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Price shock: Why car prices are being driven higher

By June 10, 2022No Comments

The cost of everyday items is continuing to rise, with a recent estimate from the Central Statistics Office suggesting consumer prices were 8.2% in the year to the end of May.

That translates into higher costs at the shopping tills, leaving many households with less money at the end of the week – and forcing others to cut back on essentials.

But not all price rises are equal, and a myriad of factors affect different products in different ways.

To help make sense of what’s going on, we’ve taken a closer look at a selection of everyday items. Each one has seen significant price increases, but each one has a different story to tell as to the reasons why.

In this piece, we’ll look at car prices.

Is a car really an ‘everyday’ item?

Not really. We’re stretching the definition of ‘groceries’ to its absolute limit here.

But it is a good representation of the kind of big ticket purchase that a household might be considering; something that might crop up once every few years.

And it does have an impact on the household budget. The vast majority of people buying a car, certainly a new car, rely on some form of finance arrangement or loan to make that happen. It may even be the biggest loan they have outside of their mortgage.

The more they have to pay for the car, the more their weekly or monthly repayments are – and that has a very real impact on what they have left to spend on everything else.

So how much are car prices rising by?

According to the CSO’s most recent consumer price index, which brings us up to April – the price of motor cars specifically rose by 12.7% in the year. That’s on top of a near 4% rise in the 12 months before, which was at a time when prices were generally not moving much.

So a huge, huge rise in prices – and bear in mind that, generally, when we’re talking about an ‘X’ percent increase, it’s on a product with a relatively low starting price. So the actual, real-world cost increase is cents or euros. That can all add up, of course, but it’s not a dramatic shift in and of itself.

But when you’re talking about a car that might cost at least €10,000, up to tens of thousands of euro – and you add 13% or more onto the price – you’re talking about an additional cost that’s in the thousands of euro.

So that kind of increase in a year or two is remarkable.

So what’s the cause?

Put simply, it’s a shortage of supply.

Even if you haven’t gone looking to buy a new car recently, there’s a good chance you’ve heard some of the radio ads from certain manufacturers apologising for the lack of car model options, and the time it’s taking to delivery on an order.

And it’s reflected in sales data, too.

Figures from the Society of the Irish Motor Industry shows that car registrations here in the first five months of the year are down more than 21% on the same period in the pre-pandemic period of 2019.

And it’s similar across Europe – recent data put registrations 20% lower in April, they say, simply because firms didn’t have the cars to sell.

Is this a knock-on effect of the pandemic?

Yes – but maybe not in the way that you’d think.

The pandemic did impact car factories and shipments like everything else. But the real problem has been in one specific area – and that’s the world’s semi-conductor, or computer chip, supply.

People probably think of processor chips as something you’d find in your PC – or in your smartphone – which of course is the case. But modern cars have so much going on inside them in terms of sensors and electronics that they’re packed full of computer chips too.

Apparently the average car now has somewhere in the region of 1,400 semiconductors, each one looking after different functions – like your heating and cooling system, your tyre pressure monitor, your infotainment system, your electric windows, your reversing sensors and so on.

Basically, if it’s controlled electronically, it has at least one semi-conductor managing it.

When the pandemic hit, there was an assumption that demand for semiconductors would drop – and the factories making them scaled back.

But that assumption was completely wrong.

Wasn’t it actually the complete opposite?

Yes – as people will no doubt remember, the early weeks of the pandemic saw everyone suddenly have to work from home, even though they may not have been set-up to do so. That meant there was a scramble for PCs and laptops, tablets and smartphones.

It also put huge pressure on the data centres of the world, because suddenly all of the business that was being done in-person was suddenly having to take place over the internet.

And there was also a jump in demand for the likes of TVs and games consoles as people stocked up on things to keep them entertained. And all of those things need lots of semiconductors too.

That caught many semiconductor makers on the hop – not only did they have to quickly scale production back up, they also had to quickly reorientate what they were doing to focus on those consumer electronics and servers.

And to do that they put the semiconductors they make for cars on the back burner. They did that, in part, because they understandably reckoned car sales would fall due to global lockdowns. But also because car chips are less profitable than chips for PCs and smartphones.

That was two years ago – why is it still causing problems?

There’s a couple of factors here – for one, demand for consumer electronics is only really starting to tail off in recent months as economies, including our own, start to move back to what you might call “normal” work practices. But even with that, there are a lot more people working remotely or hybrid today than was the case three years ago.

But that sudden shift in demand in the early stages of the pandemic was also compounded by some other problems. As we’ve seen, unfavourable weather has hit food production in some places, but it also impacts the other kind of chips.

For example, Taiwan is a major exporter of processors, but in 2020 there were fewer typhoons than normal.

That sounds like it would be a good thing, but it actually meant that there was less rainfall. Water is a vital resource for these plants – they can use hundreds of millions of litres of water a day – so that hit production.

At the same time, there was a cold snap in another big area of production, Texas.

Both of those things hit the amount of chips the plants could produce, and made what they did produce more expensive.

And, as we know, when these supply chains get disrupted, it’s not easy to get them back on track.

Another factor is Bitcoin.

The price of bitcoin sky-rocketed in the first two years of the pandemic, which drew a lot of people in.

Anyone can make new bitcoin – but you need to devote a lot of computer power to do it. So we’ve had this phenomenon of people and companies, particularly in places like China where electricity has been cheaper, buying up processors to build make-shift server farms to ‘mine’ bitcoin.

So that was just another thing that was adding to demand and making chips harder to come by.

And, by the way, it’s not just cars – if you’re one of the many people that has been trying to get your hands on the likes of a Sony’s Playstation 5 console for the past two years, these are the same reasons it’s still in such short supply.

So if demand has been so high for so long, why not just make more chips?

Well, the big producers are trying to do that.

People might aware that Intel, for example, has been expanding in Kildare – it’s more than half way through the construction of a new FAB, or fabrication plant.

Back in March they also announced plans for two new plants in Germany – which is actually part of a broader push by the European Union to increase the number of chips being made within the bloc.

But these facilities take time and a lot of money to build – they’re huge plants stocked full of extremely expensive, precise equipment. And they have to be designed specially to ensure the chips are made in extremely clean conditions, because a spec of dust could cause a short circuit and make them worthless.

So you can’t just find an empty factory unit, kit it out and start producing chips.

Those German Intel plants announced back in March aren’t expected to come on stream until 2027, for example.

So what are car-makers doing in the mean time?

Well it’s not that there are no chips available whatsoever – there are just fewer of them, and they’re costing a lot more than before.

That means there are fewer cars coming off the production lines, and they’re each costing more to make.

So what manufacturers have done to try to deal with this is, in some cases, simply halt the production lines, maybe for days at a time, because they just don’t have the cars to justify keeping things ticking over at the same scale as they would otherwise.

Some have also opted to focus more on their more basic cars – because they have fewer electronic parts, and, so, fewer semiconductors inside.

Any sign of this easing soon?

The short answer is ‘no’.

I mentioned the time and money it takes to ramp up chip production – even with a lot of new plants being built, and existing plants being expanded, the general expectation is that it will be at least another year – maybe even two – until supply is able to catch up again.

And even if that problem is overcome, the war in Ukraine has added a further complication because a lot of car parts would have been manufactured there.

So if this is all about a shortage of chips and parts – how does it impact used cars?

It’s pushed prices way up – some figures suggest by more than the price rises we’ve seen in new cars.

And it all goes back to the simple principles of supply and demand.

Most people who would be buying a brand new car already have an older one that they’d sell or trade in – but if they can’t buy new, they’re keeping their old car for longer.

Also, changes introduced in recent Budgets, along with Brexit, have made importing cars from the UK more expensive – shutting off what had been a popular supply line for motorists here.

So the supply of used cars to the market is falling.

At the same time people who, for whatever reason, really need to switch vehicle but can’t get what they want new are turning to the used market.

So supply is down, demand is rising – and prices rise with it.

It’s hard to get data on used car sales for obvious reasons – maybe the best we have is from DoneDeal, which would be one the platforms where people buy and sell used cars. It’s obviously not the only selling platform, though, so it’s not a complete sample.

But it says that in the year to March, used car prices were 30% higher – and when you compare it to pre-pandemic levels, back in January 2020 – prices are more than 50% higher.

There’s an old rule of thumb that a new car will lose about 10% of its value the minute you drive it away from the dealership – and, generally, will lose about 60% of its value after three years…

But those rules don’t seem to apply at the moment – and in some cases people may find the value of their car is actually higher now than what they paid for it a year or two ago.

Article Source – Price shock: Why car prices are being driven higher – RTE

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