Price shock: Why car prices are driving higher

Price shock: Why car prices are driving higher

The cost of groceries continues to rise, with a recent estimate from the central statistics office indicating that consumer prices were 8.2% during the year to the end of May.

This leads to higher costs at the checkouts, which gives many households less money at the end of the week – and forces others to cut back on the essentials.

But not all price increases are the same, and a myriad of factors affect different products in different ways.

To help you understand what is happening, we have taken a closer look at a selection of everyday objects. Everyone has seen significant price increases, but everyone has a different story to tell about the causes.

In this paragraph we will look at car prices.

Is a car really an “everyday item”?

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Not really. We extend the definition of “food” to its absolute limit here.

But it is a good representation of the type of large ticket purchase that a household can imagine; something that can show up once in a few years.

And it has an impact on the household budget. Most people who buy a car, probably a new car, rely on some form of financing arrangement or loan to make it happen. It may even be the largest loan they have outside of their mortgage.

The more they have to pay for the car, the more their weekly or monthly repayments are – and that has a very big impact on what they have left to spend on everything else.

So how much do car prices rise?

According to the CSO’s latest consumer price index, which takes us to April – the price of cars rose specifically by 12.7% during the year. This is in addition to an increase of almost 4% in the 12 months before, which was at a time when prices generally did not move much.

So a huge, huge price increase – and keep in mind that, in general, when we talk about an “X” percent increase, it’s on a product with a relatively low starting price. So the actual, actual cost increase is cents or euros. Of course, it can go together, but it is not a dramatic change in itself.

But when you talk about a car that can cost at least € 10,000, up to tens of thousands of euros – and you add 13% or more to the price – you are talking about an extra cost that is in the thousands of euros.

So that kind of increase in one or two years is remarkable.

So what’s the reason?

Simply put, there is a shortage of supply.

Even if you have not been looking to buy a new car recently, there is a good chance that you have heard some of the radio ads from some manufacturers apologizing for the lack of car model options and the time it takes to deliver on an order.

And that is reflected in sales data as well.

Figures from the Society of the Irish Motor Industry show that car registrations here during the first five months of the year have decreased by more than 21% compared to the same period during the pre-pandemic period 2019.

And it’s similar across Europe – recent data led to 20% lower registrations in April, they say, simply because companies did not have the cars to sell.

Is this a consequence of the pandemic?

Yes – but maybe not in the way you might think.

The pandemic affected car factories and transportation like everything else. But the real problem has been in a specific area – and that’s the world’s semiconductor, or computer chip, supply.

People probably think of processor chips as something you find in your PC – or in your smartphone – which of course is the case. But modern cars have so much going on inside them when it comes to sensors and electronics that they are also full of computer chips.

Apparently, an average car now has somewhere near 1,400 semiconductors, each taking care of various functions – such as your heating and cooling system, your tire pressure gauge, your infotainment system, your electric windows, your back sensors and so on.

Basically, if it is electronically controlled, it has at least one semiconductor that handles it.

When the pandemic struck, there was an assumption that the demand for semiconductors would decrease – and the factories that manufactured them decreased.

But that assumption was completely wrong.

Was it not quite the opposite?

Yes – as people will no doubt remember, the first weeks of the pandemic saw everyone suddenly have to work from home, even though they may not have been prepared to do so. This meant that it became a battle for computers and laptops, tablets and smartphones.

It also put enormous pressure on the world’s data center, because suddenly all the business that was done in person suddenly has to take place over the internet.

And it also increased the demand for TVs and game consoles when people filled things up to keep them entertained. And all of these things also need lots of semiconductors.

It captured many semiconductor manufacturers – not only did they have to quickly scale up production, they also had to quickly reorient what they were doing to focus on these consumer electronics and servers.

And to do that, they put the semiconductors they make for cars on the back. They did so in part because they understandably believed that car sales would decline due to global shutdowns. But also because car chips are less profitable than chips for PCs and smartphones.

That was two years ago – why is it still causing problems?

There are a couple of factors here – firstly, the demand for consumer electronics has only begun to decline in recent months when economies, including our own, are beginning to return to what can be called “normal” working methods. But even with that, there are many more people working remotely or hybrid today than was the case three years ago.

But the sudden change in demand in the early stages of the pandemic was also exacerbated by some other problems. As we have seen, adverse weather has affected food production in some places, but it is also affecting the other types of chips.

Taiwan, for example, is a major exporter of processors, but by 2020 there were fewer typhoons than normal.

It sounds like it would be good, but it actually meant less precipitation. Water is a vital resource for these plants – they can use hundreds of millions of liters of water a day – so it hits production.

At the same time, a cold snap occurred in another large production area, Texas.

Both of these things affected the amount of chips that the plants could produce and made what they produced more expensive.

And, as we know, when these supply chains are disrupted, it is not easy to get them back on track.

Another factor is Bitcoin.

The price of bitcoin soared during the first two years of the pandemic, which attracted many people.

Anyone can make new bitcoin – but you have to spend a lot of computing power to do so. So we’ve had this phenomenon that people and companies, especially in places like China where electricity has been cheaper, are buying up processors to build temporary server farms to “break” bitcoin.

So it was just another thing that increased demand and made land harder to get hold of.

And by the way, it’s not just cars – if you’re one of the many who’ve been trying to get their hands on a Sony Playstation 5 console over the last two years, these are the same reasons why it’s still lacking.

So if demand has been so high for so long, why not just make more chips?

Well, the big producers are trying to do that.

People may be aware that Intel, for example, has expanded into Kildare – it’s more than halfway through the construction of a new FAB, or manufacturing facility.

As early as March, they also announced plans for two new factories in Germany – which is in fact part of a broader EU effort to increase the number of chips produced within the block.

But these facilities take time and a lot of money to build – they are huge facilities filled with extremely expensive, precise equipment. And they must be specially designed to ensure that the chips are manufactured under extremely clean conditions, as a dust specification can cause short circuits and render them useless.

So you can not just find an empty factory unit, put it together and start making chips.

The German Intel factories announced as early as March are not expected to become operational until 2027, for example.

So what do car manufacturers do in the meantime?

It’s not that there are any chips available at all – there are only fewer of them, and they cost much more than before.

This means that fewer cars come from the production lines, and each one costs more to manufacture.

So what the manufacturers have done to try to deal with this is to in some cases simply stop the production lines, maybe several days at a time, because they simply do not have the cars to justify things ticking over on the same scale as they would otherwise.

Some have also chosen to focus more on their more basic cars – because they have fewer electronic parts, and thus fewer semiconductors inside.

Are there any signs that this will ease soon?

The short answer is “no”.

I mentioned the time and money it takes to increase chip production – even when many new plants are built and existing plants are expanded, the general expectation is that it will take at least another year – maybe even two – until the supply is able to catch up again.

And even if that problem is overcome, the war in Ukraine has added another complication because many car parts would have been manufactured there.

So if this is about a lack of chips and parts – how does it affect used cars?

This has pushed prices far upwards – some figures indicate more than the price increases we have seen on new cars.

And everything goes back to the simple principles of supply and demand.

Most people who would buy a brand new car already have an older car that they would sell or exchange – but if they can not buy a new one, they keep their old car longer.

In addition, changes introduced in recent budgets, along with Brexit, have made importing cars from the UK more expensive – which has shut down what has been a popular supply line for motorists here.

So the supply of used cars to the market is falling.

At the same time, people who, for some reason, really need to change vehicles but cannot get what they want turn to the second-hand market.

So supply decreases, demand rises – and prices rise with it.

It is difficult to get information about the sale of used cars for obvious reasons – perhaps the best we have is from DoneDeal, which would be a platform where people buy and sell used cars. It’s obviously not the only sales platform, so it’s not a complete test.

But it says that during the year to March, the prices of used cars were 30% higher – and when you compare it with pre-pandemic levels, back in January 2020 – the prices are more than 50% higher.

There is an old rule of thumb that a new car will lose about 10% of its value the minute you drive it away from the dealer – and generally will lose about 60% of its value after three years …

But those rules do not seem to apply at the moment – and in some cases, people may find that the value of their car is actually higher now than they paid for it a year or two ago.

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