Who is Immune to the Changes in the New and Used Vehicle Industry?
The short answer to this question is – no persons and no companies are immune to the new and used vehicle industry impacts on the economy. The long answer is – the impacts vary in intensity and vary in speed of impact and length of impact.
The CPI tracks changes in the prices of new and used vehicles. While the overall April CPI was 8.3%, the new vehicle component was higher at a 13.2% year over year increase.
In January of 2022, Kelley Blue Book reported the average price of a new car reached an all-time high of $47,000. Assuming a 13.2% increase in price, a car that cost $40,000 in April of 2021 would cost $45,280 in April of 2022.
The price of used cars has increased faster than the price of new cars. The CPI for used cars and trucks is reported at 22.7% in April of 2022. A used car costing $40,000 in April of 2021 would cost $49,080 in April of 2022.
Clearly these price increases are material and are impacting consumers and businesses as direct cost increases.
The demand for new cars is exceeding the supply of those cars because of new car component shortages, primarily in the chip markets. The next graph shows the worldwide production of vehicles from 2000 to 2020.
Chip manufacturers and other experts in the vehicle sector are expecting the chip shortages to continue throughout 2022 and some are suggesting the shortage will continue into 2023. This will further disrupt supply and demand for new vehicles, which flows down to used vehicles, and in turns flows throughout the economy.
In Q4 of 2021 the US government surveyed more than 150 companies that either make or buy chips and found that the chip shortage is a critical problem impacting production, supplies and inflation. The Commerce Department reports that demand for semiconductors increased 17% from 2019 to 2021 and there was not a similar increase in supply. At the time of the survey semiconductor manufacturing plants were at 90% capacity and therefore had little ability to increase their production. On hand inventory at users of microchips decreased from 40 days pre-pandemic to less than 5 days as of the survey date.
How does this impact the economy?
The increased costs of new and used vehicles have direct cost increases for consumers and businesses who use vehicles. Those cost increases have been a driver of the increases reported in the CPI and PPI. While energy and food have been increasing at higher rates than vehicle prices, the combination of energy, food, and vehicles means employees are feeling stress in costs for food, shelter, and transportation.
This employee stress has driven employees to search for higher salaries. With the labor shortages throughout the country, the opportunity for employees to move positions for increased salary remains strong. Recently a business owner reported that the accounts payable clerk that was earning $19.00 per hour, left after only a couple day notice for a similar position earning $26.00 per hour with the ability to work 100% remotely. This puts stress on businesses to increase salaries, pay stay bonuses, increase benefits, and otherwise work to keep and attract employees. This results in increased costs for businesses in all sectors of the economy. And these higher wage levels continue to trickle into the expense line items on a company’s financial statement.
The chip shortages for vehicle manufacturers resulted in plant shutdowns and plant production delays and reductions. This means the companies that supply products and services to vehicle manufacturing plants are experiencing disruption in their revenue streams. Tier 1 and Tier 2 automotive suppliers have clearly felt the disruption and have experienced cash flow and financial performance problems. Inventory levels have been bumpy, and lines of credit have been stressed.
The impact further flows to the suppliers of products and services to the Tier 1 and Tier 2 automotive suppliers. The suppliers of the suppliers are experiencing the same issues as the Tier 1 and Tier 2 automotive suppliers, but at different times and for differing lengths of time.
Every business needs to evaluate its risk related to these trickle-down impacts. Let’s consider the far-reaching impact of vehicle prices. For example, the trucking company that delivers vehicles from the manufacturers to the dealers has fewer vehicles to deliver, has less access to new vehicles for its own fleet, and continues to work to maintain employees in a tight labor market. All this works together to impact both fixed and variable costs against a reduced revenue level and compounds the impact on break even financial performance. Also consider the restaurants near the vehicle manufacturing facilities and their key suppliers. Consider all retail businesses in communities relying on the vehicle manufacturing businesses.
One key problem we are seeing is that the financial impacts are compounding in multiple revenue and expense line items on the income statement. An expense line item that was not impacted immediately, will be impacted at some point in time in the future, and at different levels depending on industry and geographic location.
Businesses need to continue to emphasize and improve their ability to analyze financial performance. Financial analysis and performance adaptation cannot be a once a year or once a quarter exercise. To maintain or improve financial performance, businesses will need to be evaluating all aspects of their business on a monthly or weekly basis. The impacts of vehicle supply and pricing trickle throughout the entire economy and manifest themselves in multiple income statement line items. Close attention and monitoring of financial performance, coupled with adaptive flexibility will be the path to success during these stresses.