Before the pandemic wrecked manufacturing channels, automakers were already dealing with a crisis.
“Even before the chip thing happened, production was not up to speed with demand,” said Michelle Krebbs, an executive analyst at Autotrader. “The hottest things are pickup trucks and sport utility vehicles. They just have not gotten back up to production [and] I think we’re off 1 million units of inventory.”
The pandemic’s grip on the economy gave car makers good reason to assume demand would be remarkably low last summer. When consumers flocked to buy new cars in June, stock of cars and trucks was decimated.
Semiconductors are small chips used to power everything from the electronic consoles in vehicles to new gaming consoles, and they’re getting harder to find.
The semiconductor shortage, economists say, looms as an added detriment to consumer prices. With new and used vehicle prices dropping after a surge in 2020, demand and supply are at a crossroad that will inevitably drive prices up and leave consumers a small field to choose from. Economists differ on the scale to which the shortage will hinder the new car market although most experts agree the semiconductor shortage is a dire situation in need of aid.
The March Consumer Price Index report from the Bureau of Labor Statistics shows used cars and trucks increased to 0.5% in March, rebounding from a -9.5% mark in February.
But Ford, Toyota and Honda are among major manufacturers in the U.S. already addressing a chip shortage by slowing production. Toyota and Ford were both already dealing with excess inventory of sedans and smaller vehicles before the pandemic.
“What Toyota decided to do was [say] ‘let’s slow down the production of the Tundra because this version is going out of production by the end of the year,’” Krebbs said. “[Toyota said] ‘let’s take the Tundra chips and put them into the brand-new Toyota Highlander that just hit the market and is [in] high demand.’ That’s kind of one of the trade-offs.”
Semiconductors are produced in large part by two companies, Samsung and Taiwan Semiconductor. The small parts are extremely difficult to make and require massive capital to start production. Chips often become useless after just a few years because new products continually upgrade and are easily outdated, like the entertainment centers in vehicles.
“I think ‘mass shortages’ may be a bit much, but for sure, for certain models supply is being curtailed by the chip shortages,” said Richard Moody, chief economist at Regions Financial Corp. “And it does figure that the combination of an already elevated savings rate and the third round of Economic Impact Payments will provide a lift to demand, and the combination of stronger demand and limited supplies figures to push prices higher.”
Vehicles aren’t the only market touched by semiconductors this year. The latest shortage of Sony’s flagship PlayStation console and Microsoft’s Xbox have both been sluggish to rollout because of the chip shortage and supply chain pitfalls. The Biden Administration has already allocated billions to fix manufacturing holes.
Moody says that it won’t be long before manufacturers raise prices to keep up with the surging demand which is further damaged by scalpers buying mass quantities of gaming consoles and reselling them. Economists predict used cars and trucks will be next as buyers exhaust supply.
Still, prices haven’t yet surged in a way that suggest a mass shortage of parts. The February and March new vehicle index from the BLS was flat.
“I would expect there to be more of an impact on sales than on prices in the near term,” said Stephen Stanley, chief economist at Amherst Pierpont LLC.
Krebbs says U.S. automakers like General Motors recently closed a plant in Lansing, Mich. The plant made vehicles like the Chevy Camaro and certain Cadillac products, and the poor-selling Cadillac vehicles are being stripped of semiconductors for more popular GM SUVs.
“Due to COVID and recent severe weather related events, Toyota has been informed that a supply shortage will continue to affect production at our Kentucky, West Virginia, Mississippi, Texas and Mexico plants,” said Kelly Stefanich, a Corporate Communications representative and Group Manager at Toyota Motor North America.
Stefanich says Toyota Motor North America doesn’t currently anticipate the shortage to cut employment at its facilities.