By Ray Birch
TORONTO, Canada—Some “spit and polish,” strong new extended warranties, and automaker and dealer “creativity” should mean used values will remain elevated for some time, according to one analyst.
All of that should provide lenders with greater confidence to continue lending on used vehicles, and possibly even extend terms and lower rates, the analyst said, even as used car values have begun to back off their recent all-time highs, that same analyst told CUToday.info.
Lewis Black, CEO of Almonty Industries, a global company involved in the mining, processing, and shipping of tungsten concentrate, which is used in semiconductor manufacturing, predicted the microchip shortage will continue for two more years. He said that will lead automakers to focus their chip supply on their most profitable and expensive vehicles, which will include electric vehicles (EVs).
That market scenario, according to Black, will speed up consumer acceptance of EVs, simply because they will have fewer choices among gas-powered cars and trucks.
With the supply shortage of new cars expected to keep annual new car sales units well below the 17 million average for quite some time, Black said automakers and dealers are creatively coming up with ways to make used vehicles more attractive.
Expanded Certifications
One of the biggest moves being made, said Black, is improvements by automakers in their certified pre-owned programs with longer warranties—some out to 10 years, based on the model.
Kelly Blue Book reported that in the past year, pre-owned cars sold too fast to certify them all.
But sales have settled down to a more manageable but still above-average pace. Now, automakers are expanding their certified offerings,” Kelly Blue Book stated on its website. “Honda and its Acura luxury brand are the latest to make the move. The company’s existing CPO programs cover cars up to five years old. The two have added a new tier of older, less-expensive used cars that still carry a certification. It’s called HondaTrue Used at Honda dealerships, and Acura Precision Used at Acura stores. The new program covers cars up to 10 years old.”
Lewis Black
Values Slip into Reverse
The fact is used car sales have become more valuable to dealers, said Black—"More valuable than new cars sales. They can’t get new cars to market quick enough, so now automakers and dealers are basically putting spit and polish to the older vehicles,” he said.
That includes some “kits” that will give sparkle, shine and added performance to used vehicles, explained Black, saying the enhancements “give older cars a little vroom vroom.”
Meanwhile, what those changes mean for lenders is greater confidence to extend terms on used cars, and possibly even lower rates to make them closer to a new car rate, asserted Black.
As CUToday.info has extensively reported, lenders have been consistently extending terms on new cars to make the monthly payment affordable as prices have soared. The average new car price in 2021 was more than $33,000.
All of this will likely keep used vehicle prices elevated for an extended period, Black believes.
The Market Remains Strong
As CUToday.info has also reported, used vehicle prices have appreciated as inflation soars and the short supply of new cars markedly increases consumer and dealer demand for used. The momentum has stalled a bit, however, as Black Book recently reported that in March and April used values saw their first monthly declines after an extended period of appreciation.
What’s going to be required to return used car values to something closer to historical norms nd trend lines is getting semiconductor production up to the levels to meet consumer demand, stated Black.
“We're looking at probably 24 months before you see some stabilization in the shortages,” said Black. “This issue is not going to go way overnight. And even though that chip output now is almost back to where it was pre-COVID, the country has introduced new levels of demand that exacerbated this problem.”
Part of the increased demand for chips is the result of a stronger push for EVs. Black said the average gas-powered vehicle requires 8,000-10,000 semiconductors, while EVs require twice that number.
Not a Quick Process
Black said it takes nine weeks to make a semiconductor.
“These things are at the cutting edge of what is technically possible,” said Black. “I know the government just passed the $54 billion bill to improve semiconductor manufacturing in the U.S., but this is not like building a widget factory. These plants take time to build. Again, I don't think we’re going to see any noticeable difference for at least 24 months, maybe longer.”
The chip shortage may inadvertently boost acceptance of EVs, because their production rate will likely increase as the number of gas-powered cars rolling off the assembly line declines, Black pointed out.
“If you're a car manufacturer, where do you allocate your chips?” Black said, adding the answer for carmakers is obvious--toward production of their most profitable and expensive models, which include EVs. “You’ve got increasing demand for EVs and there is all this political pressures to produce EVs…You may actually come to the point where people can't buy regular cars—not enough choices—they'll have to buy an EVs. I am not saying there's any kind of conspiracy here, but if you're in the marketing business and you want to force people into more expensive vehicles…”
Learning to Love a Car Longer
Black agrees that the United States has now entered into a “very different time for car sales and car buying.”
“That old convenience approach to buying a car, almost getting to the point where the car is a disposable as your phone, where you get a new car and a year or two later decide you want a different one. Well, I think consumers are going to have to live with your purchase and learn to love your car longer,” Black said.