But second-hand vehicles are not lacking.

By Wolf Richter for WOLF STREET.

Despite the ridiculous price spikes for used vehicles – the used vehicle retail price CPI climbed 41% year-over-year in February and the Manheim wholesale price index for used vehicles soared 38% – there is no shortage of used vehicles on dealer lots. There is a lot of supply. But new vehicles have seen a historic shortage due to semiconductor shortages and resulting production cuts. And that changed the way the industry works.

The number of used vehicles across many franchise and independent dealerships in February (purple line in chart below) rose to 2.62 million vehicles, the highest since December 2020, according to data from Cox Automotive. This is a decrease of 9% compared to the average stock in 2019 (2.88 million vehicles).

But the number of new vehicles on dealer lots hovered at catastrophic levels. In February, dealer inventories increased slightly to 1.07 million vehicles (red line), down 70% from the 2019 average of 3.66 million vehicles.

Supply days.

The standard retail industry measure of days supply shows how many days that inventory at the beginning of the month would last at the current rate of sales, without additional vehicles being added to inventory. The measure is based on both the number of vehicles in inventory and the number of vehicles sold in the previous 30 days, and it eliminates the effects of inflation on inventory.

Supply of used vehicles fell to 51 days in February, mainly due to higher sales in February than in January. This 51-day supply is higher than the average 2019 supply of 48 days, and higher than the average 2021 supply of 41 days. In other words, the supply is abundant, at the current rate of sales:

But the supply of new vehicles at dealerships checked up to 34 days. Before the pandemic, a 60-day supply was considered healthy. The average in 2019 was 90 days, which was too high due to the slowdown in new vehicle sales at the time. During the March and April 2020 shutdowns, when sales all but stopped, supply skyrocketed. But then sales picked up in mid-2020, and production cuts due to semiconductor shortages became the #1 problem:

Total combined offer of new and used vehicles and auto parts at dealerships, which the Census Bureau reported yesterday for January, fell to 1.24 months (about 37 days supply), having remained in the same catastrophically low range since March 2021, with virtually no improvement.

This Census Bureau data goes back 30 years, to 1992, unlike the above data sets which only go back to 2019. This shows how outlier current vehicle inventory has been. But by combining new and used vehicles and parts, it masks catastrophically low inventory levels at new vehicle dealerships:

Production Nightmare.

When the Federal Reserve today released industrial production data for February, which includes manufacturing, there was another bad number for manufacturing output of motor vehicles, components and parts. This is the sector that has been hardest hit by semiconductor shortages and other supply chain issues.

The motor vehicle and parts production index has been in the same low range since the start of 2021, when shortages of semiconductors began to bite. In February, production was about the same as in February 2021, but was down 11% from February 2020, and was back to where it was in 2014.

Despite the decline in the production of motor vehicles and spare parts (red line), the overall industrial production index reached its highest level since 2008 (purple line):

The reduction in production of car manufacturers is a global problem. Toyota has just announced a series of production cuts at some factories around the world. Electric vehicle maker Rivian, which has just started rolling out its vans from the factory, said last week it may have to cut production in half this year. German automakers are now announcing further production cuts, in addition to those caused by chip shortages, as some of their major component makers – such as wiring harnesses – are in Ukraine and have shut down. Every day seems to produce a new challenge.

Supply chain challenges have always existed, but most issues could be resolved fairly quickly. Today, the problems are multiple and widespread, to which are added new causes, such as the difficulties of component suppliers in Ukraine and Russia.

New vehicle sales – and the new way.

Due to the shortage of new vehicle inventory, customers have turned to ordering vehicles in large numbers and are patiently waiting for their arrival.

But it is difficult to assess the real demand for new vehicles because the supply is so low. Vehicles are being sold at eye-popping prices, for eye-popping gross profits per vehicle at dealerships and automakers, because customers are still paying anything to get a new vehicle.

And there’s enough demand at these eye-popping prices, given the limited supply, and stocks haven’t built up significantly yet. A large inventory build would mean that supply exceeds demand at these prices. But it hasn’t happened yet.

So right now sales are limited by what automakers can produce. In February, only 1.05 million new vehicles were sold. This is down 12% from February 2021 and down 22% from February 2020. These are historically low sales dating back to the 1970s:

Automakers and dealerships love mega-record gross profits per vehicle, and they love that customers have stopped haggling and paying anything, including the sticker, and they love the large-scale change in customers to buy via make-to-order, rather than in the field.

This is a Tesla system, which has no franchise dealerships, implemented from the start. Making to order solves all kinds of problems. This solves the problem of some aging units sitting on the lot and having to be sold at deeply discounted prices. It solves problems with dealer inventory hoarding and overstocking, like in 2019, when automakers had to rack up costly incentives in the market to get these vehicles on the sidewalk.

Building vehicles that have already been sold is a more efficient way to sell, and dealerships and automakers want to encourage customers to keep doing it. And dealers would like customers to continue paying MSRP or more than MSRP.

But they would all like to sell more vehicles at these mega profits per vehicle. Which means automakers will need to be able to straighten out their supply chains and build more of them – but they never want to. overbuild again, as they once did, because such gluts of inventory depress profits.

Semiconductor shortages have upended the old way of doing business in the auto industry and disrupted the way customers purchase new vehicles, such as paying for a sticker or sticker and ordering vehicles rather than buying them. choose one on the ground. Retail customers could still order, but only a few customers did. Now many customers do.

The dream for the industry – but not necessarily for the customers who have to pay for it – would be for automakers and dealerships to be able to maintain this system of how customers buy and what they pay, with dealerships operating with very lean inventories and mega profits, even as production begins to recover from shortages.

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