Sat | Jun 19, 2021

Chip shortage driving car prices higher

Published:Friday | May 14, 2021 | 12:09 AM

Ford pickup trucks built lacking computer chips are shown in parking lot storage in Dearborn, Michigan, on May 4.
Ford pickup trucks built lacking computer chips are shown in parking lot storage in Dearborn, Michigan, on May 4.

A global shortage of computer chips has forced automakers to slash production. The result has been far fewer vehicles on dealer lots, just as the waning pandemic has fuelled a pent-up consumer demand for cars, trucks and SUVs.

With shrunken supply and robust demand, the average new-vehicle sales price tops US$40,000, up nearly 10 per cent in two years.

“It’s pretty evident when you pull on to our lots that there’s not much selection,” said Charlie Gilchrist, who operates 11 car dealerships in the Dallas-Fort Worth area. “Our (sales) volume is falling because of the sheer lack of inventory. It will still fall during the next two or three months.”

The across-the-board surge in auto prices contributed mightily to last month’s jump in consumer prices, the United States government reported on Wednesday. A record 10 per cent increase in used vehicle prices, in fact, accounted for roughly one-third of April’s overall rise in consumer prices – the sharpest monthly increase in more than a decade.

Ford expects to produce only half its normal number of vehicles from now through to June. GM and others have resorted to halting production of some cars and smaller SUVs and diverting computer chips to higher-profit pickup trucks and large SUVs. Leading automakers are warning of diminished earnings.

The vehicle scarcity and the soaring prices can be traced to the eruption of the coronavirus 14 months ago. As the virus spread, auto factories shut down for a couple of months. With millions more people working from home, demand for laptops and monitors led semiconductor makers to shift from autos to personal electronics. Soon, though, a faster-than-expected economic rebound boosted demand for vehicles, and auto plants tried to restore full-scale production. Yet chip makers couldn’t respond swiftly enough.

With production slowed, dealer inventories shrank. Now, as the chip shortage has persisted, the shortage of new vehicles has worsened, and analysts foresee no return to normal before next year.

Yet so far, automakers have been earning big profits even with a depleted inventory, largely because many buyers have been willing to pay more to get what they want. With government stimulus cheques and tax refunds in hand, Americans bought about 1.5 million new vehicles in April. That’s an adjusted annual sales rate of 18.5 million – the highest such rate since 2005.

“It’s like toilet paper was a year ago,” said Michelle Krebs, executive analyst for Cox Automotive. “Everyone is rushing to buy a car.”

Cox Automotive surveys suggest that 63 per cent of potential buyers will stay in the market even with higher prices and a meagre selection of vehicles. With new vehicle prices jumping, the cost of popular vehicles has become eye-opening. The average price of a new Chevrolet Silverado pickup, for example, is now just under US$51,000.

Even so, the supply of vehicles is dwindling. Last month, the nation’s total new-vehicle inventory plummeted 42 per cent from a year ago to 1.9 million. That’s enough to supply only 33 days of sales at the current pace — 88 days fewer than a year ago, according to Cox. At the same time, discounts fell five per cent from March to April and 25 per cent from a year ago to an average of US$3,239 per vehicle.

Given the lack of supply, nearly everyone expects new vehicle sales to fall soon. That would mean fewer trade-ins, which would further tighten a low supply of used vehicles. For consumers who can wait, analysts say, it might be wise to delay buying any vehicle until next year or even beyond.

Dealers are now scrambling for used cars, hoping to sell them to keep cash flowing through the summer as new vehicle supplies dry up. Richard Bazzy, who runs four Ford and Lincoln dealerships in suburban Pittsburgh, said he’s formed a team to buy used vehicles.

“Every car dealer in the world is jamming the auctions right now trying to fill their shelves because of the lack of new-car inventory,” he said.

Cox’s Krebs said it’s hard to predict how long the chip shortage and tight supplies will last. Morgan Stanley analyst Adam Jonas cautioned investors not to expect extremely high auto prices beyond the end of this year as new-vehicle supplies recover.

Whenever the car shortage ends, GM, Ford and others say they will change business models away from having huge stocks. GM has considered regional distribution centres that could send vehicles to dealers in a matter of days. Ford’s CEO Jim Farley has talked of quickly delivering on factory orders. Both companies hope to reduce the interest paid on high inventories and keep discounts low.

“I do think we are on the verge of possibly a different kind of paradigm for how vehicles are distributed,” Krebs said.