It's possible that the never-ending shortage of automotive semiconductors may be ending. I know nothing about the auto sector, but that's likely very bad news for the OEMs because pricing and margins entering a consumer-led recession? This could be the straw that finally breaks TSLA?
I'm wondering if you're better informed on the semiconductor shortage and its implications?
Not much better informed. I know BMW said last week they're still dealing with some shortages, looking to mid-2023 for full normalcy. We'll see what Ford & GM say this week.
But my general sense is much like yours - it wasn't until I was actually in the writing process that I started really trying to figure out why investors are treating the used space differently from the new space. If it's really macro risk that's causing the problem, then the new space is going to get hit harder — that's what history and common sense (there's some trade-down to used cars) suggests.
Increasingly thinking about doing the pairs trade as a result.
I'm totally clueless about the auto sector, but the supply of new cars should improve if supply chain issues are partially or fully resolved, which should pressure both new and used car pricing?
I'm likewise clueless about who wins or loses in this scenario. It's good for consumers, it will help inflationary forces moderate, maybe it's good for automotive suppliers, but bad for OEMs and dealers?
It's interesting in the sense that:
1. Somewhat counter-intuitively OEMs were huge beneficiaries of the supply chain issues since it affected all their competitors (except TSLA?), which meant they could shift production to their highest profit models and sell them at full price
2. Other pandemic beneficiaries (PTON) have gotten crushed, but I don't think the market has yet metered out full punishment to automotive OEMs
Net net, OEMs could be awash in a flood of structurally lower margin product that will have to be heavily discounted to a weakened consumer paying much more for financing?
All else equal, a normalized new-car supply chain is a positive for new car manufacturers (who couldn't meet unit demand), and modest positive for new car dealers (more units, lower margins). It's definitely a negative for used-car dealers, who have benefited from people buying used cars bc they literally could not find a new car to buy.
But all else is not equal. Everything we're seeing suggests on top of those trends, demand is coming down. And that trend is more negative for the new car space than the used car space.
In that context, I understand why KMX is down big. I don't understand why AN and PAG and even F and GM are, relatively speaking, holding up.
The semi chip shortages are definitely easing. Positive for volumes but negative for prices. OEMs that did well during the pandemic (e.g. the Koreans) will suffer now, and others whose production has been constrained (e.g. Subaru) will benefit. Auto parts companies will do better as volumes improve.
It's possible that the never-ending shortage of automotive semiconductors may be ending. I know nothing about the auto sector, but that's likely very bad news for the OEMs because pricing and margins entering a consumer-led recession? This could be the straw that finally breaks TSLA?
I'm wondering if you're better informed on the semiconductor shortage and its implications?
Not much better informed. I know BMW said last week they're still dealing with some shortages, looking to mid-2023 for full normalcy. We'll see what Ford & GM say this week.
But my general sense is much like yours - it wasn't until I was actually in the writing process that I started really trying to figure out why investors are treating the used space differently from the new space. If it's really macro risk that's causing the problem, then the new space is going to get hit harder — that's what history and common sense (there's some trade-down to used cars) suggests.
Increasingly thinking about doing the pairs trade as a result.
I'm totally clueless about the auto sector, but the supply of new cars should improve if supply chain issues are partially or fully resolved, which should pressure both new and used car pricing?
I'm likewise clueless about who wins or loses in this scenario. It's good for consumers, it will help inflationary forces moderate, maybe it's good for automotive suppliers, but bad for OEMs and dealers?
It's interesting in the sense that:
1. Somewhat counter-intuitively OEMs were huge beneficiaries of the supply chain issues since it affected all their competitors (except TSLA?), which meant they could shift production to their highest profit models and sell them at full price
2. Other pandemic beneficiaries (PTON) have gotten crushed, but I don't think the market has yet metered out full punishment to automotive OEMs
Net net, OEMs could be awash in a flood of structurally lower margin product that will have to be heavily discounted to a weakened consumer paying much more for financing?
All else equal, a normalized new-car supply chain is a positive for new car manufacturers (who couldn't meet unit demand), and modest positive for new car dealers (more units, lower margins). It's definitely a negative for used-car dealers, who have benefited from people buying used cars bc they literally could not find a new car to buy.
But all else is not equal. Everything we're seeing suggests on top of those trends, demand is coming down. And that trend is more negative for the new car space than the used car space.
In that context, I understand why KMX is down big. I don't understand why AN and PAG and even F and GM are, relatively speaking, holding up.
I added some additional commentary (see above) while you were replying ...
The semi chip shortages are definitely easing. Positive for volumes but negative for prices. OEMs that did well during the pandemic (e.g. the Koreans) will suffer now, and others whose production has been constrained (e.g. Subaru) will benefit. Auto parts companies will do better as volumes improve.