Chip shortage, pandemic tamp down 'toxic' sales channels, for now

Automakers have struggled for years to reduce their reliance on sales in so-called “toxic” channels such as short-term rentals and self-registrations, which offer easy and quick access to the market but low margins, with varying degrees of success. 

But now, the double hit of the pandemic and the semiconductor shortage appears to have done their work for them. 

With demand far outstripping supply -- for the moment -- automakers are selling every car they can build, at higher prices, to private and fleet customers, bringing them record profits even at greatly reduced volumes. Those two channels have gained market share, while sales to rental companies and self-registrations are down. 

“Self-registrations usually mean higher discounts, so if you need fewer of them, it’s a healthier market,” said Benjamin Kibies, senior automotive analyst at Dataforce, which tracks sales by channel.

At some brands, the decline since 2019 has been dramatic. Renault and Ford have both reduced self-registration and rental sales by more than 70 percent since 2019 (see chart, below).

It’s not clear what will happen when the chip supply returns to a more normal level. Will volume take precedence over value as automakers try to regain lost market share, or will the “toxic” sales channels remain off-limits? If so, the European market could look very different in the future, with lower overall volume becoming the new normal.

Self-registrations are cars that are registered by automakers or dealers for necessary uses, such as demo cars, press cars, courtesy cars or for employee use. But they can be abused for "tactical" reasons, to push cars on the market to boost sales or market share, or to smooth out production variances. 

In one popular tactic, dealers sell the cars to themselves, then market them as used cars at a discount with zero or limited mileage.

Such registrations were on an upward trend in the late 2010s, going from 16.3 percent of sales in 2016 to 17.6 percent in 2019, according to figures from Dataforce. That accounted for 2.69 million vehicles in 2019, Kibies said.

But that fell to 15.1 percent in 2021 and 14.2 percent in the first five months of this year, the lowest level in more than a decade. Even so, that represents a loss of about 235,000 units in the first five months, based on 2019 sales. 

“That is still a lot, considering that everyone is waiting for a car and delivery times of 12 months are the new normal,” Kibies said of the self-registration rates.

Steve Young, managing director at ICDP, a research company that specializes in automotive retailing and aftersales, said he, too, was surprised at the relatively high level of self-registrations. 

“There is a core level of [self-registrations] demand that’s quite genuine,” he said. “That seems beyond the level that’s genuine. It sounds like there are still some manufacturers that are doing [excess] self-registrations,” he said, possibly to push diesel cars or slow-selling models, or to get more EVs on the market to meet fleet emissions targets.

Self-registrations lost 3.5 points of market share since 2019, but sales to rental agencies fell even more: 4.5 points, going from 10.6 percent in 2019 to 8.4 percent in 2021 to 6.1 percent through May of this year. 

As Europeans emerged from pandemic lockdowns in 2020 ready to travel, they encountered a shock: Rental car prices had soared -- and there were few cars to be found. 

It turned out that cheap and plentiful rental cars were another casualty of the pandemic. As business and pleasure travel ground to a halt, companies sold off their fleets rather than hold a depreciating asset, analysts said.

When travelers returned in 2021 -- as the chip shortage began to seriously hamper production -- rental car companies found they were at the back of the line for new cars, after retail and fleet customers. 

As a result, the short-term rental channel has fallen from 10.6 percent of the market in 2019 to 6.1 percent in the first five months of 2022, according to Dataforce, which closely monitors several sales channels in 15 countries (see chart, below). 

If that percentage is applied to sales data for all 31 countries in Europe, it would represent a loss of roughly 500,000 vehicles in a period of just five months.

In terms of full-year figures, Kibies said there were 1.56 million short-term rental cars registered in 2019 out of total European sales of 15.87 million. In 2020, that number almost halved to 890,000 vehicles, he said, recovering slightly in 2021 to 920,000. And it could have been worse, he noted, with most rental registrations taking place in the first half of the year -- before the semiconductor shortage really hit -- to anticipate the summer travel rush.  

It's not clear when -- or even if -- short-term rentals will return to pre-pandemic levels, but this may not be a bad thing for automakers that have pledged to focus on retail sales.

“The brutal reality is that the rental channel is a distress channel,” said Philipp Sayler von Amende, the CEO and co-founder of Carwow, an online buying and selling service. According to von Amende, rental sales carry a discount of 30 to 40 percent for automakers, compared with retail at 10 to 15 percent and fleet at 15 to 20 percent. 

“You are selling cars at a higher discount and lower margin,” he said. “At the moment, that’s where they are cutting back.”

Although rental cars have lower profit margins, there are a number of reasons the channel is attractive to automakers, analysts said.

“You can have foreseeable volume because contracts are made long before delivery,” Kibies said. “You have contracts with fixed buyback prices, and this gives you a flow of relatively young used cars for re-marketing or other purposes.”

And in times of oversupply, the rental channel can provide a relatively quick escape route, von Amende and Kibies said.

Volkswagen Group has shown its faith in the long-term potential of the rental market by acquiring a majority share in Europcar. It plans to use the Europcar name as the centerpiece of its overall mobility strategy (See sidebar).

Rentals also provide free advertising, for both established automakers and new entrants such as Polestar, which will supply Hertz with 65,000 electric cars -- provided, of course, that the vehicles are in excellent condition. 

“It’s still good exposure to have your car in a daily rental fleet,” Young of ICDP said. “You don't want 2-year-old cars there that are getting a bit battered and worn, so you’re still supplying [rental companies], but not at the same discount levels.”

If retail is the channel that all automakers aspire to, then fleet sales are a close second. For some segments, such as midsize sedans, fleet and business customers make up a majority of registrations, and automakers enjoyed the benefits of booking sales well in advance with relatively low costs, even if they had to absorb some discounts.

The channel had held steady through the 2010s with about 27 percent of all sales, but the increase in working from home during the pandemic could have dealt it a serious blow, with Zoom meetings replacing traditional face-to-face sales calls.

In fact, the opposite happened: Fleet sales gained two percentage points in 2020, and made up 33.4 percent of the market through May this year. The 2020 gain could be partly attributed to the collapse in retail sales -- with fleet contracts still being delivered -- but the channel’s continued strength has surprised some analysts.

“Lots of companies that have big fleets continued to work,” von Amende said. Automakers are also trying to keep their customers happy during the chip shortage. “It’s very hard to tell a company that has a contract for 200, 300 or 500 cars that they can’t get them,” he said.   

Will automakers fall back into the same patterns when the semiconductor supply stabilizes?

Analysts say it will take a lot of discipline to avoid price wars, incentives and rampant self-registrations.

That is partly because not all automakers will emerge from the chip shortage at the same time. Some will be able to resume normal production rhythms, while others will continue to struggle. In Europe, for example, Hyundai and Kia have gained several points of market share as competitors faced frustrating production halts. 

Brands that have enough supply to meet demand can take market share. To win back that share once their production is flowing freely, automakers could turn to “push” tactics to get their cars on the market -- triggering a response from the winners of the previous cycle.

“Everyone understands that the profitability of the manufacturers and dealers has been driven by constraints on supply,” ICDP's Young said, “but not all manufacturers will return to free supply at the same point.”

It will take “an enormous amount of restraint” by automakers “not to ramp up production when there is a market clamoring for cars at full retail,” he said, “and equally large restraint on the part of brands that would have to accept that they lost that market share and it’s going to take a while to win it back.”

Kibies of Dataforce said that even before the pandemic, some automakers had sought to reduce their reliance on lower margin channels to increase profit, among them PSA Group (now part of Stellantis), Ford, Jeep, Kia, Mazda, Seat and Toyota. 

“Every other automaker has seen that it’s a good business model,” he said. “But the market will become competitive again. There are new players entering Europe, and yes, there will be a lot of pressure to defend existing market share.”