Used vehicle costs to rise due to computer chip shortages
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Get ready to pay higher prices for used cars.
A dearth of semiconductor chip production is cramping new-vehicle production , limiting the availability of certain models in the coming months and threatening to raise used-car prices as buyers hunt for alternatives.
The shortages of chips, a result of the pandemic, are rippling through the automotive industry, undercutting production at General Motors, Ford, Honda, Toyota and other companies.
The upshot is that the used-car market, in particular, is poised for significant disruption – likely in the form of higher prices.
A similar thing happened in 2020 when automakers were forced to temporarily stop the production of most new vehicles due to COVID-19 lockdowns. That drove more buyers into the used market, increasing prices.
“The used-car market went haywire,” says Ed Kim, vice president of industry analysis for AutoPacific. “I’m expecting to see more of the same thing year, but for a different reason.”
This time: Chips are suddenly hard to come by, and it’s hampering auto assembly operations.
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It’s a troublesome development for consumers who are already dealing with higher price tags for used cars due to rising new-vehicle prices and last year’s issues.
Wholesale used vehicle prices rose 3.74% in the first 15 days of March compared with average prices for the full month of February, according to Cox Automotive’s Manheim Used Vehicle Value Index. That index hit an all-time high of 175.5 in mid-March, up 24% from a year earlier and up 8% since the beginning of 2021.
Here’s what you need to know about how the chip shortages.
Why is this happening?
Two reasons:
1.Temporary plant shutdowns in 2020 led chip makers to send supplies to other customers.
“So by the time that automotive production restarted, automakers were basically looking down the barrel of chip shortages because the supply of chips had gone way down,” Kim says.
And when vehicle sales outperformed expectations for the year, automakers were left with fewer chips than they needed to meet customer demand.
2. Increased vehicle technology in recent years has led to a significant rise in automotive demand for chips, which are already in high demand from other consumer electronics makers.
Everything from the infotainment system on the center console to advanced safety systems such as blind-spot alerts is computerized and requires semiconductors to provide processing power.
“The sheer number of chips that go into a modern car nowadays is staggering,” Kim says.
Will any vehicles be hard to find?
It’s possible.
Dealers typically have a few months supply of each model, so they’re not likely to run out immediately. But temporary production shutdowns of vehicles like the Ford F-series pickup – the best-selling model in the country – suggest that supplies could begin to dry up.
At General Motors, plant shutdowns have throttled production of vehicles like the Chevrolet Colorado pickup, the Chevrolet Malibu sedan and the GMC Terrain SUV.
It’s not just U.S. automakers that are hurting. Foreign automakers have also been affected.
Production connected to Honda vehicles fell 18% in January, compared with a year earlier, according to Panjiva, the supply chain research division of S&P Global Market Intelligence.
But automakers have significant incentives to preserve the production of high-volume, high-profit models like pickups and large SUVs. So if forced to prioritize, they are most likely to preserve those vehicles over poorly selling passenger cars.
“Those vehicles are so important to the financial health and business model of those companies,” Kim says.
Will automakers take shortcuts to get around the shortages?
It’s possible. GM took the unusual step of reducing the fuel economy on certain Chevy Silverado and GMC Sierra models by forgoing a computerized module that needed a chip. That resulted in a fuel economy reduction of about 1 mile per gallon.
“Rather than stopping production they decided to go ahead and ship,” Kim says.
But they can’t get around the shortages forever. As technology advances, self-driving vehicles and increasingly computerized cars will demand more and more chips.
“The connected and autonomous vehicles of the future are effectively supercomputers on wheels requiring dramatically higher chip content and driving greater convergence of the automotive and semiconductor industries,” said Gary Silberg, global automotive sector leader of consultancy KPMG, in a February report.
“In tomorrow’s world, these remarkable, integrated circuits will be even more strategically important.”
Is every automaker in the same boat?
Yes and no. Hyundai Motor Group, which owns the Hyundai, Kia and Genesis brands, saw the shortages coming and acquired extra chips in advance.
“They did anticipate this issue, which is very smart on their part,” Kim says.
But the Financial Times reported on Tuesday that Hyundai and Kia have scaled back production on less popular models.
Are suppliers catching up?
Yes, but it’ll take a while. Intel, for example, on Tuesday announced plans to invest $20 billion in two manufacturing plants in Arizona. That kind of operation can’t be launched overnight.
“The global supply chain is scrambling to get their production up,” Kim said.
Follow USA TODAY reporter Nathan Bomey on Twitter @NathanBomey.
