SURGING CAR PRICES: BUY NOW or WAIT for MORE CHIPS?

 

Car prices have been surging for over a year, as the pandemic disrupted supply chains and caused shortages in critical auto components like semiconductors, resulting in a lack of new vehicles hitting the lots.

 A global shortage of semiconductor chips supplied primarily from Southeast Asia—where COVID-19 cases are among the highest in the world— forced automakers to cut production. Nearly 20 auto factories stopped or reduced production due to supply chain issues, affecting plants across the globe.

 But as bad as things are for new car prices, things are even worse for used vehicles. The lack of new cars available has created an absolute frenzy in the cheaper used car market. Since March of 2020, used car prices are up a staggering 39.8%, according to the U.S. Bureau of Labor Statistics’ Consumer Price Index.

 As manufacturers struggle with production, new and used vehicle prices have reached record highs across the nation this summer. The average new-car price hit $41,044 in July.

 But what does this mean for consumers? Should they pony up and pay these prices, or hold out for future deals?

 At the onset of the pandemic, auto manufacturing across the globe came to a screeching halt. That’s not an exaggeration: In April 2020, the U.S. saw auto production drop 99% from February 2020 levels, according to U.S. Bureau of Economic Analysis data. By the summer of 2020, the automotive industry did begin to rebound, but that was short-lived: Component shortages and delays—caused by a disrupted global supply chain—caused monthly U.S. auto production to fall again.

 The decrease in vehicle production is worse for the market than it might first appear. The car market is continuously losing vehicles to a combination of life cycles and accidents. That phenomenon, referred to in the industry as “car scrappage,” combined with decreased auto production

 The simple answer is for supply chain issues to get worked out and production to return to normal levels so that supply and demand can balance out. But easing those upstream shortages and supply chain issues won’t be easy. “It’s a shortage of individual components, which is caused by a shortage of semiconductors, shortages of labor, allocation of steel and resin…There’s lots of disruption,”

 as semiconductor manufacturers attempt to speed up production, automakers struggle to capitalize on the strong consumer demand. The global auto industry is expected to produce nearly 4 million fewer vehicles than planned this year because of the chip shortages, losing over $100 billion in sales.

 Some car companies are employing short-term strategies like stockpiling chips and allocating them to higher-profit vehicles that more consumers are willing to buy. Toyota has taken chips from its Tundra pickup truck—which will get a new look next year—and allocated them towards the brand new Highlander SUV, which is in higher demand. Ford is considering the idea of shipping cars without chips that dealers can later install when they become available.

However, these unchipped cars may not have the advanced safety features and infotainment systems of higher tech models. Stewart says his dealership is encouraging customers who want a particular model to order Toyotas that don’t require chips because delivery for those vehicles takes only three weeks, compared to eight weeks for cars equipped with chips.

  It will likely take well into 2022 (or beyond) for the used car market to start to return to normal.

“As you solve the bottlenecks, and you solve the lack of production, you’ll eventually start to see normal price patterns.

Mike Jackson, the CEO of AutoNation, note that “consumer demand continues to outpace supply, driven by consumer desire for personal transportation and ongoing manufacturer supply chain disruption,”

 
Mike Jackson, the CEO of AutoNation, note that “consumer demand continues to outpace supply, driven by consumer desire for personal transportation and ongoing manufacturer supply chain disruption,”

posted by Rob Longwell, Senior Editor