The semiconductor chip shortage has indirectly led to 4 million fewer cars being produced in Europe this year—down 16% from average production levels. European consumers, flush with excess savings after the crisis, have been keen to upgrade: This pent-up demand has resulted in long waiting lists for new models.
One consequence has been that second-hand car prices are hitting all-time highs. Consumers are keeping their cars longer: We estimate that the average age of cars on the road is up by two years since the onset of COVID-19. While the growth and level of used car prices is now stabilizing, we believe prices will remain elevated until the supply of new cars normalizes. Supply chain issues, particularly with respect to microchips, suggest to us that this may not be until the second half of next year.
The extension of average vehicle life is leading to a surge in demand for parts, supplies and tires to prevent breakdowns for aging vehicles. This backdrop will likely lead to some beneficiaries and some laggards.
Auto original equipment manufacturers (OEM’s) and their immediate first- and second-tier suppliers are the most affected, with the absence of new car volumes impacting fixed cost absorption and profitability.
Conversely, auto parts distributors, garages, tire companies and other secondary suppliers are seeing good levels of demand in spite of the absence of new car sales. Other beneficiaries in Europe could also include car auction companies whose revenue models are based on commissions tied to car resale value in the secondhand market and which have seen strong performance over the last year, albeit offset by some volume declines.
In our view, the wide gap between winners and losers, while not permanent, may persist for some months yet. With increasing regulation on older cars in some countries (e.g., the recently expanded “ULEZ” ultralow emission zone in London), consumers may be forced to pay up for new “cleaner” models to avoid civil penalties. For European auto OEM’s that can navigate the various supply-chain constraints, we anticipate robust improvement in profitability and cashflow in 2022 as customer orders are met and production volumes return.