Semiconductors, the Supply Chain and Vehicle Finance
The current disruption to supply chains is making itself felt in a variety of ways. One of these is a shortage in the availability of new vehicles on the market.
This has lengthened lead times and driven more demand for used vehicles, putting pressure on the transport sector and on various businesses that are dependent on maintaining their fleets.
For SMEs facing various inflationary challenges, increased vehicle costs are one more set of problems they could do without.
The Problem with Semiconductors
Vehicle manufacturers are at the mercy of new technology. The pandemic led to a huge surge in demand for electronics. In turn, this led to significant growth in the demand for semiconductors.
According to the Semiconductor Industry Association, demand in May 2021 was 26% higher than at the same time the previous year.
Manufacturers have been struggling to keep up the pace of production. At the same time, the pandemic has exposed weaknesses in the semiconductor supply chain.
Basically, there are just two main companies involved in manufacturing these chips. One, TSMC, is based in Taiwan, the other is Samsung in South Korea.
A prolonged drought in Taiwan has restricted the water supplies chip manufacturers need as part of the production process. Other factors disrupting the semiconductor supply chain include power outages and factory fires.
The automotive industry has been especially badly affected. The shortage of semiconductors has had a knock-on effect on vehicle production. And again, the pandemic has been a factor.
At the start of lockdown, manufacturers scaled back their production as global demand for vehicles fell. But when the industry wanted to re-start production it found itself at the back of the queue for semiconductors.
Electronics manufacturers had taken priority for the semiconductor suppliers. The global demand for these chips grew during the pandemic.
Typically, a vehicle can contain between 50 and 1,000 semiconductors. Chips control things like brake sensors, power steering and infotainment systems.
The Association of Fleet Professionals (AFP) has reported an extension of the lead time from most vehicle manufacturers. The typical three-month lead time has now stretched to six to nine months.
The delay means more companies are running older vehicles for longer, which will mean increased maintenance costs. Hire van companies are retaining older vehicles beyond their preferred guidelines.
The Impact on the Used Vehicle Market
With the semiconductor shortage squeezing the supply of new vehicles onto the market, the demand for used vehicles has surged.
Fewer vehicles are entering the market because companies hold onto their fleets for longer (see above).
The pressure is also coming from retail buyers. According to What Car? more new buyers are switching to the used market. This can only mean prices heading in one direction: upwards.
Consequently, those SMEs dependent on running vehicles need to find ways of financing their fleets that won’t add to the inflationary pressures they’re already facing.
How to Approach Vehicle Financing
Flexibility is critical when it comes to making vehicle financing work. With many businesses having to price in uncertainty, they need room to manoeuvre.
It may be a more affordable solution to fund whole or part of a vehicle purchase using asset finance.
With this system, technically the leasing company retains ownership of the asset. But the borrower benefits from structured repayments that suit their cash flow.
It can relieve a lot of the pressure of financing essential business purchases. It also applies to hire purchase agreements, giving further flexibility to how SMEs finance their vehicles.