New car supply problems stifle recovery

In this section, we provide context around recent new car market trends and stories, and our latest Q2 and 2021 forecasts.

Continue reading

There is no denying that 2020 was a tough year for manufacturers, retailers and the wider automotive supply chain. When Covid-19 hit Europe in March 2020, all plans were thrown out of the window as businesses tackled the disruption caused by the virus.

While consumer and business confidence picked up in the latter stages of the year, with many positive about the outlook for the new year, fresh waves of the virus in the early parts of 2021 have put to bed any hopes of a strong recovery this year.

Indeed, while the extent of local Covid outbreaks and restrictions varies across international markets, all have felt the impact in some way. Covid-enforced showroom closures have massively impacted dealers’ ability to sell vehicles, while global production lines and supply chains have been affected by workplace restrictions.

New car supply problems

The world is currently amid a well-documented global shortage of semiconductors that are used to make the microchips found in all modern vehicles and other electronics. Since winter, supply chains for these chips have prioritised the consumer electronics market, impacting new car production lines globally. All manufacturers have felt the effect of this in some way and will likely continue to do so through to Q3.

As a result of the shortage, the European Automobile Manufacturers Association (ACEA) has written to the European Commission to ask for their support in securing more semiconductors for European manufacturers. In the letter, Eric Mark Huitema from the ACEA speaks of "partial or complete production stoppages in motor vehicle manufacturing plants in Europe and elsewhere"

He goes on to say: "Everything indicates that this shortage will persist for many months, possibly into the third quarter of this year. As a result, production volumes in Europe will probably be considerably lower than expected this year. This implies that capacity utilisation and employment will go down, at least temporarily. Since vehicle deliveries will need to be postponed, total sales volumes for 2021 may also end up below expectations.

"While this would be inconvenient at any time, it is particularly hard in the current situation where the European auto industry is trying to recover from the impact of the Covid‐19 crisis that saw motor vehicles sales in Europe decline by almost a quarter in 2020."

Data and information services provider IHS Markit has indicated that there will be 1 million fewer cars produced globally in Q1 2021 due to disruptions to supply chains and the semiconductor shortage – 200,000 of which will be in Europe. The most significant impact will be on battery electric vehicles (BEVs) and plug-in hybrids (PHEVs) because of the increased complexity in their design. For example, a typical internal combustion engine vehicle (ICE) includes $60-$90 worth of semiconductors, while a BEV or PHEV can have five times the amount - $500 on average.

While some manufacturers have been hit less by the semiconductor shortage – namely Toyota and Hyundai who have stockpiles to draw from – most have had to make changes to their supply chains, meaning some models are in short supply.

The UK new car market

A third national lockdown quickly dashed any hopes of a strong Q1. Effective from 6th January in England, showroom doors have been closed, with retailers only able to operate click-and-collect services. While online models have helped retailers continue to sell throughout Q1, consumer demand and appetite for this type of purchase haven’t been enough to make up all of the lost physical sales.

The SMMT has acknowledged that car retailers' shift to online orders and click-and-collect has provided ‘a lifeline’ for the sector, but nevertheless once again revised its new car market forecast to 1.83 million registrations in 2021, down from the 1.89 million predicted in January.

In total, the UK has seen -12% fewer new car registrations in Q1 compared to 2020 – a year that was already impacted by many additional factors to Covid such as Brexit and environmental legislation. Compared to 2019, the UK has seen -39.3% fewer registrations in Q1. We saw a small recovery at the end of March this year as virtually no sales took place from 23rd March 2020 following the first lockdown announcement, but overall, the market has been significantly impacted during what is a crucial quarter.

Thankfully physical showrooms are now open again and the market is expected to bounce back in April and throughout the rest of Q2 through pent-up demand, however, this is unlikely to be at the levels we saw on the back of the first lockdown. We know that Q2 performance will increase, although from a low starting point.  But because of the first national lockdown in spring 2020, comparisons will need to be made to 2019 to get the true picture as sales should be significantly higher than last year.

2021 new car forecasts

Building on assumptions for the remainder of 2021, and in-line with previous Cox Automotive forecasts, several scenarios have been outlined for this year. There are best, mid and worst-case scenarios, with the middle ground representing the most likely outcome. As ever, there are significant, multiple and complex variables at play, so dealers and automotive retailers are advised to prepare for all possible contingencies.

New car forecast - quarter focus 2020 and 2021

Source: Cox Automotive & Grant Thornton

Best-case scenario (unlikely)

While unlikely, our best-case scenario sees 2021 end on 2.05 million new car registrations, a -10.8% (-247,617) downgrade on the November 2020 forecast published in our most recent Insight Report. In this scenario, Q2 2021 specifically will see 581,862 new car registrations, up +5.2% on the 2000-2019 pre-pandemic average.

The Q1 lockdown significantly impacted prospects for the year as a whole so even the best-scenario won’t reach the levels we had previously hoped for.

This scenario assumes that post-lockdown, the market recovers to volumes observed in 2019 with the only negative impact resulting from the Q1 lockdown. Large amounts of pent-up demand will see a strong bounce back in April and May following the restriction lift from 5th April, and retail activity will remain strong throughout the rest of the year.

Mid-case scenario (most likely)

The most likely scenario given everything we know at the time of writing sees the year end on 1.87 million new car registrations, a -7.7% (-155,078) downgrade on our November 2020 forecast. In this scenario, Q2 2021 specifically will see 520,835 new car registrations, down -5.9% on the 2000-2019 pre-pandemic average.

This scenario assumes some modest pent-up demand in April and May, but general consumer nervousness remaining, meaning retail activity won’t recover fully. This also assumes a continuation of the same supply constraints we are currently witnessing.

Worst-case scenario (unlikely)

Our worst case-scenario, although unlikely, sees the year end on 1.66 million new car registrations, a -5.6% (-97,803) downgrade on our November 2020 forecast. In this scenario, Q2 2021 specifically will see 445,799 new car registrations, down -19.4% on the 2000-2019 pre-pandemic average.

For this scenario to play out, there will need to be no significant pent-up demand driving up the recovery in April and May. We would also continue to see a heavy impact to new car supply and demand, while the UK tackles potential debt and unemployment problems resulting from Covid and the EU exit.

New car annual forecast 2021

Source: Cox Automotive & Grant Thornton

How will consumer behaviours affect sales?

It remains to be seen what the consumer appetite for new cars will be like once physical showrooms reopen. Disposable income was massively boosted last year for many people thanks to a lack of overseas travel and us all simply doing less, and we could see another year of the ‘staycation’ depending on how the pandemic plays out in the coming months. If this is the case, then there could be lots more people with money to spend on a new car.

However, due to the unpredictable nature of the Covid pandemic, it’s unlikely that there would be too much irresponsible spending. As restrictions are lifted and Government support is removed, unemployment is expected to rise, so consumers will likely remain cautious in their spending this year.

Dealer predictions for 2021

In a January 2021 Cox Automotive dealer sentiment survey, two-fifths (43%) of dealers said they expected new car registrations to decline in 2021, while a third (33%) felt that they would remain the same as last year. A quarter (23%) were more optimistic, anticipating an increase in registrations by the end of the year. Compared to a similar Cox Automotive survey in Q3 2020 where over a half (52%) expected 2021 levels to be lower, this paints a positive picture for the remainder of the year.

Dealer sentiment towards new car supply was more negative. Two-thirds (65%) of those surveyed said they believed new vehicle supply would decline in 2021 and 15% thought it would remain just as constrained as last year.

It’s important to remember that we were asking dealers to predict 2021 when many unknown factors could come into play. Will the lifting of restrictions be delayed? Will people be able to travel overseas? Will there be another wave of the virus and further restrictions? It’s impossible to say right now, but overall, it seems that the roll-out of the vaccine has given retailers a reason to be slightly more optimistic about the year ahead, although it’s clear that many remain cautious.

The US perspective

“New inventories are currently down about 27% year-on-year and days’ supply down similarly. The supply chain challenges are mainly keeping production from recovering and alleviating the supply challenge. Manufacturers are managing within their own supply chains and production. The chips are fungible and so the production downtime being induced is mainly in slow-moving vehicles with ample supply. There are a handful of in-demand vehicles with acute supply shortages, but overall, the chip story seems to be helpful PR to help keep expectations low on supply and therefore margins high through stronger pricing and lower incentives.”

Jonathan Smoke, Chief Economist, Cox Automotive US

Cox Automotive Inc. Market Insights & Outlook