How is the Chip Shortage Affecting the Auto Industry?

Just when production levels started leveling out from Covid-19 shutdowns, automakers are facing a new problem: a semiconductor chip shortage. Once, again, factories are closed or on  delayed production schedules, waiting for these components. It’s strange to think that something so small could cause such a huge issue - an estimated $60 billion issue!

IHS Markit estimates that 672,000 fewer vehicles will be produced in Q1 worldwide. Chysler, Ford, Nissan, Subaru and Volkswagen are a few of the impacted brands. General Motors has had to shutter manufacturing completely at three of its plants until mid-march at the earliest. Ford has had to significantly reduce production of the F-150, the brand’s bread-and-butter vehicle.

Meanwhile, Toyota has about 4 months worth of chips stockpiled, making us wonder if they’re the auto industry version of a “prepper.” Being the only automaker to stay on schedule (at least for the time being) should yield huge financial benefits.

Chips for US-based automakers are designed here, but most are actually manufactured in Taiwan, China and Korea, where plants were also closed down for some time. Plus as the auto plant shutdowns happened in Q2 of 2020, demand for chips in the industry decreased, which naturally reduced production for the chips. Then things went from 0-to-60 as plants reopened and now required more chips than ever before all at once.

Not to mention, nearly everything today requires a chip, so the demand isn’t just coming from the auto industry. There was also a surge in electronic purchases as shutdowns happen in early 2020. People were working and going to school from home, and they needed the technology to accomplish this (laptops, extra monitors, webcams, etc.). Plus they were bored during lockdowns, so they bought things like gaming systems, surround-sounds, and newer, bigger televisions.

Even though these chip fabricators have boosted production, the damage has already been done. One blip in the automotive supply change causes long-term, devastating ripples. According to Ford’s chief product platform and operations officer, Hau Thai-Tang, there is a 26-week lead time from the time the chips are built to when they’re installed in a vehicle. That’s half a year. Now extrapolate that to an entire industry, plus the hundreds other industries requiring these chips.

Many are hoping that Biden will enforce the National Defense Authorization Act, wouch would in a round-about way force the foreign manufacturers to prioritize specific US needs, including needs for the auto industry, rather than other, more lucrative industries like server production. It would also (financially) encourage the few domestic fabricators to boost production and sell to industries they wouldn’t typically do business with. But, it’s unlikely that any of this would actually happen in time to make a difference as it will take years for chip manufacturers to ramp up and make noticeable increased productivity a reality.

So what does this mean for dealers? Shortages like that in 2020 will continue, maybe through all of 2021 and into next year. This will likely continue the upward trend of revenue on vehicles. Prices on new cars will stay high as supply remains high, which will ultimately continue driving up the price of used cars as new car availability is diminished and prices of new cars remain out of reach for many consumers. It doesn't look like things will be changing soon, so hang in there.