Material shortages continue to impact new car production

In this section we discuss the biggest factors driving the current new car market and share our latest forecasts for Q3 and Q4.

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Even before the UK and many of our European neighbours had started to emerge from lockdown in April, the automotive industry had switched its focus to its next big challenge – how to boost new car production to meet pent-up demand while supply chains faltered in the wake of a global pandemic.

In truth, it’s a challenge that is yet to be solved. With manufacturers around the world attempting to mend broken supply chains and source the materials needed to make their cars - all while adjusting to new ways of working - global new car supply has dropped significantly as a consequence. This has translated to restricted options and lengthy lead times for consumers.

And things aren’t expected to get better any time soon. We anticipate supply issues to remain for the remainder of the year, and they certainly won’t be fully resolved until well into 2022. Our recent dealer sentiment survey revealed nearly three-fifths (59%) of dealers agree with our 2022 view, while 37% are more optimistic, stating supply issues could be solved by Q4 2021.

Material shortages are at the heart of the problem

As we discussed in the previous issue, the world is currently amid a well-documented global shortage of semiconductors. These are used to make amongst many things the microchips found in all vehicles. When the automotive sector closed down last year, chip suppliers shifted their focus to alternative markets, particularly the supercharged and highly profitable consumer electronics sector. And with demand showing no sign of abating, this is where their attention remains. Automotive manufacturers have been caught blindsided by this shift and have been struggling to source the required chips since, in addition to the global raw material shortages and a simple lack of manufacturing capacity.

It’s not just the effects of the pandemic that has caused these issues. A fire at a semiconductor plant in Japan in March added to the strain, while the severe winter storms in Texas and recent drought in Taiwan have led to further disruption.

A shortage of computer chips isn’t the only problem for manufacturers. The price of aluminium and steel has skyrocketed due to increased demand and the complexities of transporting it around the world in the current climate, while plastics and rubber have seen reduced production. All of these are essential materials in all bar a handful of vehicles.

Simultaneously, most automotive manufacturers are also currently in the throes of the very expensive business of shifting their R&D and manufacturing capabilities away from internal combustion engine (ICE) vehicles and towards EVs. All of this and we haven't even mentioned Brexit and the implications of the transition period. There are signs of delays and disruption but in a market which is facing a lower need and demand for distribution. It is a perfect storm.

What are manufacturers doing to sort the problem?

The reliance on technology in vehicles nowadays is huge and this reliance will only increase as more EVs enter the market and the vehicles themselves become ever more sophisticated. Electronics are responsible for 40 percent of a new car's total cost, and forecast to increase to 50 percent by 2030. The microprocessors and chips that power modern vehicles are now so prevalent that they're practically a commodity in the same vein as steel and aluminium .

Vehicle manufacturers around the world are working hard to ensure they can continue to meet the demand for their most important models. While car production overall is down, many 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 in favour of cheaper and smaller city cars. There’s even a push by some manufacturers to focus the available computer chips on their commercial vehicles due to increased demand.

Consumers are now feeling the effects of this, with lengthy lead times on orders and fewer options to choose from, and even simplified specs on some derivatives. In some cases, add-ons such as upgraded sound systems or driver-assist options now come with a long wait and even a hefty premium on the price tag.

Plant closures have become increasingly common while manufacturers work to resolve the supply challenges they are facing. Some workarounds include reverting to analogue displays or fitting aftermarket fuel economy gauges. Some are even producing the vehicles with missing parts and then holding them in storage until the required parts arrive. This is far from ideal for them, however as the process generates additional costs and further complexities when putting these vehicles back into the production line.

There are also reports of a reluctance to supply the leasing, rental and contract hire sectors with new vehicles to maintain focus on the more profitable retail sector. All in all, drastic measures are being taken to weather the storm. While we know these problems won’t be sorted for some time, the sector hopes that some semblance of normality will resume in 2022.

And while retailers are certainly not exempt from the knock-on effects of the issues manufacturers are facing; they have been invigorated by the removal of the usual manufacturer-imposed quarterly and annual sales targets in favour of a more profit and margin focused approach. This is encouraging retailers to be more creative in their sales approach, which stands to benefit consumers.

The new van market

“Reports of extended new van lead times continue, with some manufacturers believed to be prioritising car production over van due to raw material and component shortages. Specifically, it is the semiconductor shortages which, for both car and van, has led to some manufacturers, removing higher specifications, such as sat nav or optional autonomy cameras and sensors. For some manufacturers this has manifested itself in model production suspension and even extended factory shutdowns. The June SMMT new van forecast foresees the UK selling 3,000 more vans this year than 2019, a total of 369,000, however, the Cox Automotive forecast differs from this position and sees us ending 2021 at 285,000 – 29% lower than the SMMT forecast and broadly in line with 2020 actual registrations. With many new van deliveries deferred into 2022 and the resultant onward challenges with multi-stage conversion builds, we believe new and used van volumes will continue to be severely constrained throughout 2022.”

James Davis, Customer Insight Director (Commercial Vehicles), Cox Automotive Europe 

New car forecasts

Building on recent new car figures, assumptions for the remainder of 2021, and in line with previous Cox Automotive forecasts, we have adjusted our forecasts for the next quarter and the remainder of 2021.

We give 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.

Although we have revised our latest forecast downwards, this is entirely due to the supply issues. Consumer demand is ahead of our previous mid-case (most likely) view..

New car forecast - quarter focus 2020 and 2021

Source: Cox Automotive & Grant Thornton

Best-case scenario 

Our best-case scenario for Q3 sees the quarter end on 588,053 new car transactions, down -7.4% on the 2000-2019 average. We’ve also adjusted our full-year 2021 forecast downwards to 1,945,848 new car transactions, -5.03% (-102,984) versus our issue 1 forecast (April 2021) and -15.8% compared to the 2000-2019 average.

This scenario assumes that retail demand will remain as strong as it has been throughout the summer, and crucially that manufacturer workarounds to increase new car production translates to improved supply.

Mid-case scenario (most likely)

Our mid-case scenario for Q3 sees the quarter end on 522,425 new car transactions, down -17.7% on the 2000-2019 average. We’ve also adjusted our full-year 2021 forecast downwards to 1,823,426 new car transactions, -2.48% (-46,349) versus our April forecast and -21.1% compared to the 2000-2019 average.

This scenario assumes that modest demand will remain throughout the summer, but the same supply issues we are currently seeing will continue as expected.

Worst-case scenario

Our worst-case scenario for Q3 sees the quarter end on 417,740 new car transactions, down -34.2% on the 2000-2019 average. We’ve also adjusted our full-year 2021 forecast downwards to 1,651,340 new car transactions, -0.66% (-11,047) versus our April forecast and -28.6% compared to the 2000-2019 average.

This scenario assumes that we see a continuation of the same supply issues, but also a drop off in demand from current levels as the summer goes on and consumer spending goes elsewhere.

New car annual forecast 2021

Source: Cox Automotive & Grant Thornton

The US perspective

“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. However, we see substantial variation in supply levels by make, segment, and vehicle, so the success this spring has varied greatly based on available supply and differences in production. Very strong demand and limited supply have led to further declines in incentives. Dealers have enjoyed strong pricing power, and with other strength in F&I, used car sales, and service and parts, have seen record profits.”

Jonathan Smoke, Chief Economist, Cox Automotive Inc.

Cox Automotive Inc. Market Insights & Outlook