Key Takeaways
No relief in sight, with vehicle and petrol prices likely to remain elevated for the rest of 2022.
Vehicle shortages set to continue into 2023, due to international semiconductor scarcity worsened by the Russia-Ukraine conflict
Businesses in affected industries will need to adjust their operating habits to remain functional and profitable, while alternative modes of transportation are set to capitalise on consumers seeking more affordable mobility options.
The Russia-Ukraine conflict is set to exacerbate already difficult trading conditions, with demand for new vehicles going unmet due to the COVID-19 pandemic and the global semiconductor shortage. These challenges are forecast to flow through to the Motor Vehicle Wholesaling industry, reducing revenue and profit. Consumers are also likely to feel the pinch of supply constraints on multiple levels, with both car and petrol prices rising strongly in 2021-22.
Vehicle supply tightens
Prior to the pandemic, tighter lending restrictions, weak wage growth and the devastating 2019-20 summer bushfires reduced demand for motor vehicles. The outbreak of COVID-19 brought with it uncertain economic conditions and weakened consumer spending, further limiting vehicle sales. As a result, passenger vehicles sales fell by 12.1% per year over the two-year period through June 2020. Despite ongoing lockdowns in the 2021 financial year, stronger demand boosted vehicle sales by 8.1%. As a result, revenue for motor vehicle wholesalers has fluctuated substantially:
- 4% revenue decline in 2018-19
- 1% revenue decline in 2019-20
- 5% revenue growth in 2020-21
While demand has started recovering, the same can’t be said for supply, with the pandemic and the global semiconductor shortage causing major gaps. For example, Toyota, the largest motor vehicle wholesaler in Australia, reduced vehicle production multiple times in 2021. In the current year, the company slashed their global production targets for April 2022 by 150,000 units to 750,000, and adjusted the average vehicle production per month from April to June to 800,000, down from the original target of 900,000.
These conditions are projected to worsen with the ongoing Russia-Ukraine conflict. Ukraine dominates global production of neon, a gas which is crucial to the manufacturing of semiconductors. The ongoing conflict has disrupted neon production. To further compound matters, Ukraine depends on Russian steel manufacturing to produce neon. This means we can expect more vehicle shortages over the remainder of the financial year and into 2022-23.
In the market
Motor vehicle prices rose by 6.4% in the 2021 calendar year, and are projected to rise even faster in 2022 as shortages push demand and supply further apart. While higher prices generally boost revenue for motor vehicle wholesalers, industry firms aren’t likely to be celebrating. The shortage is forecast to reduce new passenger motor vehicle sales, causing revenue to fall by an expected 1.1% in 2021-22, to $34.5 billion. Higher vehicle prices are also bad news for the industry’s bottom line, with purchase expenses rising and profit falling as shares of revenue in 2021-22. However, profit is anticipated to remain above levels recorded during the initial outbreak of COVID-19.
Outlook
The global semiconductor shortage is set to continue into 2022-23, putting further pressure on production and likely maintaining high vehicle prices. Manufacturers are rushing to get new semiconductor manufacturing facilities up and running, such as Intel’s recently announced plants in Ohio, USA and Magdeburg, Germany. However, these facilities are time consuming and costly to build, and are only projected to improve supply after 2022-23. Still, new vehicle sales are forecast to rise in 2022-23, boosting revenue for motor vehicle wholesalers by 4.7%. The industry is on track to benefit from higher vehicle prices as demand for new motor vehicles starts to be met. However, a volatile political landscape due to the Russia-Ukraine conflict will likely continue disrupting production, which could worsen supply conditions and potentially offset growth in vehicle sales over the year.
Businesses across the economy will likely have to adjust their operating habits as a result of these challenging conditions. Manufacturers, IT operators and other businesses may need to delay purchases of new equipment such as motor vehicles, laptops and other capital that require semiconductors, and instead focus on repair and maintenance to extend their equipment’s life cycle.
Other businesses, such as car rental companies, are likely to take a different approach, and shift the extra cost onto consumers. This is likely to increase the cost of holidaying and hinder tourism operators’ recovery from the pandemic.
Changes to inventory management systems may also occur following the shortage. Motor vehicle dealers may decide to adjust their product portfolios to contain a higher percentage of the most popular and profitable product lines, in a bid to ensure that limited manufacturing capacities aren’t being wasted on low margin products. Many motor vehicle dealers also operate on a just-in-time inventory system, where stock is brought in to meet demand. Motor vehicle dealers may start shifting to a just-in-case system, where large volumes of stock are kept on hand to protect themselves from future supply shortages. This could lead to greater demand for storage spaces, benefiting rental agencies.
Providers of alternative modes of transport are also likely to grow in popularity, as consumers seek more affordable ways to stay mobile. Bicycle retailers benefited from a surge in sales during the pandemic, boosting industry revenue by 8.1% per year over the three years through June 2022. Revenue in the Bicycle Retailing and Repair industry looks set to remain well above pre-pandemic levels in 2022-23. Public transport use is also likely to rise as the community becomes more comfortable with living with COVID-19 and people return to the office, with revenue projected to increase by 8.3% during 2022-23.
IBISWorld reports used to develop this release:
