There is big trouble brewing in car industry due to a global chip shortage. Everything needs micro chips these days to function. Cars are no different and cannot run without them. Problem is car manufacturer’s around the world can’t get any. Trouble has been brewing ever since the pandemic began and demand for cars dropped. After all who needs a car if your sitting at home.
Meanwhile the people who were sitting at home needed new computers. A huge surge in demand diverted the chips that the cars needed over to the high tech industries. Free markets are free markets and whoever is the best customer is the one that wins. Unfortunately the car industry lost. So what now? Expect car prices to soar when the economy bounces back. Already you can see used car prices on the rise as well as new vehicles also.
No End in Sight
Makers of high quality cars such as Nissan are cutting back on production of their cars. New Chip plants are not being built and once the economy gains steam cars will be needed. People who were working at home will be heading back to the office. Cars will be in high demand but there will be no chips available to make them work.
What this means is there is no end in sight for rising car prices. That old clunker you were going to be sending to the junk yard could be worth a lot of money. Investing in cars is going to be big business both for collectors and for used car dealers. These dealers will be charging you more for the cars they have and the usual incentives will be gone.
Believe in demand and supply? When a supply of cars does not meet the demand of the buyers it will drive inflation higher. Manufacturing is making a comeback in most industries and supplies of chips are in short supply. The shortage is being felt acutely in the automotive industry and will for years to come, analysts say.
Global chip shortage Problems
One of the issues is there isn’t the return on investment to build foundries to satisfy the demand by the automakers. Investors are not investing in the Chip industry which is going to be a major problem as demand rises in the years ahead. There is simply no incentive to build new chip plants.
Another problem is poor planning. During the second quarter of 2020 car manufacturer’s shut down. As they did that they canceled orders from a lot of the supply chains. Disgruntled suppliers found other markets that were still doing well despite the pandemic.
These included the big eight cloud infrastructure providers, which saw demand skyrocket when people began working from home. Children were attending school remotely, causing a massive spike in PCs, tablets and consumer electronics. This took chips away from the car makers.
Trade sanctions added to Shortages
Another big problem no one talks about is the trade sanctions Trump imposed on China and other nations. This caused a lot of hiccups in the chip industry. Along came the pandemic and a surge in demand from the computer sector and big trouble started to brew.
Biden is trying to calm the storm of trade with the world but the future is still unclear how this will unfold. In the meantime the shortage of chips gets worse and it could be years for things to get back to normal trade practice. Don’t expect the sanctions and trade problems to be solved easily. Tech wars between the super powers might just intensify. The US is not about to lose it’s top spot in the technology war any time soon. These ongoing sanctions and trade problems will only make the chip shortages continue until an agreement on trade is found.
Automotive Sector hit Hardest
The automotive market segments will take longer to recover simply because they are at the back of the food chains. These industries have inefficient supply chains and it could take many months if not years for them to come back online. Brace for much higher prices ahead which will fuel inflation in the auto sector. Car prices are already on the rise and much like the housing shortage who knows how high they will go.
Like I said before it’s all about supply and demand. When people starting bidding on a house it might be no surprise to have multiple bids on cars in the coming months.
New Car Prices Are already Skyrocketing
- Buyers are paying more for new cars as average transaction prices rise. Ford cited an average transaction price of $43,600 in April.
- This is the result of low inventory and high demand for new vehicles causing automakers to reduce incentives.
- Price-conscious shoppers may want to find segments where supply is higher.
The combination of strong demand for new cars and tight inventories is creating a perfect storm of high vehicle prices. Many buyers in 2021 are paying more for new vehicles compared with last year as incentive spending drops and average transaction prices (ATP) rise, and this trend could increase as the global microchip shortage continues to affect production for many models.
New vehicle inventory is down 25 percent compared with this time last year at the start of June and could soon be down by as much as 40 percent. This is a huge draw down and could cause car prices to rise in accordance. Imagine a 40 percent surge in car prices!
Automakers are reporting strong sales numbers through the first few months of 2021 despite the rise in prices. With fewer vehicles on dealer lots but strong consumer appetites for new cars, automakers are rolling out fewer incentives. You won’t find much cash backs or other tid bits under the hood. Cox Automotive said that incentive spending fell by nearly 16 percent during the first quarter. Measured as a percentage of average transaction prices, incentives dipped below 10 percent for the first time since 2016.
Transaction prices rose by an average of $3500 per vehicle in the first quarter of 2021 according to General Motors. High average transaction price of $43,600 from Ford in June 2021 was driven by a greater mix of more expensive SUV and truck models.
Truck and SUV’s now comprise 94 percent of its sales since the company dropped most of its passenger-car models. This will lead to a massive shortage of smaller cars.
Ford used the example of the Bronco Sport compact SUV to show how this switch has benefited the company.
The Bronco Sport’s average transaction price (ATP) of $31,800 in June was considerably higher than the out-of-production Fusion mid-size sedan’s $22,600 ATP.
People looking for lower cost cars in the coming months could be in for a sticker shock.
Rising Prices Loom
While this shift may boost automakers’ bottom lines, it’s not so good for value-minded consumers. With used-car prices also on the rise, price-sensitive shoppers in need of a vehicle are facing a tough market. “It’s getting more difficult for shoppers to find excellent deals,” noted Charlie Chesbrough, Cox Automotive senior economist. “
If price is the ultimate driver, shoppers might be wise to focus on segments of the market where inventory is healthier.” Cox’s data indicates that compact and mid-size cars and subcompact SUVs may have better supply, which means there could be better deals to be had.
How long will these higher prices last? No one knows, but surely not forever.
Reuters reported that many auto executives, including GM CEO Mary Barra, believe that the chip shortage will worsen in the second quarter of 2021. This means prices could go even higher.
This shortage could further impact inventories and drive prices even higher. The bottleneck is expected to improve in the second half of the year, at which point the supply and demand could start to balance out.
If you can hold off on your new-vehicle purchase and take the bus until the supply get’s back to normal, your wallet might thank you. One problem with this theory is no one really knows when things will return to the way they once were. Especially now with the world going green.
More and more electric cars are coming in the months and years ahead. Will these electric and self driving vesicles need even more technology? Odds are they will, further driving inflation in the car industry.