Prices are high, but there are still deals to be had
The used car market is on fire right now, thanks in large part to the global chip shortage. Scott and Nora get the scoop on the semiconductor business from Jeanne Whalen, global business reporter for The Washington Post. Then, Kayla Reynolds, a manager of economic and industry intelligence at Cox Automotive, sheds some light on the current car shopping experience.
Nora Ali: The used car market is on fire right now, thanks in large part to the global chip shortage. Consumer Reports found that Toyota, one of the largest car manufacturers in the world, said that they were going to build 60,000 to 80,000 fewer vehicles in October, while some analysts in the report predicted a production shortfall of almost eight million vehicles by the end of the year. Because there are fewer new cars on the market, consumer prices for used cars have risen by more than 24% in the United State over the past year, while new car prices are up nearly nine percent, according to the Labor Department. Today, we are talking about the used car market, how bad it actually is for dealers and consumers, and when it might return to normal. We're going to get some insight on the global chip shortage from Jeanne Whalen, the Washington Post's, global business reporter, and then we'll dive into the chaos of the current used car market with Kayla Reynolds, a Manager of Economic and Industry Intelligence at Cox Automotive. From Morning Brew, this is Business Casual, the podcast that gives you a front row seat to candid conversations with some of the biggest names in business, asking them the questions you wish you could ask. I'm your host, Nora Ali.
Scott Rogowsky: And I'm your other host Scott Rogowsky. Nora and I are here for your ears, bringing you stories of how business shapes our lives today and into the future. Now let's get down to business.
Nora Ali: Scott, I hear that you've had some recent car experiences, renting, buying. So what's that been like for you?
Scott Rogowsky: Yeah, I'm a car guy now that I live in LA. So after not owning a car since college...oh boy, that was a mistake. I bought this Saab hatchback 1987, used Saab that fell apart six months after I bought it for $2,000.
Nora Ali: Oh, no.
Scott Rogowsky: Yeah. That's what happens. You pay for what you get, right? But recently I bought a car in LA and it was back in April. So I guess I just got ahead of it where we're learning about this chip shortage, which really spiked in the summertime leading to these issues we saw in the fall and into now. So I was lucky. I also also didn't order my car new, which would've taken a few months, instead I got one of these inventory cars. So it was slightly used, had some miles on, I guess it'd been used like a test drive vehicle. And that was a little trick I heard from a friend of mine and I'm on my payment plan now. And for the next six years, I'll be paying this baby off. But I also rented a car, Nora, because I'm back in New York now had a drive out to Jersey and it was cheap. It was fifty bucks for the day from Budget. So I guess I didn't experience the-
Nora Ali: You got lucky.
Scott Rogowsky: I got lucky or maybe just, New York City right now, the market's different. I assume this is a regional thing. Because we hear like in Orlando, where people are driving to Disney World, those rentals could be $500 a day, which is nutty. Are you a car person? I mean you're in New York, so you don't really need one.
Nora Ali: I don't. But when I go back home to Minnesota, I do drive mom's car. And my first car that I ever had in high school was a Nissan Pathfinder, which I loved so much, but I have never-
Scott Rogowsky: That's a big car.
Nora Ali: It's a big car, I only-
Scott Rogowsky: For a small woman.
Nora Ali: It made me feel powerful on the road. No one can mess with me in my Pathfinder.
Scott Rogowsky: Yeah.
Nora Ali: But yeah, I've never had to buy my own car. I think I've rented a car maybe a couple of times. And it's almost more difficult in some ways than buying plane tickets. I feel like rental prices fluctuate even more than airline tickets for some reason, but yeah.
Scott Rogowsky: All these dynamic pricing, all these algorithms, you're right. Everything, you can change it by the minute these things change.
Nora Ali: Totally. Totally.
Scott Rogowsky: Nora, before we get into our conversation with our two auto experts, I just have to ask you this very important question.
Nora Ali: Okay.
Scott Rogowsky: You went with a Nissan Pathfinder instead of a Ford Explorer. You could have been Nora the Explorer.
Nora Ali: Oh my gosh. Oh, that's good, Scott. I've never been called that before. Just kidding. I get called that all the time, bro. All the time. Very creative though. That's awesome. I'll think about that for my future.
Scott Rogowsky: Could be good for your personal brand is all I'm saying.
Nora Ali: Exactly. All right. Okay. Let's get to it. Starting with our conversation with Jeanne Whalen, global business reporter for the Washington Post. You can't talk about the car market without talking about the chip shortage because that's obviously one of the biggest components that is impacting supply and demands dynamics. And, Jeanne, you've been covering this. So how did the pandemic affect chip production and subsequently the auto industry overall?
Jeanne Whalen: The pandemic helped create this global shortage of semiconductors, which are also known as computer chips or just chips. And these are the tiny components, about the size of a dime or sometimes much smaller, that are the brains behind all modern electronics. And there are dozens, sometimes hundreds of them in your average automobile running airbags, dashboards, everything. So when the pandemic hit, a number of things happened. Consumers worldwide stopped buying cars because they thought, "Oh no, I'm going to lose my job. I can't go anywhere." There was just a huge collapse in consumer purchases of all kinds, including cars. The car manufacturers panicked and said to their car parts suppliers, "Stop sending us parts. We can't make cars right now. We're furloughing our employees, we're halting our production lines. We don't want them to catch COVID." The car parts manufacturers are the ones who typically bought the semiconductors to put into the car parts. So to put into the airbags, or the dashboard displays, or the breaking systems. And so those car parts manufacturers went to the semiconductor manufacturers and said, "We can't buy semiconductors right now. We're not making car parts. Just cancel our orders." The semiconductor manufacturers said, "Fine. We have huge demand cranking up now from the electronics industry, from cell phone makers, from computer makers, from video game console makers." Because all these consumers stuck at home, working from home, after initial kind of shock when no one was buying anything, they started gobbling up all kinds of computers, and phones, and Xboxes and everything else. A pattern of purchasing that has continued through to the present day. Consumer purchases of products, particularly in the U.S., Have just gone through the roof since the pandemic started. And so the semiconductor manufacturers just shifted the portion that had been going to the car industry, into making chips for your cell phones, and Xboxes and everything else. Those happen to be chips that are much more profitable for them to make anyway, because they're more expensive chips, they're more high-tech typically. And so the chip manufacturers were, I think, happy to shift their production. And when car demand returned, when consumers later in 2020, wanted to start buying cars again, the carmakers went to their parts suppliers and said, "Okay. Hey, we need parts again." Parts suppliers went to the chip companies and said, "Hey, we need chips again." And the chip manufacturer said, "Sorry, we don't have any production space left for you. We're busy dealing with others now." And so that is the root of the problem for the car companies. And the car companies really have not been able to recapture the attention of the chip companies ever since.
Scott Rogowsky: Well can't Ruffles and Lays just make more chips? I mean, there have to be enough potatoes out there for everybody. I don't-
Jeanne Whalen: Not enough. If only potatoes could run a Tesla. Actually Tesla has been one of the companies, they've also suffered a bit, but they've been more successful in getting chips for their cars.
Scott Rogowsky: So in terms of different types of vehicles and their chip demands, where does the EV fleet stand as separated from the traditional gas powered vehicles?
Jeanne Whalen: Electric vehicles require more chips and they require more sophisticated kinds of chips. I did a story the other day and I interviewed Gina Raimondo, the U.S. Commerce Secretary. And she was saying that your average electric vehicle requires 2,000 chips, whereas existing gasoline-powered cars today typically require hundreds of chips. So just a huge amount more chips are acquired per electric vehicle. So that's going to create even more demand for chips and more strain on chip manufacturers. And Secretary Raimondo was saying the other day, if we don't significantly increase our production of chips, we're not going to be able to meet the electric vehicle adoption targets that the Biden administration has set. So she was pushing for Congress to pass federal subsidies for domestic chip manufacturing, which is something she and others are hoping will lead to more chip factories being built in the U.S.
Nora Ali: And to the extent that automakers can take more control over the chip manufacturing space on that front, you recently reported that Ford Motor had signed a deal with chipmaker GlobalFoundries. What is significant about this deal? And what does this now allow Ford to do?
Yeah, it's a very unusual deal. It's the first of its kind, at least that I can see where an auto company, which as I was saying earlier, used to buy chips, several steps removed from the chip maker. The auto companies never used to really talk to the chip manufacturers before. They would just buy their parts from the auto parts makers and the parts makers would deal with the chip companies.Now the auto companies are saying, "Holy cow, these chips are absolutely central to what we make. So we need to have direct relationships with chip manufacturers and make sure that they know that we are going to be a faithful buyer." It looks as though, and Ford and GlobalFoundries wouldn't really confirm this exactly, but it looks as though Ford, ultimately through this partnership will end up helping finance, helping pay for an expansion of chip manufacturing capacity at a GlobalFoundries facility. And in turn will get GlobalFoundries to promise to send Ford that extra supply. So those chips will go to Ford. The details of that partnership, they have not yet disclosed. They are still to be worked out, but it seemed to me that that is what they're heading toward, which is the first of its kind. And I think we will probably see more car companies striking agreements with GlobalFoundries, or Intel, or perhaps TSMC, the giant Taiwanese chip manufacturing company, in order to secure really reliable supply in the future.
Nora Ali: To take it one step further in the way that Apple, for example, stopped using Intel chips last year for their Macs, but started to develop them in house: Do you foresee automakers starting to further vertically integrate so they rely less on other companies, on other chip manufacturers, to get the necessary parts across the supply chain?
Jeanne Whalen: I don't think that Ford or GM will ever make their own chips. They're not going to have Ford semiconductor factories. It's extremely costly, it's extremely hard. I went to a semiconductor factory a couple months ago and it's incredible the level of skill required and the amount of time. It can take three or four months to make a single chip and the way that they are made is that these kind of record-sized silicon wafers, they look like shiny mirrors, go through an elaborate manufacturing process where they are etched in dozens of layers over time and transistors are built on those silicon wafers. And that whole process to etch and build the layers on this wafer takes three or four months. And then the wafer is sent to a different facility, where it is cut into individual tiny chips. That whole process takes a ton of expertise. It takes some of the most expensive manufacturing equipment in existence. And if there's even a single particle of dust, anywhere in the factory that falls on one of those wafers, it ruins the whole wafer and you need to start over.
Nora Ali: Oh my gosh.
Jeanne Whalen: So the whole facility needs be completely particle free. When you walk in, you have to have a hair net, and two sets of gloves, and this whole jumpsuit like hazmat suit, face mask. It's incredibly-
Nora Ali: So me shopping at Trader Joe's circa March 20th, 2020.
Jeanne Whalen: Exactly. Yeah, it sounds a bit like that. The workers were saying, "COVID for us was no big deal because we were already all wearing face mask in our job." So Ford and GM are never going to do that, but they will, as I said, probably help finance their own production space at these factories in order to ensure that they have their own supply. And Ford also said, "We're trying to develop more in-house expertise in designing semiconductors." So they never did in the past design their own semiconductors. Design means drawing the pattern of the transistors on the chips and how the transistors will fit together to create the function of the chip. That too is a hugely sophisticated process that Ford and other car companies have not traditionally done in-house. Tesla is doing it more and more in-house. And now Ford wants to develop that expertise as well because they see that chips are so critical to the future of high tech cars.
Scott Rogowsky: Good time to start a chip manufacturing business.
Jeanne Whalen: Yeah. If you've got a spare $15 billion lying around. Sure.
Scott Rogowsky: Let's pull together. It's not the first idea we've crowdsourced here on the show. We're always looking for new investments. So, listeners, donate whatever you can to our semiconductor startup.
Nora Ali: Jeanne it was great to have you with us. Jeanne Whalen is the global business reporter at the Washington Post. Thanks again Jeanne for the time.
Jeanne Whalen: Thank you very much.
Nora Ali: We're going to take a quick break and when we come back, we'll hear from Kayla Reynolds, a manager of economic and industry intelligence at Cox Automotive, who'll give us some insight on the chaotic used car market.
Scott Rogowsky: Kayla Reynolds, welcome to the show.
Kayla Reynolds: Thank you guys for having me.
Scott Rogowsky: You have a very interesting job, Kayla.
Kayla Reynolds: I do. I do.
Scott Rogowsky: Do you want to tell the folks listening out there, what exactly it is that you do?
Kayla Reynolds: I am a manager of economic and industry insights at Cox Automotive. And on the consumer end, the two companies that we have under our umbrella, that many people are very familiar with is Kelley Blue Book and Autotrader. We also have a plethora of dealer software and systems that a lot of dealerships use when you're going to purchase a vehicle or even when you're going in to get your vehicle serviced. So Cox Automotive supplies that nationwide for a lot of the dealers on the franchise and independent new and used side.
Nora Ali: You've got all the scoop, all the data for the auto industry, special focus on dealers, which is very relevant for what we're talking about today, which is the used car market. So to start with some context, how does the used car market compared to the new car market in terms of size, demand, especially right now?
Kayla Reynolds: When we look at historical numbers, especially for the used volume, sales volume on an annual basis versus new, it's not out of the ordinary to see used sales for a year go above 20 million. Whereas on the new side, sales have never been above 17 million for a given year. The used market is a majority of the vehicle market that we see every day. I know that what we see on TV as a consumer is a lot of the new sales that are going on. And all of the manufacturers that are pushing out the newest vehicles that we're seeing, but a lot of those vehicles that we're seeing in operation and on the road today are used vehicles.
Scott Rogowsky: Can you educate us on the car sales supply chain or the life cycle from a car rolling off a factory line and being sold new or sold to a dealer? We're trying to understand how these car auction houses work and how that all happens. So you must know this better than most.
Kayla Reynolds: Well, interestingly enough, since we've been having a lot of the microchip shortages and inventory shortages recently, especially on the new side, the supply chain has definitely looked different than we've seen in historical years. So a lot of these vehicles that the manufacturers are rolling off of the lines, they're going straight to a retailer or a dealer, and they're already being sold. Once those vehicles get into circulation after a consumer purchases it, on the new side, typically the time frame now from a lot of our data sources for how long a vehicle lifespan is or how long ownership of a vehicle is, is around a 12-year mark. But if we think of also those other consumers that are going towards the leasing side, that's one of the largest sets of vehicles that go into the used auction space, the three-year-old vehicles, because that's the typical length of a loan. What we see is when those consumers are going to lease those vehicles and they return them, obviously the value of that vehicle goes down substantially, especially in the first three years. And then they're putting them back into the used auction ecosystem. Those dealers are able to purchase those vehicles from something like the Manheim Auction Place. And then in turn, they put those on their lot. When we go into the used environment that welcomes not only franchise dealers, but also independent dealers as well. So those are only the dealers that are selling the new vehicles, but they're also the mom and pop shops that you're seeing when you're driving within your neighborhood, not the franchise, the Ford, the Chevrolets, those larger, more expensive dealerships.
Scott Rogowsky: So this Manheim Auction House that Cox Automotive runs, where are you getting your supply of these used vehicles? Are people coming to you with their car and just driving up to Manheim and saying, "Here's my used car."
Kayla Reynolds: Yeah. So that's one of the ways that the auction places get a lot of their inflow, but also directly from franchise dealers as well. But also there's a large piece of the used side that's private party. Where, you're seeing these consumers that are selling their vehicles directly to another consumer, but also a lot of these dealers are able to sell their vehicles directly to another dealer and cut out those auction cost. So in the used market, the auction place is not the only place where consumers or dealers are able to get vehicles that they're able to sell on their lots as well, or consumers are able to purchase as well.
Nora Ali: You mentioned a few reasons why used cars might just make more sense for consumers, value and otherwise, but we have seen the prices of you used cars go up in part because of these chip shortage issues that you brought up. So what have been the biggest impacts to the used car market because of these supplies chain constraints we have seen due to the pandemic in many ways?
Kayla Reynolds: Yeah. Historically when we look at the new versus used market, anything that happens in the new market typically trickles down into the used. Obviously with used vehicles, they're not being manufactured and built, so they're not needing microchips, but the shortage in the new side is pushing a lot of consumers into the used side. And then when you think about it, a lot of those consumers that were maybe at a lower price point on the new side, when they're pushed into the used side, have the ability to purchase the more expensive, better quality vehicles that's in turn creating a different mix of vehicles that are available on the used side. And when we look at pricing, it's definitely risen greater than we've seen ever in the previous years. We just hit above a threshold of average list price of over $27,000, which is a more than double digit increase year over year. And then even when we look at that versus 2019, it's also a substantial increase in list pricing. So what these consumers are seeing when they're going into these dealerships is definitely a different vibe than they've seen in previous years, more expensive vehicles, vehicles that have higher mileage, but also vehicle that maybe aren't of better quality that we've seen in 2019 or before then, but at a higher price point.
Scott Rogowsky: But fewer people are actually physically going into dealerships these days I imagine, thanks to the rise in recent years of e-commerce platforms for used cars like Carvana and Vroom, and I'm sure many others that are popping up all the time. How have those large, national, retail operations, these digital platforms like Carvana, how have they benefited from this surge in the used car market? And are they really reaping most of the rewards here?
Kayla Reynolds: It's funny that you asked that, because I got my vehicle delivered yesterday at my house from Carvana.
Scott Rogowsky: Tell us about your experience.
Kayla Reynolds: It was a pretty easy experience. I was very stressed out during the Thanksgiving week because I needed a car. So after trying other sources and reaching out to used and new dealers, I just resorted to going online. And I was like, "This is the easiest way." I was able to get my financing through my bank and find my car on Monday night. And I got my vehicle delivered at 2:30 yesterday and it was seamless and very easy. But I will say, especially on the digital retailing side for a lot of those digital retailing dealerships such as CarMax and Carvana, the one thing that they have been able to take or opportunize during this process has been that they already have this large volume of vehicles in their ecosystem. So CarMax, for example, what they've been able to do is, consumers that wanted to take advantage of the values of used vehicles increasing, they're kind of going to CarMax and they're having this easy, transition where they sell them their vehicle. They're not having to go to a franchise or a used dealership per se. And then in turn, CarMax is keeping this vehicle in their ecosystem. They're going to refurbish it theirself. They're going to recondition it themselves, which lessens the cost and also increases the profit on their end. And then they're possibly going to ship it to California. They're possibly going to ship it to somebody at a CarMax in New Jersey. So I think that they've been able to take advantage of the volumes of vehicles that they have within their own ecosystem, thus in turn, being able to make more profit off of these vehicles versus if they were having to go into these auction places and paying much more top dollar for vehicles that they wouldn't in turn get a higher profit margin.
Nora Ali: How are they able to do this? The Carvana's and CarMax's of the world, keep those higher inventories, higher volumes versus your IRL traditional dealerships? And are those local dealerships taking a page out of the book of the Carvanas of the world?
Kayla Reynolds: So I think when we look at the business models of like Carvanas, and CarMaxes, what they pride themselves on, especially CarMax, is being a national franchise. Where there's a CarMax in California, Florida, here in Georgia, and one in New Jersey. And they have a system, which between all of those franchises where they're able to communicate. So I think that they've been able to take advantage of their ability to interchange these vehicles across those state lines, whereas the business models for a lot of these franchise dealers and independent dealers, they're typically within state, they're not outside of their state lines or they're not national versus these Carvanas in these CarMax's.
Nora Ali: Mm-hmm (affirmative).
Scott Rogowsky: We're going to step on the breaks and take a quick break, but we'll be back with more from Kayla. What is the best option for someone right now who is maybe looking for a vehicle? Or is the idea to wait, bike, run to work? I don't know, use an alternative method.
Nora Ali: Uber.
Scott Rogowsky: Uber, or maybe buses, public transportation, those exist. Right?
Kayla Reynolds: So I mean, as a team, when we're looking at the opportunities that a lot of consumers have, especially on the affordability front, we will say that, there's good deals still out there for consumers. And I know that's what a lot of consumers have been worried about, but I think it depends on a lot of consumers, whatever situation they're in financially. There are a lot of consumers out here who still have the ability to take advantage of the fact that these manufacturers, since they don't have a lot of inventory, the vehicles that they are pushing out on the new side are like top of line, fully upgraded vehicles. And those prices are reflecting that. So the consumers that do have the ability to purchase these vehicles, they still are, but there are also a lot of consumers that on the used side, especially have had to search, like I did, long and far for a deal versus how it used to be in the past few years where you could just go to the dealership down the street and be like, "Okay, well this is a vehicle I want, it's a great deal and I can get it." When we look at leasing in particular, the people who are at the end of their lease for this year or early next year, they're in pretty good shape. We have a few people on my team now who are finishing up their lease this year and they're kind of in the best opportunity to buy the car out, especially because the value of that vehicle where the first three years, the value of a vehicle goes down the most. What we've seen in this past year has been unprecedented making used vehicle values skyrocket, meaning that if you leased a vehicle three years ago and you have to turn it in, your vehicle may be at a better value than what you were looking at last year. Thus in turn, you're in a great situation now.
Scott Rogowsky: There are examples where people are trading in their cars and getting more than they would've bought it new.
Kayla Reynolds: Exactly. Yeah. Yeah. There are definitely examples like that. And I know a few people who've taken advantage of that. Especially people who've had the opportunity to have more than one vehicle in their household and they're like, "Oh, well, maybe we can just make due with one vehicle as a family for the time being and take advantage of these used vehicle values and go in and trade these vehicles."
Nora Ali: I do want to know what role electric vehicles plays in all of this. Obviously one of the biggest movements in the auto space overall recently. And I know a recent report from Cox Automotive noted that vehicle price continues to be a major obstacle for many when it comes to EVs. So this, I would imagine, might point to people looking increasingly in the used car market, if they're price conscious and want to get into EVs for the first time. So what role from your perspective do EVs play right now in the used car market?
Kayla Reynolds: So on the used side, EVs make up less than five percent of the market. So when we look at how EVs play out in the used market, it's a very small share of it. And what comes with that is the inability for a lot of consumers to understand the longevity of these vehicles. So when they're purchasing them new, they have the confidence of, "I'm purchasing this new vehicle, this new electric vehicle, it has a warranty, it has the battery life that's needed. And I at least know that this vehicle is going to last me for some time." And so consumers with less education of, if I'm purchasing this used electric vehicle, what's the battery life that entails? What's left of this vehicle, or what kind of warranty do I have on this vehicle, or is the value of my vehicle in turn going to be what I'm paying for it? But what we've seen especially in the last few years is that, there's a lot of infrastructure, especially in the government sector where, they're trying to pass infrastructure bills and greaten the volume of electric vehicle chargers, and where a lot of consumers have charging anxiety, range anxiety. And so we're hoping that in the next few years, especially with a lot of new electric vehicle models being released from these manufacturers that will thus in turn possibly make the price point of the electric vehicles segment much more affordable. We're hoping that that in turn will push a lot more consumers into that market and then educate them to what the electric vehicle market can bring to them and make them more confident.
Nora Ali: All right, well hopefully improvements for the better for the buyers-
Kayla Reynolds: Hopefully.
Nora Ali: ...the sellers and all parties involved. Well, Kayla, it's been a pleasure talking to you. Kayla Reynolds is a manager of economic and industry insights at Cox Automotive. Thanks again, Kayla.
Kayla Reynolds: Thank you guys for having me.
Scott Rogowsky: And now, BC listeners, we want to hear from you. So send us an email at email@example.com or DM us on Twitter @bizcasualpod, that's B-I-Z casualpod, with your thoughts.
Nora Ali: You can also leave a voice memo on our website, businesscasual.fm, or give us a ring and leave us an old fashioned voicemail. Our number is 862-295-1135. As Business Casual grows we are excited to get to know our listeners, old and new, drop us a line, and don't forget to leave your name and where you're calling or writing from so we can hear from you in a future episode.
Scott Rogowsky: Business Casual is semiconducted by Katherine Milsop and Bella Hutchins, additional production, sound design and mixing by Daniel Markus. Alan Haburchak is director of audio at Morning Brew. Sarah Singer is our VP of multimedia and Jessica Coen is our chief content officer. Music in this episode from Daniel Markus, relation to Greg, and the Mysterious Breakmaster Cylinder. If you like what you heard, please follow Business Casual on Spotify, Apple Podcasts, or wherever you go for your candy. And we'd love it if you would give us a great rating and a review.
Nora Ali: Thanks for listening to Business Casual, I'm Nora Ali.
Scott Rogowsky: And I'm Scott Rogowsky.
Nora Ali: Keep it business.
Scott Rogowsky: And keep it casual.