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The semiconductor chip shortage in USA has led to a decline in the new vehicle inventory, leading to increased demand of used vehicles in the market: Ken Research

08-Aug-2022   Mr. Randy Derr, Designation: Assistant General Manager , Manheim Pa   Author: Vassuman Agarwal, Nishika Chowcharia

In conversation with Mr. Randy Derr, Assistant general manager at Manheim PA, we tried to understand the rise of the Used Car industry in the United States. We also discussed the effect of pandemic and the future going forward.

Q1. What is the current stage of the used-car industry in USA?

The lack of new cars has driven up the cost and the demand for used cars. Hence currently, there is more demand than there is supply, thereby brining more money than they ever have. In relative terms, usually those cars depreciate over time and what we've seen is a majority of them are actually more valuable now than they were a year or 18 months ago.

Q2. What are some of the major growth drivers and challenges in this industry?

I think technology has caused a boom in the market, where companies like Carvana and Vroom offer so much online. With the onset of pandemic,it has sort of fast-forwarded us years into the future that we really didn't expect. However, I think the chip shortage has been a major issue in the market, thereby resulting in low manufacturing units

Q3. Do you think the franchise dealers are going to amalgamate and adopt the kind of business models that Vroom and Caravana are using today?

I mean, they are still going to be doing brick and mortar stores that people can go in and look at the cars. But I don't believe that they're going to be able to buy the car and leave the same day.  I think it's going to be order your car and the factory will produce/procure it and you'll get it in three months’ time. But as far as these e-commerce companies are concerned, only time will tell whether Carvana and Vroom are successful. I don't know if they are or not successful at this point, I think it's too early to tell.

Q4. How do you think that Covid-19 pandemic had any role to play in the drastic change in this industry?

Well, as I said before, the pandemic has pushed us five ten years in the future. You know, even now we're the largest auto auction in the world and before the pandemic, we were selling about 40-45% online, as opposed to 55-60% buying from dealers in the lanes. Now, we probably sell 90% online to 10% in the lanes, so I think people got used to and got comfortable with and have confidence in the online process.

On the contrary, there are some challenges in regards to purchasing from an online channel that does not match with customer’s expectations. We try to describe the car in the best way we can, but sometime what he expects and what he gets are two different things and we have to navigate that post the sale.

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Q5. So how do you think that the pandemic acted as a catalyst in changing the mind-set of the consumers?

I think the younger generation especially that live in cities, don't care much about cars. I think there's obviously always going to be a need but since new and used cars both are quite expensive, not everybody can afford it. Moreover, today we have the taxi services, Lyft and Ubers that these young people seem to really gravitate to. It is a great invention but I think other than the big cities, there's always going to be a need for vehicles.

Q6. With increase in vehicle and gas prices along with financing rates, how do you think it is going to impact people wanting to purchase new and used cars in the near future?

Well, that's a good question. I think people will buy what they can afford to buy but you know with increasing gas prices and interest rate, I don't think it will have much of an impact on the volume of cars sold. It may affect a small percentage of people, but most people live month to month to pay their bills. So if that interest rate equates to an extra $50 a month, I don't think that's going to deter people one bit.

Q7. Now that we are seeing other alternatives like renewable energy sources that are coming into the market, how do you think this flow of electric vehicles is going to impact the used automobile industry?

I don't think that the world is quite ready for electric cars just yet and only a small percentage of the US population are driving EV’s, because of the battery capacity and lack of charging stations all over the US compared to gas stations.

Q8. Have EV’s started to penetrate the used-car industry at this point. If yes, what percentage of it do you think would currently be electric vehicles?

Currently, I'd say less than 5-10 % of total used car vehicles are EV’s. I mean obviously Tesla and most of the manufacturers are selling EV’s, but by far people are still used to gas vehicles and they're not quite ready to make that switch yet. I think it will move forward once the charging infrastructure is set in place along with advancements in batteries that lasts longer than 200-300 miles.

Q9. How organized is the used-car industry in USA?

The used car vehicles mostly comes from trade-in. When people go to buy new cars, they buy a new car and trade their old cars, thereby increasing the stock of used cars. More and more dealers now are holding on to those cars as opposed to auctioning them. They are also trying to keep cars in the perfect condition since there is a shortage of new cars. More stores are keeping those trades than they had 10-20 years ago, because cars are hard to get.

Q10. I was just reading somewhere recently that the U.S government has come up with this new bill which allows the manufacturing of semiconductors. So how do you think is this going to impact the used-car industry in particular?

Oh, that's a good question. Obviously, the U.S.A had their attention on chips. They recognized the chip shortage and that's a part of a result of skyrocketing prices of used cars. So what that all is going to look like?  I wish I had an answer but I really don't know how that's going to affect things going forward. It's probably going to put more new cars in the marketplace which is needed. I think that's the goal of that program, and maybe eventually those would enter the used car lots in a few years.

Q11. What are the major sources of used car fleet for your company?

Majority of our cars are sourced from rental car agencies. They usually rent out their fleets for a specified distance and run them back through the auctions to dispose them off. We also source our cars through dealers, if they want to turn their inventory into cash. For example, they sometimes have cars that are only 90 days old which they are unable sell. We also have wholesalers who buy all those trades from particular dealers like the ones I was talking about earlier, where they may buy 10-20 trades off of the franchise dealer as a package. So they get both, the good ones and the bad ones which they'll then try to fix them up and then bring them in here to try to sell them for obviously more than they paid for them.

Q12. It's no surprise that the used car prices has shot up in the past few years. The average price that was observed in 2021 for used car was somewhere around $26,000, and it is expected that the average price will go up to ~ $34,000 in 2022. Do you think that this trend will continue or the prices are going to normalize? If so, then by when are we expecting this stability?

During our conversation, you had mentioned the government getting involved with the chip. I think if that is a success, and produces more new cars then that will stabilize the used car market. So I think the used car market is going to stabilize within the next two years, but I don't see the prices changing very much, at least the rest of this year and perhaps 2023 as well. As long as there's a strong demand and short supply, nothing's going to change.


Q13. How do you feel is this industry going to change in the near future?

In the next five years, I don't foresee franchise stores stocking their lots like they used to. I think they're going to eventually have 10 - 20% of what they usually had on their lot and customers are going to have to order their cars from the factory and wait months before they're delivered as opposed to just going in the same day and buying.

For any queries or feedback, reach out to the author at Namit@kenresearch.com

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