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:
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:
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.