Due to numerous factors—some going back years and others linked to the COVID-19 pandemic—the computer chips needed to produce a huge variety of products are in short supply. These semiconductors are a key component of countless products, including smartphones, washing machines, medical devices, and more. In fact, according to an analysis by Goldman Sachs, the chip shortage impacts a whopping 169 industries!
What does this mean for the automotive industry? The semiconductor shortage has hit the automotive industry particularly hard. As Daniel Howley, Technology Editor for Yahoo Finance, explained in a recent article, “When the pandemic began, automakers, figuring consumers would slow down auto purchases, cut down on their supplies of semiconductors used in everything from their vehicles’ infotainment systems to high-end driver-assistance technologies.” At the same time, people around the world began purchasing consumer technology goods to adjust to the pandemic-induced remote learning environments, Howley noted. Semiconductor manufacturers shifted to meet the demand by producing chips for consumer technology products, but the market for vehicles bounced back quicker than automakers expected, leaving them in a lurch. Further complicating matters, a limited number of global semiconductor manufacturers, and some advanced semiconductors take up to six months to make.
Lacking these essential computer chips, many automobile manufacturers simply cannot produce as many (or certain types of) vehicles that consumers want. Toyota, Volvo, General Motors, Volkswagen, Ford, Subaru, and Nissan have all been forced to slow production at their manufacturing facilities or temporarily halt production of some models. Analyst Stephanie Brinley reported in the New York Times that “lost global automotive production is at 6.58 million units through the third quarter” in October 2021. This is bad news for both the automotive industry, which is projected to see financial losses in the billions, and consumers, who will pay more!
What does this mean to consumers? Because fewer new cars were made this year, most dealerships have limited inventory. “New Car Dealers” are turning into “Used Car Dealerships.” Demand is outpacing the supply, so prices are up, and incentives (unless you’re in the military or are a recent college graduate) are almost nonexistent. Buyers are unlikely to be able to negotiate down from the sticker price; in fact, most dealerships are selling cars at prices higher than MSRP! “The average new car sold for 2% over MSRP in October 2021—about $800 more than list price. And automobile distributors and dealers are adding options to make extra profits!
One year before, we were spending an average of $2,300 less than sticker price,” wrote Sean Tucker in a November 2021 article for Kelley Blue Book. The average price of a new car is now more than $46,000, Tucker noted, over $5,000 more than it was a year ago! Part of the reason for this jump is that many vehicle producers have chosen to dedicate their precious supplies of computer chips to make higher-priced models (for example, SUVs and trucks) rather than cheaper models like sedans.
Used cars are also selling for more than they have in the past. This is because used vehicles are also scarce: with limited availability and higher prices for new cars, more people are holding onto their old cars instead of “trading up” to new ones. The low supply is good news for sellers, however, who can price their used cars higher. In fact, the U.S. Department of Labor’s most recent Consumer Price Index report, released in August 2021, indicates that used car prices were up almost 32 percent at that time compared to the previous year.
In addition to pricing concerns, shortages may make it difficult to see the vehicle you’re considering buying in person. Depending on the model you’d like to test drive, you may have to go out of state to do so. During recent car shopping trips I conducted, I was unable to find the model I wanted in my home state of South Carolina or in nearby North Carolina!
What should I do if I need to buy a vehicle? With prices for both new and used cars at such high levels, many experts are saying that those who don’t absolutely need to buy a vehicle should avoid doing so. Jake Fisher, senior director of Consumer Reports’ Auto Test Center, suggested “holding off until the market has shifted in the buyer’s favor.” Based on my research, I also recommend waiting until next year, when inventory may increase, driving down prices.
However, there are some instances where purchasing a car is unavoidable. In such cases, Fisher suggested considering automobiles that are less desired (versus high-demand models like all-wheel-drive SUVs and trucks) or expanding your search to comparable models produced by brands you have not considered before. If you’re not flexible in terms of model or specific features, be aware that you may need to expand your geographic search area…or prepare to wait a long time to find the car you want!
Here are some additional tips gleaned from my research and personal experience when it comes to buying a new car in this tough market:
- To help decide which models you like without pressure from salespeople, visit car lots on Sundays.
- When you have decided which type of car you like, research the car on Consumer Reports (it’s worth paying for a subscription!). Using Consumer Reports will also allow you to see comparable models that you might not have considered yet…and that may be available if your first preference is not!
- Once you know which models you will consider buying, visit the manufacturers’ websites. Select “Build Your Car” and include your desired options to gain an idea of the MSRP costs and if there are any cars that meet your criteria nearby (if not, you may be able to obtain your desired car transported for an extra fee). Most manufacturers will have the option to alert dealers that you’re seeking a certain car, but I recommend avoiding this or only allowing dealerships to contact you via text or email so you’re not flooded with annoying sales calls.
- Go to dealers’ websites to search new inventory but beware that some dealerships may list cars on their sites that are still in transit—they could be weeks or even months away!
- Before contacting dealerships, seek the amount of credit from your personal bank you will need (unless you are aware that the manufacturer will provide a low-interest loan). Be prepared to pay $2,000-$3,000 above MSRP. During negotiations, don’t mention to dealers that you plan to pay cash or if you have already arranged financing, as they typically make money on financing.
- Make sure that your credit bureau accounts aren’t frozen (which some people may do for increased protection from identity theft) so that they are available when dealers run credit checks!
- When you find a car you like on a dealership’s website, contact their internet salesperson (most places have a specific person for online sales). Ask for the “out-the-door” price (retail price plus sales tax, fees, tags, markups, etc.) to understand the full cost and make sure it is within your budget. Also, ask for pictures or a PDF of the manufacturer’s stickers (which contain detailed information about the new car’s amenities and options) to be emailed to you so you are aware of the specifics before you attempt to negotiate.
- Coordinate with the internet salesperson to set up a time when you can test drive a car comparable to the one you’d like to buy (if it’s still in transit). Don’t rush the test drive; take an hour or so to drive the car without a salesperson on both back roads and the interstate. Test all the options before returning the car.
- While you want to shop around to obtain the best deal, note that cars are leaving dealerships in record time (Some are sold before they hit the lots). If the price is right and the car is the one you want, go in prepared to pull the trigger and make the purchase!
- Don’t be afraid to walk away, however, if the price is unfair or the car is not as you expected. This is a big purchase, so you want to make the right choice!
- Avoid buying extended warranties unless you are a high-mileage driver. If you do decide to purchase the extended warranty, initially decline it and then later in the negotiations seek a lower price.
- After the sale, ask the dealer to transfer your old car tag to the new one to reduce taxes.
What should you do if you have a used car to sell? Rather than trading in your previous car to the dealership, I recommend selling it privately because you can obtain more money that way. Here are some strategies to help sell your preowned car for the best possible price:
- Refer to your car’s original window sticker (which should be in your documentation from when you first bought the vehicle) and note the car’s options, which you will use to determine its Kelley Blue Book value. You can also search on-line your options with the VIN#. Companies like CarFax.com have the ability to search your options using your car’s VIN#. I was surprised to see how many hidden options on a Mustang we sold which added to the value.
- Visit www.kbb.com, then, under the “Car Values” tab, select “My Car’s Value.” Fill out the form with your car’s model and options and go to “Private Party Value.” Do not fill out your contact information unless you want some annoying calls! But, be prepared for them to call anyway!
- Have a professional detail your car which costs about $100. Then, take pictures of the interior and exterior in bright sunlight and from a variety of angles. If you reside in the South Carolina’s Midland’s region, we recommend Pure Art Mobile Detail (803-429-7759). Or you can Google “Car Detailer in your City State” to locate professionals but check their references.
- Create a listing for your car, including the photos, desired price, mileage, options, condition, and information like new tires (the more the better), on Facebook Marketplace, Craigslist, and/or other online avenues. Be prepared for dealers and individuals to contact you, and make sure to have your VIN# available. We also made appointments with local dealers to inspect our car and provide us with a quote. Don’t rush since we obtained ten offers on our used Mustang over a week’s period.
- If you decide to sell your car to an individual, meet in a public place like your bank for safety reasons. They will usually provide access to a meeting room at no charge.
The Bottom Line: New and used cars will continue to be in high demand until the global supply chain recovers from COVID-19. Gone are the days when you could buy a new car for significantly under MSRP. Consider waiting to buy a new or preowned car for a while; however, if you cannot, there are still reasonable deals to be had! It just takes patience, willingness to research, and realistic expectations.
Mike DuBose has been a staff member with USC’s graduate school since 1986 when he began his family of companies. He is the author of The Art of Building a Great Business. Please visit our blog for additional published business, travel, and personal articles, as well as health articles written with Surb Guram, MD.
