealers are enjoying an uplift in activity as a result. But this can only go on for so long, as supply isn’t there to meet demand.

“Lack of nearly new stock means volumes are lower overall and are typically older and have higher miles, while average prices are rising as dealers compete for what little stock is available. Used car prices rises can only rise so far until the situation is unsustainable. However, cap hpi are reporting increasing numbers of used vehicles with values above the cost new.”

Cox analysis indicates new car supply shortages will not to be resolved until H1 2022, suggesting the knock-on effects in the used car market will be around for some time. As there is unlikely to be a flood of vehicles into the used market, the prospect of a significant drop in values is small.

UK used car sales rose by 17.1% in June 2021 year-on-year according to the latest INDICATA UK used car market insights report. This was despite June 2020 being a major used car month last year as dealers came out of a two-month industry-wide lockdown where new and used car sales were severely restricted.

The current rise in sales contributed to a 3.1% fall in dealer stock from June into early July which fuelled a 6.9% price rise in the month as used car volumes from fleets, rental and dealer part exchanges did not materialise.

“Dealers sold used cars quickly in June and then couldn’t replace them fast enough to keep up with demand. Prices continued to rise so dealers had to keep a close eye on forecourt prices against market prices for fear of selling cars too cheaply,” said Jon Mitchell, INDICATA UK’s group sales director.

“We have continued to help dealers re-value used cars on a daily basis during June such was the pace of the market. Moving into July there has been no sign of a fall in demand or increase in used car supply so prices will remain high for the foreseeable future,” he added.

There is support for this view from Autorola, which has reported a major rise in online prices in Q2.

“We generally have 10,000 used cars on our MarketPlace online portal, and this has fallen by two thirds to nearer 3,500 such has been the high demand from dealers searching for stock. We are constantly signing up new dealers looking to buy replacement used stock,” explained Jon Mitchell, Autorola UK’s group sales director.

“Our online ex-lease and rental auctions have reported 100% conversion rates since the beginning of the year. We could sell double the volume of cars we are currently offering through our weekly online auctions.”

Premium brands

Aston Barclay’s Used Car Desirability Index for July highlights premium SUVs and used sports cars are the most in-demand stock across both its physical and online auction channels, with 19 out of the top 25 places taken up by BMW, Mercedes-Benz, Volvo, Jaguar, Range Rover and Lexus.

Its data takes into consideration three key metrics: web views prior to sale, number of physical and online bids per sale, and the sale price achieved as a percentage of CAP average.

The BMW 7-series and BMW M4 tied for first place with the Mercedes S-Class and Range Rover Velar close behind. This is the first month where no full electric cars have made the top 25, previously Tesla had made the June list, while the Lexus NX was the only hybrid on the list.

Martin Potter, Aston Barclay’s managing director – customer said: “Our latest index highlights the current demand for premium vehicles. At this end of the market consumers do not want to wait long periods for a new car to arrive so they have switched their attention to the used market to source their next car. This has meant many dealers are competing for the same make and model of car which continues to push up prices.”