Explained: Why New Car Sales Are Falling While Used Cars Are Booming In India

NEW DELHI: Sales of passenger vehicles fell 10.7% in January 2022 from a year earlier as shortages of semiconductors continued to create supply shortages, the Federation of Automobile Dealers Associations, a national body at the apex of the auto retail industry representing 26,500 dealers across India.
Major passenger vehicle makers Maruti Suzuki, Hyundai, Mahindra & Mahindra, Toyota Kirloskar Motor and Honda reported lower shipments of vehicles from factories to dealers in January amid shortages of semiconductors, which are essential components used for features such as navigation, infotainment and traction control. , among others.
Even in December 2021, a month when automakers typically offer multiple discounts to close year-end sales, numbers were down 6%, while in November sales were down 19% due to constraints. of supply as auto majors continue to battle a worldwide semiconductor shortage.
What is a semiconductor and why does its shortage affect car sales?
A semiconductor is a crucial component for powering several electronic devices such as smartphones, automobiles, robots, refrigerators, etc. As more people have started working from home, increased demand for electronics has flooded the supply chain. Pandemic-induced lockdowns have forced people to turn to their phones, TVs and game consoles while children have resorted to laptops and iPads for virtual schooling. Add to that the closure of factories and a trade war between the United States and China, which has further halted production.
Manufacturers have struggled to create enough chips to meet the growing demand, which is why there is a huge backlog even now. The automotive industry has been hardest hit as cars are run by software, with some having over 3,000 chips. A car’s music system, touch screens, power windows, and even remote key modules use semiconductors. High-end cars with advanced safety and entertainment features need more chips than base models.
When car factories restarted and sales picked up, microchip makers were unable to keep up with the growing demand. For OEMs, the shortage has led to production losses, while for customers, the lead time for some models has dropped from 2-3 months to 6-9 months.
“The global semiconductor shortage that began in the first quarter of 2021 has halted assembly lines around the world as the long lead time for tiny silicon chips has slowed production of everything from smartphones and devices. major automakers, including a US-based OEM, have already announced major production cuts, reducing expected 2021 revenues by billions of dollars,” says Ondrej Burkacky. , partner at McKinsey.
What triggered the crisis?
The global chip shortage problem started in 2020 after many countries imposed a complete lockdown, affecting the production and supply cycle. Supply, in particular, suffered a severe blow in 2021 after a storm halted production in the United States and a factory in Japan was engulfed in fire – affected factories in both countries together accounted for 50% of semiconductor chips used in cars worldwide. In addition, the emergence of the Delta variant and the resulting COVID-19 outbreaks in Southeast Asia have increased the shortage of semiconductor chips, says Vinodkumar Ramachandran, Partner, Global Head, Industrial Markets and automotive, KPMG India.
How did the shortage occur?
No incident or disruption caused the shortage. A combination of events has contributed to the situation the automotive industry is currently facing.
The struggles of Covid-19
In the first half of 2020, the automotive industry faced a substantial drop in demand. While new vehicle sales rose in the second half, the highly ambiguous sales outlook at the time meant that automakers did not significantly increase their semiconductor orders, even when other sectors were down. faced with an increased need.
“Actual demand for semiconductors in the automotive industry in 2020 was about 15 percentage points lower than a pre-pandemic estimate. During the same period, most other segments (except the industrial sector) expanded rapidly, resulting in an average increase of 5-9% in semiconductor sales above expected growth.For this reason, when demand from the automotive sector recovered faster than expected in the second half of the year 2020, the semiconductor industry had already shifted production to meet demand for other applications, Burkacky says.
No new ability
While the semiconductor industry has increased its production capacity by nearly 180% since 2000, its total capacity is nearly exhausted at the current high utilization rate.
Geopolitical tensions
Due to geopolitical tensions, some consumer electronics manufacturers have dramatically increased their chip inventory levels to weather a period of limited access to semiconductor manufacturing. McKinsey estimates that such storage has caused a 5-10% increase in demand for semiconductors in the wireless space, equivalent to a third of chip sales in the automotive market.
Limited stock
Since many gamers did not expect the shortage of chips in 2020 and 2021, they probably had a very limited supply to deal with the crisis.
“Poor inventory planning by OEMs, hoarding of chips by Chinese companies, and natural disasters affecting major chip factories have further exacerbated the problem. In addition, traffic congestion at ports has also affected chip shipments this exercise,” says a Crisil report.
What is the impact ?
The shortage of semiconductor chips is expected to cost the global auto industry $200 billion in revenue. These shortages have forced several original equipment manufacturers (OEMs) to slow production, with some even halting production; thus, further extending the waiting period for popular, feature-rich, high-end passenger vehicle models – with delays of up to 12 months for some models.
Sales fall, even for new entrants
“Indian demand for semiconductors currently stands at around $24 billion and is expected to reach $100 billion by 2025. Sales of passenger vehicles consisting of SUVs and premium sedans fell significantly in the second quarter compared to the same period last year. have reduced their productions as their current chip supplies have dried up,” says Ramachandran.
“Passenger car sales are plummeting due to shortage of chips. The entry-level car segment faces some challenges as gasoline prices remain high and the incomes of those in the middle and bottom of the income pyramid continue to experience revenue pressure Availability of CNG provides much-needed respite to entry-level passenger vehicle segment Chip shortage is slowly and gradually easing, but migration to electric vehicles across the world and recovering economies will keep the pressure on semiconductor availability well into 2022,” said Hemal Thakkar, Director, CRISIL Research.
“The sourcing of such crucial imported components is vital for the continued production of vehicles. It is therefore imperative to improve inventory planning by changing the sourcing policy from just-in-time to a longer order period. And even more so as increased competition will make more chip-driven features a crucial differentiator for PV,” Crisil noted.
The holiday season saw sales at their lowest in a decade
Auto sales in India recorded their lowest figures in 10 years during the recent festive season. Sales in all segments were down 18% from last year’s sales over the same period. Vehicle registrations in India were 14% lower year-on-year than in Europe, where they were 23% lower year-on-year.
Waiting period for best-selling cars up to 6-8 months
“Dropping production levels over the months have resulted in unusually long wait times for many top-selling models, with wait times for some models of up to 6-8 months. Despite high demand, low inventory levels at dealerships have limited retail sales to some extent; in January 2022, retail sales at 3.04 lakh units represented a growth of 2% on a sequential basis and a decline of 10% year on year annual basis,” said Rohan Gupta, Vice President and Sector Head, ICRA.
This has led to growth in the used car market
However, on the positive side, used car sellers in all markets, including India, are enjoying a boom in demand. Used car prices rose around 20% globally on a yearly basis through August 2021, Ramachandran said.
India’s used car market was valued at $27 billion in 2020, and is expected to reach $50 billion by 2026 as the number of people preferring individual mobility increases, according to an industry report on Mordor Intelligence. With sales and production of new vehicles hampered due to the pandemic, the immediate option for buyers is the used car market.
How long will the chip shortage last?
With demand pressures growing, but supply remaining unchanged, the global chip shortage conundrum could continue well into 2023, with some improvements to be seen from mid-2022. Some major chipmakers in the United States and Europe are expanding their manufacturing capacity while investments are also being made in Southeast Asia to curb the shortage of semiconductors. Some of the chip giants in Taiwan and South Korea are investing hundreds of millions of dollars in capacity expansion over the next few years.
How are the auto majors tackling this problem in India?
According to Ramachandran, automakers are taking various countermeasures to improve vehicle supply and reduce the waiting time for customers, such as:
1.Stop or reduce vehicle production
2.Removal of infotainment systems, reducing chip usage per vehicle and providing cars with fewer chip-dependent features, which can be retrofitted later
3. Divert chips to high demand segments, such as SUVs, from mid-demand segments such as sedans
4. Prioritize the production of high-end passenger cars, which is experiencing strong growth
5. Some OEMs are also increasing their vehicle prices on all models.

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