Right now, if you want to buy a car in the US, the best option seems to be a used one. This, however, was not the case before February 2020. The reason for that is the reduced production of new cars. According to a recent Washington Post Article, 1 million fewer cars were manufactured in 2021 compared to the last year.
It is, obviously, in the best interest of the car manufacturers to keep up with the demand for new cars, but they are failing to do so. The pandemic and the infamous global chip shortage indeed had an enormous effect on the production of new cars, but the numbers started going down in 2019. In 2020, all the factors combined to culminate in what’s being called ‘the greatest fall in worldwide automobile production.’
That is why the used car market is booming, now more than ever, and it is not uncommon to see used cars bringing more money than their sticker price.
Let’s have a closer look at the reasons that have made second-hand cars an industry more popular than ever.
2019 – The Auto Industry Sees First Decline in a Decade
Everyone remembers the global economic crisis of 2008-9. It was a bad time for the auto industry. Production of new cars declines from 70 million to 62 million units. However, thanks to the massive bailouts, the production kept increasing over the next decade, seeing an all-time high of 98 million units in 2019.
In 2019, there was a 5% decrease in the production of new cars, leading to longer waiting times on the delivery of new cars. This increased the demand for used ones because the demand for personal and light-duty automobiles was still high due to the increased suburban lifestyle.
The result was seen as an increase in the size of the used cars marketplace. However, the effects were not as pronounced as they would be in the coming years.
2020 – The Pandemic Hits
When the pandemic hit in early 2020, the auto industry was already in recession, and the lockdowns acted as a catalyst. During the pandemic time, not a single vehicle left the production facilities in China. The case of Japan and Germany was no different. These three are the top producers of cars in the world.
According to OICA data, 78 million cars were produced globally, down 16% from the last year. It must be noted that the demand for new cars did also decline at this time. That was due to the restrictions on travel and the reduced buying power of people caused by diminished economic activity.
However, that decline was not as much as the massive shortage in the production of new vehicles. As a result, people turned towards used cars as a solution. This can be seen from the size of the used car market in the US. It was stagnant at $140 billion from 2018 to 2020 and grew to over $150 billion in 2021, and is expected to cross $160 billion in 2022.
These stats show that the used car market did not grow in 2020. You can get a clearer picture by looking at the new car market which was down 16% in the same year. That means while all other industries were in decline, the increased demand for second-hand cars kept the market afloat.
2021-2022 Global Chip Shortage
This was another impact of the COVID-19 pandemic. The demand for semiconductor chips, which power all digital electronics, including cars’ computers, went up by 6.5% in 2020 and a whopping 26% in 2021. This was because of the increased demand for computers for work and study from home mandated by the lockdown.
The effect was compounded by:
- The worst drought in the last 50 years in Taiwan, leading to scarcity of water in TSMC and other major chip manufacturing factories.
- Fires in chip factories in China.
- Unscheduled power outages.
- Transportation blockage in the Suez Canal.
All of this had a massive impact on the automotive industry, including:
- Ford and General Motors announcing the prolonged shutdown of their plants in North America
- Jaguar Land Rover halving its sales expectations for 2021.
- The opportunity cost to the automotive industry from lost production amounted to $47 billion.
This sure was a bad time for the automotive industry worldwide, but for the used car market, it was a time of growth, as seen from the massive growth in the size of the used car market in the US.
New Cars are Getting More Expensive
As cars keep getting more and more advanced features, they keep getting more expensive too. The average price of a new car is $45,000, while a used one only costs $27,000 on average. That is also one of the key factors in making people opt for a second-hand car to save money.
Another important factor is the rise of used car marketplaces where you can buy cars with a warranty and after-sales support. That gives the buyer the peace of mind that was previously only possible with a new car.
The used car market has seen a lot of growth over the last couple of years, and that trend is only expected to continue over the years to come. Looking at the reasons that led to this growth, the most important factor is the massive 16% decrease in the production of new cars in 2020. This was caused partially by the pandemic and the global chip shortage. New cars have also become expensive over the years, and that has also played a role in the popularity of used ones. Lastly, the availability of platforms that offer warranty and after-sales support on used cars has also played a role in people opting for second-hand automobiles.