Chip Shortage Reduces New Car Production and Sends Used Car Prices Higher
With Spring in the air and the lure of the open road, you may be thinking of buying a new car. If you are, be sure to buckle up — you are in for a rough financial ride.
A worldwide shortage of semiconductor chips is playing havoc with the manufacture of new vehicles across all brands. More and more automotive plants are closing temporarily due to the shortage.
Used Car Prices Rising
“The auto manufacturers are in a situation where they can’t fill production to capacity,” George Peterson, President of automotive research and consulting firm AutoPacifc told Saving Advice. “At the same time, consumer demand is spiking. So there is a crisis in the supply chain. That means many consumers will move to the used car market. Because of the increased demand, consumers will pay more.”
Used car prices are already moving upward. In the first half of March, wholesale used car prices jumped 3.74 percent, according to the Manheim Used Vehicle Index.
“The latest trends in the key indicators suggest used vehicle values are likely to continue to see appreciation in the days and weeks ahead,” according to Manheim. Leading the way in used vehicle sales are pickup trucks.
New Car Supply
Most dealerships maintain a couple of month’s supply of all current year models. So inventory would not be affected immediately. However, a Wall Street Journal survey found dealers are experiencing inventory reductions. The uptick in sales that usually occurs in Spring and Summer will put more pressure on the supply line.
Meanwhile, manufacturers may be forced to reduce or halt the production of some models in favor of more popular ones, according to Peterson. In that case, high-profit vehicles, such as pickup trucks and SUVs will be prioritized.
Car and Driver has predicted that one million fewer cars will be manufactured in the first quarter of 2021. Already, manufacturers have announced reductions totaling 680,350. The result, according to the magazine, will be a loss of $61 billion dollars to the industry worldwide.
History Repeats Itself
We have seen this before, says Peterson. In 2020, many automotive plants closed for various periods of time. The reason for the closures then was COVID-19. Chip producers decreased production and shifted supply to other customers. When auto production ramped up again, there were fewer chips available.
Along with the shortage, the automobile industry has increased its use of semiconductor chips. As many as 100 can be found in some vehicles. They are used in everything from Bluetooth, engine management systems, road navigation, and collision detection systems.
That makes cars more expensive. Semiconductors make up around forty percent of the cost of a new car, according to consulting firm Deloitte.
Possible Surge in Used Lease Cars
With the reduction in new car production, as Peterson says, consumers are more likely to turn to used cars. Fortunately, there may be a ready supply.
“Top of the line car sales three years ago totaled about 16 to 17 million,” says Peterson. “About 40 to 50 percent of those cars were lease cars and they are coming off lease, so there is a good supply of quality used cars coming on to the market.”
Some Manufacturers Reducing Chips
“GM is shipping some of their trucks without components that aren’t essential to safety or operation,” says Peterson.
General Motors decided to ship some Chevy Silverados and GMC Sierras without a nonessential chip. The decision results in a drop of one gallon per mile in fuel economy.
“When you’re trying to sell vehicles,” says Peterson, “fuel efficiency becomes less important.”
Is There an End in Sight?
No one has set a date for when they see the chip shortage ending and automobile production returning to normal.
Manufacturers are scrambling for chips and chip producers are expanding operations. But building a new plant and getting it into production takes considerable time.
In the meantime, the semiconductor industry will face more strain in the future. Automobile companies are continually creating more tech-heavy vehicles. With the push to electric vehicles leading the way.
A Government Call to Arms
President Joe Biden has responded to the chip crisis with a call for money and action.
Wednesday, Biden called on Congress to authorize $37 billion to stimulate semiconductor chip manufacturing in the United States. In addition, the president signed an executive order to address the shortage.
“I’m directing senior officials in my administration to work with industry leaders to identify solutions to the semiconductor shortfall,” Biden said on Wednesday. “Congress has authorized a bill but they need $37 billion to make sure that we have this capacity. I’ll push for that as well.”
Biden was referring to the $37 billion needed to fund provisions of the National Defence Authorization Act. The law is aimed at boosting semiconductor chip manufacturing in the United States. However, Congress is yet to fund the legislation.
The executive order kicks off a 100-day review of supply chains for semiconductor chips as well as electric car batteries, rare earth minerals, and pharmaceuticals.
The president met with a bipartisan group of lawmakers Wednesday, before his televised remarks.
American semiconductor companies account for 47 percent of chip sales globally. However, only about 12 percent of chip production is done in the United States, according to the Semiconductor Industry Association.
The semiconductor chip shortage will be with us for an indefinite period of time. Scarcity drives prices higher. As a result, vehicles and many other products that use chips will cost more until the shortfall is resolved.
If there is a silver lining, it looks like the White House, Congress and the semiconductor industry are on the same page.
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