A shortage of used-car stock caused prices to soar in 2021 and left many dealers unable to keep up with demand. Will this year see the market return to normal levels of trade?
Last year saw crazy prices paid for some used cars as supply outstripped demand. According to the Auto Trader Retail Price Index, average used car prices reached another record in January, the 22nd consecutive month of price growth. Used car prices were 31% more expensive at the start of this year than they were in January 2021, according to the Index.
Used car supply has been caught in a perfect storm. Despite the uncertainties of the pandemic, demand for cars and commercial vehicles remains high. Yet waiting times for new vehicles have climbed – they are now anything from six months to a year – while used car supply has contracted, as people hold on to their vehicles longer, rather than exchange older cars for new.
Global chip shortage to continue
Although the market has rebounded from the worst of Covid-19 disruption in 2019, plant closures and a shortage of semiconductors continues to affect new vehicle production. UK car industry output in 2021 was down by more than a third on 2019, and was at its lowest level since 1956. New car sales in 2021 were almost 29% below pre-Covid levels, the second worse year for annual vehicle registrations since 1992, according to SMMT.
There have been signs that stability may be returning to the market. The UK automotive sector got off to a strong start in January with new car sales up by almost 28% on January 2021, when lockdown restrictions kept car showrooms shut, according to the latest figures from the SMMT data. However, underlying issues in the new car market are expected to persist for some time yet.
Manufacturers have warned the semiconductor shortage is unlikely to be fully resolved until 2023, at the earliest. Combined with a squeeze on the cost-of-living, supply chain problems are expected to hit new car sales for the foreseeable future. SMMT recently cut its forecast for new car sales in 2022, despite a year-on-year increase in new car registrations in January. It predicts that new car sales in 2022 will still be almost 18% lower than 2019.
The conflict in Ukraine brings additional challenges for a sector already dealing with a shortage of semiconductors. The war is likely to disrupt automotive supply chains, as sanctions and plant closures effect the flow of components and raw materials from Ukraine and Russia. The economic consequences of the war will hamper the post-Covid-19 pandemic recovery, while higher fuels prices and higher cost of living is likely to affect the supply/demand balance for used and new vehicles. Due to every vehicle needing a wiring harness and this is something that cannot be fitted after production and Ukraine having many factories that make these, then this will naturally have an impact on production levels. It has been estimated that vehicle production could be down as much as 15% in the first half of this year.
Extended warranties can boost margins
The shortage of used car stock has meant dealers have not been able to fully capitalise on the post-lockdown bounce. UK used car sales grew 11.5% in 2021, yet the market was down 5.5% on the pre-pandemic five-year average, according to the SMMT.
Unable to fully restock forecourts, revenues have been under pressure. As a result, up-selling and aftersales opportunities have become critical as dealers look to boost margins, making more money from fewer sales. With another uncertain year ahead, extended warranties present an excellent opportunity for dealers to generate valuable additional revenue and build customer loyalty.
With more potential buyers delaying new car purchases, demand for extended warranty insurance has risen, with a notable increase in the average period of extend warranty. Warranties can build customer loyalty and bolster aftersales, such as servicing and repairs. They can also help protect customers and dealers against the rising cost of repairs and inflationary pressures.
Trusted partner
QBE is a trusted partner in the extended warranty market, working with automotive manufacturers, distributors and dealerships for over 20 years. Our automotive warranty offering is delivered through a purpose-built digital platform, which dovetails our products with dealers’ own service offerings. The product is backed by a fast and customer friendly claims service, which is central to increasing customer loyalty, while our advanced analytics help clients optimise growth and profitability.