In the Market for a Car? You Might Be Searching for a While. The pandemic continues to impact the automotive industry and raise prices for consumers.
By Chris Davenport Edited by Amanda Breen
Opinions expressed by Entrepreneur contributors are their own.
The aftershocks of the Covid-19 pandemic are still being felt all over the world in the automotive industry. It wasn't enough for auto sales to plunge 30% last year — the worst loss since the Great Recession. Other negative factors are at work in the global automotive market, and they are controlling the price of new and used cars these days.
First is the most glaring problem. Not only did sales drop so low last year, but there was also a significant loss of supply due to less manufacturing during the lockdowns. As a result, car prices, especially new ones, shot up to a little over $38,000 in May of 2021. With prices so high, many consumers were turned off and sought to hold on to their older cars for a more extended amount of time. With fewer people giving away or selling their used cars, there was a loss of supply as well, which in turn raised the cost of used vehicles — close to a whopping $25,000, a 21% increase from the year prior and the highest increase ever recorded from one year to the next, according to automotive resource Edmunds.
Related: It's the Worst Time to Buy a Car — But What If You Have To?
The semiconductor industry continues to lag
Holding up new car production is the semiconductor industry, which, because of the massive lockdown, is still lagging way behind on computer chips and other accessories mandatory for new cars. Already, Ford, General Motors and other major car manufacturers have cut their production numbers drastically. In the first quarter alone, according to Cox Automotive, the United States had 3.4 million fewer new cars in production, which is likely going to keep those prices alarmingly higher and force consumers' to maintain their used cars for the foreseeable future.
Additionally, many people are going back to work after months of lockdowns, quarantines or layoffs. As a result, the demand for cars is back at its pre-pandemic level, but unfortunately, the supply is still lacking. In addition, Uber, Lyft and other public transportation are becoming more critical, which means more cars for these companies are needed to compensate. Unfortunately, they're not available, which again drives up the prices. On the other hand, with the Covid-19 virus still around, some people might not be ready for public transportation and want their own cars for work and leisure, so the demand rises even more.
Related: Why a Car Rental Change Was Almost a $1,700 Mistake - NerdWallet
Many buyers are willing to pay more
The people that never really left work at all are the more fortunate ones in this climate. According to some estimates, American consumers may have an extra $2.4 trillion in savings compared to last year. This was due to less spending on going out to eat, gasoline fill-ups or summer vacations. Consumers also received large residual payments to compensate their families during the worst of the pandemic. So, this has resulted in more buyers who don't mind paying for the extra options on a brand-new car. Because of this, car manufacturers are trying to cut back on mass production of the less popular vehicles to save the surplus semiconductor chips they still have. This, unfortunately, again causes a lack of supply and steers consumers back to either used cars or keeping their own for longer than they wanted.
Is there a rainbow on the horizon, though? Perhaps when new car manufacturing gets going at a full tilt and the semiconductor market strengthens again, we'll see the new car inventory expand and production increase. But time will tell. If it remains feasible for used cars to stay serviced, maintained and tuned up at reasonable prices, they are still going to be on the road for quite a while. And with the average age of a used car still at an all-time high of 12.1 years, according to HIS Market Researchers, at least we're learning one positive thing: American cars are indeed still being built to last.
Related: Ready to Buy a Used Car? Here's What You Need to Know.
