Have you always considered your old vehicle as a depreciating asset? That may be largely true, yet lately, the tables have turned. Prices of used vehicles have recently surged to levels previously unheard of. Some used vehicles are even finding buyers at a price higher than their original MSRP (that is, manufacturer’s suggested retail price). Suddenly, what was once considered a depreciating asset has emerged as an appreciating asset. But, why?
The reason stems from the simple connection between the industry’s supply and demand. Because of the global chip shortage (the reason for which we’ll get into shortly) there is a significant shortage in new car inventory. This shortage has resulted in elevated demand for used vehicles. But before we delve deeper into understanding how significant this shortage is and how severe its impacts are on the automobile market, let’s take a closer look at the role of these chips in car manufacturing.
About the Chips
The chips wreaking havoc in the automobile industry are nothing but tiny semiconductor chips. At their core, they are tiny transistors made from silicon. Silicon is widely found in most of the minerals present on the earth’s surface. Vehicles use these chips, as do computers, smartphones, appliances, and a host of other electronic devices.
The significance of these chips in running the global economy is immense. Estimates suggest that silicon chips fuel a US$500 billion industry. In turn, this chip industry is responsible for running a US$3 trillion tech economy — six times silicon’s market size.
There are two parts of the chip-economy supply chain. The first part consists of geographical markets that export silicon to the world, such as Japan and Mexico. The second part comprises countries that use these raw materials and produce the chips like Taiwan, China, and some parts of the United States.
If you try to ascertain the dollar volume that the automobile market occupies in constituting the demand for these chips, it is nearly US$39.5 billion. Furthermore, research predicts that this market size will grow at 10 percent per year up till 2025. Although computing (US$160.2M) and wireless (US$126.7M) are two segments that occupy far greater demand volume in the global market for chips, the significance of the automobile industry can’t be overlooked.
Because of the large volume of consumers it serves and the 10 million people it employs globally, the shortage of chips always appears more pronounced in the automotive segment than in other industry verticals.
The Importance of These Chips in Car Manufacturing
The reason the shortage of chips is causing a halt in the new car manufacturing industry is more nuanced than we think. The challenge stems, to a great extent, from the intricacies involved in car manufacturing technology.
The chip processing technology of cars relies on chips made using mature-40 nanometer and older manufacturing processes. 54% of the entire manufacturing process relies on mature or legacy technology, while 17.5% depends on advanced technology and 18.5% is mainstream, which is neither old nor highly advanced.
54% of the mature technology we see in chip processing runs on old node production lines, considered advanced 15 years ago. These old nodes run on 200-mm wafers of silicon. While the auto industry is desperate for 200-mm fabs, there is no urgency among producers to manufacture them. This is in large part because the industry found 300-mm wafers more lucrative and not enough ROI on the 200-mm fabs. As a result, China’s legacy-node plants specializing in mature technology processing tech have seen their efficiency decrease.
What Caused the Shortage of Silicon Chips?
Should you try to find out why these plants have stalled, you will likely discover a story that involves missed timing and faulty assessment of the future. When the COVID-19 pandemic broke out in 2019-2020, the immediate response of the automobile industry and all its stakeholders, including automakers, suppliers, and car dealerships, was to close down the facilities. The automakers canceled their orders for parts involving chips.
Then came 0% financing offers which helped sales to grow back. Simultaneously, the world was also learning how to adjust to the requirements of the pandemic. Dealers started offering online sales, as well as home pickup and delivery, thus causing the demand for chips to skyrocket.
The factories were not ready for this sudden jump after a flurry of canceled orders. Also, they had invested their production lines in making chips for others, such as phone manufacturers, computer manufacturing industry, video games, etc. The demand for this equipment actually grew since people were suddenly working and learning from home.
The Rise of the Used Car Market
While the chip manufacturers are still trying to catch up with the delay, researchers estimate that the losses arising from chip shortage in the auto manufacturing industry can be as high as US$110 billion.
An automobile trade body estimates that the shortage may keep hampering the production for another six months, resulting in 1.28 million fewer vehicles being made in the United States alone this year. But does that mean people and businesses turned immobile due to the lack of vehicles? No, and this is where the rise of the used car market fits in.
The average price of a used car in March 2020 was US$20,484. By the time we reached June 2021, the average cost of a used car had surged up to US$26,457.
But did rising prices put a brake on the sales of used cars? Not at all. Researchers estimate that the used-car sales will hit a record number of 21.5 million vehicles sold in 2021. One of the United States’ largest sellers of used vehicles has purchased 236% more cars from customers this year.
In other countries, such as the UK, the used car market has witnessed a year-on-year surge of 108.6% in the second quarter of 2021, with more than 2.2 million vehicles being bought and sold. On the other end of the spectrum, new car sales had their weakest July since before 2000.
The market observers also noted a direct connection between the rise in demand for used cars and the easing of COVID-19 social restrictions. The demand surged as businesses reopened, suggesting that the lack of new vehicles drove people to purchase pre-owned vehicles. It was not a trend driven by the market’s unique preference towards older models or cost-savings.
Among used car brands in the UK, Ford Fiestas, Vauxhall Corsas, Ford Focuses, and Volkswagen Golfs were some of the most popular models.
It’s hard to predict what the future will hold for used cars, but one thing is certain: they’re still in high demand. If you’ve been thinking about purchasing a pre-owned vehicle and are worried that prices may have gone up too much since last year, don’t fret.
As always, it pays to compare and shop and to keep your eyes peeled for new deals on different websites or in local classifieds. Whether you plan to purchase a car from an individual seller or from an established dealership, make sure that you get all of the information ahead of time so there aren’t any surprises when it comes down to negotiating price.
That’s where our new CarrChain app comes in handy; once launched, the app will allow you to track the day-to-day maintenance of your vehicle. When it comes time to sell, you’ll have the most thorough vehicle history report on the market, helping you get a better price for your vehicle. Conversely, when it’s time to buy a used vehicle, choosing one that has a CarrChain profile ensures you have the most accurate information on the vehicle before you buy.