The past year has been bananas for the new and preowned car market. I recognize that I don’t need to explain the largest, most planet-halting influence at play, but it’s wild just how wide those ripple effects are being felt. Let me break down some of the factors that are skewing supply and demand in the current automotive marketplace.
Major Car Market Factor of 2020: COVID-19
To the surprise of no one, the coronavirus pandemic had a major impact on the supply of new cars last year. Plants located in hard-hit areas temporarily suspended production. Some had to pause due to a lack of core materials from suppliers, who were experiencing their own pandemic-related challenges. The effect was a shortage of some models which were already in high demand.
Kia’s hugely popular three-row SUV, the Telluride, is a perfect example of this. Production stopped temporarily at the Georgia plant in which it’s assembled in April of 2020, when demand was already high. I’ve been Telluride hunting on multiple occasions for clients. As of February 2021, Telluride demand was still vastly outstripping the supply. Buyers must be prepared to move quickly, if they can get their hands on one. And even then, many dealers are still charging considerable markups over the sticker price.
In contrast, the Hyundai Palisade (Hyundai’s version of the Telluride) is manufactured in South Korea. The Palisade did suffer some supply chain-related hiccups last year, but it didn’t seem to be impacted as severely as Kia’s SUV. But I suspect that ripple effects of the Telluride shortage drove demand for the Palisade as well. Shoppers may have selected the Hyundai after being unable to score a Kia.
Today, the pandemic appears to be nearly under control in most countries that produce vehicles to be sold in the U.S. But, we’re not out of the woods yet.
Major Car Market Factor of 2021: Semiconductor Chip Shortage
Currently rattling the auto industry is a shortage of semiconductor microchips. Manufacturers, believing that sales would drop last year due to the pandemic, decreased their orders with chip suppliers. Suppliers cut their production as a result. But as the industry tries to ramp back up to pre-Covid rates, car companies are now competing for chips with companies producing other electronics like video game consoles, which experienced a boom during the pandemic. Semiconductor suppliers are struggling to meet the demand.
Some manufacturers are approaching this situation in an interesting way. The Chevrolet Silverado and GMC Sierra trucks are designed to use a fuel-saving cylinder deactivation feature. But, GM is building trucks without this feature due to the semiconductor shortage. In Europe, Peugeot is replacing the digital gauge cluster in one model with traditional analog gauges to save a few chips.
But some automakers are stopping production, instead of modifying the components in their models. To see some of the impacted makes and models, Car and Driver put together this list.
This is a big one. The new car market will be feeling the effects of this semiconductor shortage for a while. Delays in production today will likely mean restricted supply in the months to come.
Tires May Be Next
The Covid pandemic affected the world’s population of rubber trees. Tire producers say that their supply is currently stable, but it sounds to me like that could potentially change. Needless to say, if there were to be a larger tire shortage, automakers would be greatly impacted.
And as an aside, if you were planning to put a new set of tires on your car before next winter, it may be prudent to replace those old tires sooner than you planned. Just to be safe.
Foam and Plastics
There is at least one factor which we can’t blame on the pandemic. The unusually severe winter weather experienced in and around Texas impacted oil refineries. Due to an inconsistent petroleum supply, producers of automotive plastics and seat foams have had challenges meeting the demands of automakers.
The Used Car Marketplace
Market forces acting upon the new car industry directly impact the preowned car marketplace. If brand new car shoppers can’t find what they want, they’re often diverted into the used car marketplace as well – on top of those who were already shopping for a preowned model.
As the demand for used cars grows and supply shrinks, prices are driven to record highs. But while it’s a tough time to purchase a used vehicle, it is an excellent time to trade in. Dealerships want inventory, and may pay more to get it.
For example, I recently helped a client who had a few months left on his lease. He was concerned about going over his mileage allowance. When you terminate a lease early, normally you’d find yourself in a negative equity position. Typically, you’d owe more money to buy out the remainder of your obligation under the lease than the value of the car. But, we were able to take advantage of the current market conditions. Instead of waiting until the end of the lease, potentially paying mileage overage penalties, and otherwise walking away, we traded in the vehicle early and realized a decent amount of positive equity which was used as the down payment on the next car.
A Major Used Car Market Factor: Rentals
After the new car market, the largest force to impact the used car marketplace is the car rental industry. When the pandemic decimated travel, rental companies sold off big chunks of their fleet to keep their heads above water. A year ago probably would have been an excellent time to purchase a used car due to this flood of inventory hitting the market.
Today, as the travel industry rebounds, rental agencies want to replenish their fleet with new cars. But they’re facing the same shortages as consumers. As car rental companies go into hoard mode, we’ll see fewer former rental cars hitting the used car market in the coming months, reducing used car inventory. And adding insult to injury, some rental companies are even snapping up used cars at auctions to replenish rental fleets which will only further restrict used car availability.
I’m guessing that for at least the remainder of 2021, it may be challenging to get a good deal on a preowned car. But as of this writing, it may be an excellent time to trade in your current car and buy or lease a new one.
Although, as supply shortages continue to affect the new car marketplace, it remains to be seen how manufacturers and dealers will react. Economics 101 at SUNY Orange taught me that if demand is high but supply is low, prices increase. Or, maybe automakers and dealerships will continue to offer attractive rebates and financing or leasing incentives. Even if supply remains low, they may want to grab as much of the resulting high demand as possible and avoid losing sales to the competition.
We’ll have to wait and see how everything shakes out. If you’re thinking about a new car and need help figuring out if this is the right time to make a move, please reach out! I’m happy to outline your options.
Thank you for reading!
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