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A P.E.S.T. of a Mess

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New vehicle supply continues to be restrained by a variety of factors. PHOTO Stellantis

A variety of influences continue to challenge the automotive sector.

Oh, how some colourful words expressed from Ukraine’s Snake Island and echoed around the world as a rallying call has also quickly defined much of 2022 so far. Russian invasion? Gas prices? Inflation? Stock markets? Food and raw material shortages? Take your pick.

We’re barely out of the first quarter of 2022 and yet the headwinds the automotive industry faces remain at full hurricane force. When thinking about the predicament we are in, I recall from business school lectures the acronym P.E.S.T., which stood for the Political, Economic, Social and Technological forces that we were to assess in a situational analysis. For the automotive sector, I am sure we (regrettably) have red lights across the board for the P.E.S.T. analysis.

Greatly strained

This past month, the Wholesale Used Car Price Index produced by Cox Automotive’s data science team again continued to hold at near record levels for Canada. The index finished the month at 207%, only off by 2% from the all-time record in November 2021. The ongoing shortage of all things automotive remains the driving force behind these all-time high prices. The global supply and manufacturing capabilities of manufacturers remain greatly strained with many facilities nowhere close to a full recovery. Sourcing both new and used units remains a challenge. I don’t expect a softening of used car prices any time soon, nor a return to stable new car supplies either.

Demand for used vehicles from Canada for export to the U.S. market also continues in volume. With the dollar at $0.78, vehicles in Canada remain an attractive buy for export. The dramatic rise in oil prices typically result in a higher Canadian dollar, which should slow exports and soften prices, but then again, this is 2022 and anything can happen.

The Russian invasion of Ukraine is a catastrophe, certainly the worst that Europe has seen since World War II. Even with a de-escalation of the crisis, the road ahead to rebuild will be long. The Russian military action has further eroded the precarious situation the auto industry finds itself in, which has surprised many people. It is easy to forget that a vehicle’s 30,000 parts are often sourced from a multitude of nations.

Major gas supplies

Ukraine is one of the foremost producers of neon gas which is used in the production of microprocessors. Around 70% of the neon in the world comes from Ukraine. The Russian steel industry also plays a part in the manufacturing of that gas. As stocks of neon run down, production of chips will be disrupted again. This impacts not only automotive, but any industry that needs a microprocessor or uses industrial lasers.

Russia plays a key role in auto parts production. About one third of the world’s production of palladium, used in catalytic converters, comes from Russia. The economic instability from sanctions on all things Russian is likely to interrupt that flow of goods as well. Without catalytic converters, vehicles would not comply with emissions standards.

One of the first concerns reported in the media was the interruption of the production of wiring harnesses from Ukraine. A vehicle’s wiring harness consists of the various custom-made spaghetti bundles of wires for a given vehicle. They are very application specific, and often one harness only works for a certain trim of a specific model. Most vehicles have over 1.5 km of wires in them. Without a wiring harness, a functioning vehicle just can’t be built. Several German auto plants are now offline due to the lack of wiring harnesses.

Closer to home, the obvious consumer shock since the invasion has been the price of oil and the immediate change to the price of gasoline. It was not that long ago that the price was well below $1.40. As I write this article, the national average price is now around $1.80 with Vancouver hitting north of $2.00. The indication from some analysts is that the average national price is heading to over $2.20 by April.

Higher fuel costs

Interestingly, the Natural Resources Canada 2022 Fuel Consumption guide provides their estimate cost of fuel for a year assuming $1 per litre, which is a bit of a fantasy at this point. To update that to today’s reality, we should double the yearly cost they provide, which is based on driving 20,000 kilometres per year. What is the impact to a consumer? An 8-cylinder powered light duty truck burns about $2,500 worth of fuel, so consumers are potentially looking at an additional $2,500 per year in fuel if the price trend continues.

Over a few periods in my career, I have tried to correlate the price of gas and the demand for large trucks and SUVs. One might assume that as the price of gas goes up the demand for trucks should fall, but that never has been the story when you dig into the data. However, $2 a litre is a big psychological price barrier that if consumers are ever going to notice, might result in changed behaviour, especially given today’s fuel-efficient options in trucks or the ability to switch to a different market segment.

Buckle up, 2022 is not the smoother ride we were wishing for.


Brian Murphy is Managing Director, Kelley Blue Book & Data Solutions, Cox Automotive Canada and Brazil. You can reach him at [email protected].

 

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