Over the last couple of years, the used car market has been battered by multiple forces, with a yet another disruptive force now making its presence felt.
Nationwide lockdowns forced physical dealerships to close on multiple occasions through 2020 and into 2021, which helped online sellers to grow significantly. Demand for used cars then soared as lockdowns ended, with many people preferring to buy a used car than return to public transport. Then the car industry was hit by a global shortage of semiconductor chips in 2021, decimating new car production and leading hundreds of thousands of new car customers to turn to the used car market.
Car manufacturers started to believe that the problems were peaking towards the end of last year, and hoped that 2022 would be the year when vehicle production starting return to pre-crisis levels. But, of course, that hasn’t happened.
Production schedules have been thrown into disarray by Russia’s invasion of Ukraine. In addition to the terrible loss of life and enormous damage inflicted by this war, there has also been a global industrial impact that leaves the automotive industry facing an even bigger crisis that could be even harder to solve.
Matas Buzelis, head of communications at automotive data company (and commercial partner of The Car Expert) carVertical, has shared his insights on the situation with us.
Damaged supply chains
Buzelis points out that although Russia’s new car market is not particularly large, the country plays a significant role in the global automotive supply chain.
Russia exports valuable components to the automotive industry. Germany, for example, relies heavily on Russia’s titanium, iron, and palladium. With 108 million tonnes of iron ore produced in 2021, Russia is the world’s fifth-largest iron ore producer, supplying European steel makers who are now facing higher prices and possible difficulties obtaining their raw materials elsewhere.
Russia’s invasion has also had an impact on the automotive industry in Ukraine. For example, German car makers such as BMW and Volkswagen use a large Ukrainian supplier of wire harnesses. Furthermore, Ukraine is the world’s third-largest producer of nickel and aluminum, two highly valuable resources required in battery and EV components.
Finally, Ukraine produces nearly 70% of the world’s neon gas required for building components such as microchips, which are already in short supply.
More difficult to get a good used car
Buying a used vehicle was already difficult and expensive in 2021, and by the looks of things, it will continue to be difficult throughout the rest of 2022. While demand from car buyers keeps growing, used car dealers are facing a shortage of vehicles.
The current situation is being driven by the crisis in the new car market. Car factories are running at far below normal pace – and some are not even running at all. This then slows down the flow of cars into the used car market. This firstly affects ‘nearly new’ cars like demonstrators, dealer loan vehicles, press cars, head office employee cars and ex-rental cars. That then has a knock-on effect for slightly older cars, which impacts on even older cars and so on, all the way down the line to the oldest used cars on the market.
“Those interested in buying a second-hand car are now choosing from the most limited and also the most expensive offers in the used vehicle market,” says Buzelis.
“However, the limited supply of used cars doesn’t mean buyers should forgo procedures protecting them from scams. On the contrary, buyers should inspect the history of each used vehicle since the selection is very limited.”
Scarce supply and higher prices are exactly the right conditions for bringing shadier sellers out of the woodwork, trying to make a quick buck flogging sub-standard cars. For buyers, the risk of purchasing a used car in poor condition may be much higher than it was a year or two ago.
The influence of fuel prices
Fuel prices are rapidly climbing towards £2 per litre here in the UK and have surpassed €2 per litre mark in many European countries, which is leading to car owners changing their driving habits.
“Rising fuel prices will cause some drivers to commute less,” says Buzelis. “People may shorten their annual mileage by choosing public transport or other alternative means of transportation. Fewer kilometers would translate to fewer accidents, leading to savings in running costs.”
This would decrease the number of vehicles on the road, but higher fuel prices also increase the interest in fuel-efficient vehicles.
We are already seeing that increased fuel prices are driving demand for used electric vehicles. Despite rising energy prices, the total cost of powering an EV is getting even cheaper relative to a petrol or diesel car with current pump prices. A small reduction in stamp duty as announced by the chancellor in this week’s Spring Statement is unlikely to alter this balance.
However, EVs remain in short supply in the used car market because new EV sales were very low up until a couple of years ago. There are simply very few 3-5 year-old electric cars for sale, which is driving up prices. This will obviosuly improve in coming years, but ongoing new car production shortages are likely to delay wider adoption of electric cars for some time to come.