Will the Chip Shortage Ever End?

Every day you see the empty spaces on your lot. You understand that it’s due to a computer chip shortage. You may be hoping for supplies to return to normal – or you may be not-so-secretly enjoying the benefits of high demand and low supply (and lower inventory costs). Automotive News reports that Toyota North America, for example, plans to reduce inventories, even after supply chain issues are resolved. Either way, everyone is dealing with it. But when will it end? And will things really return to normal?

What’s clear is that the shortage of computer chips is still massively reducing the production of new cars. It’s also causing auto manufacturers to drop certain features controlled by computer chips. BMW and GM, for example, just announced that they’ll be shipping new cars without Apple CarPlay and Android Auto. Be prepared to explain that to your customers.

The chip shortage cut production by 11.3 million new cars, trucks and SUVs in 2021. For comparison, Japan alone produced a total of 8.3 million vehicles in 2019. This year will see some improvement – but we’re still expecting around 7 million fewer cars to be built. Fewer new cars means the used car market will continue to be impacted. Many dealers, new and used, will continue to see fewer trade-ins and higher auction prices. The struggle to fill lots will continue across the industry. For some expert insights on finding inventory, check out this ‘Just the Fax’ podcast: “Selling From an Empty Shelf.”

Part of the cause of the shortage is that new vehicles rely on so many chips. Most newly manufactured cars rely on at least two to three dozen computer chips. Did you know that  fully-optioned vehicles can have 100 or more chips onboard? According to Consumer Reports, that creates the need for billions of chips each year. And your average consumer certainly expects to be able to connect their phone to their car.

So, what should dealers expect in the coming year? What has to happen for the shortage to end? And is there another type of shortage on the horizon? Read on.

What Are the Factors Causing the Shortage?

In an interview with Popular Science magazine, Syracuse University professor Patrick Penfield explained the chip shortage as “bad decisions, bad luck, and then increased demand. Put those three together, and you got a shortage.” Let’s look at those three causes.

The car manufacturers themselves made bad decisions. When COVID closed plants, the OEMs canceled chip orders that were tough to replace when conditions improved. CNBC reported that the lead time between ordering chips and receiving them for installation in vehicles is half a year. That delay alone would have caused a problem, but when those orders were cancelled, all those chips found new homes. Look for some changes in how manufacturers secure their chips.

Bad luck came from disasters that struck chip manufacturing plants in 2021. According to CDW, first COVID closed chip factories, depleting inventories. Then last winter, major chip producers in Texas were forced to shut down due to storms and the resulting power failures.

To make matters worse, fire crippled the Japanese factory that produced one-third of all chips used in cars globally for several months. All this lost production occurred when demand was skyrocketing.

A more recent development is the COVID-19  lockdowns in China which keep workers out of factories, further reducing production.

That’s a lot of bad luck.

COVID-19 drove increased demand for computer chips. Deloitte reported that sales of computers were up 34% and TVs up 12% over the last three years, “likely due to COVID-19 restrictions and more time spent working and learning at home.”

The chips used in consumer electronics devices are more profitable than those in cars, reports Motor Trend. So, chip makers may be dragging their heels shifting back to cheaper automotive chips. Keep an eye on how that plays out.

How Long Will the Chip Crisis Last?

The answer to that question depends on who you ask. General Motors, Ford and Hyundai have all stated separately they expect the shortage to ease in the second half of 2022, according to reporting by Reuters.

Chipmakers see things a bit differently. In that Reuters article, chipmakers NXP and Infineon claim that shortages will continue despite increases in production. Infineon said the shortage of the less sophisticated chips used in automobiles would carry on through 2022.

Just to stir things up, the chip shortage isn’t the only supply chain issue that might impact your dealer lot. As more and more EVs and Hybrids enter the market, batteries may become scarce. Rivian CEO RJ Scaringe is reportedly “warning that the upcoming battery shortage is going to make the current chip shortage look like a ‘small appetizer.’” So, being prepared for shortages might be a good idea.

Who’s Got a Crystal Ball?

No one can know exactly what the ongoing impact of the chip shortage will be. But dealers should be ready to adapt. You should prepare your dealership for the long haul and think about how to manage any kind of supply/demand shift.

No matter what, for the short term you will likely need  to acquire used cars through trades, lease returns, or private party sales to keep your lot full. And if you sell cars with batteries in them, you should already be thinking ahead to the next potential shortage.

To learn more about how CARFAX can help you purchase used vehicles competitively, contact us.