Empty dealer lots, delays in production plants, and skyrocketing prices - these are some of the most common outcomes due to the short supply of microchips, which has put used car prices in favor, some of which are retailing at 20% more from their original MSRP. If you are now shopping for a new car, chances are that the dealer will put your order through and delay week after week to keep you in. Flip coins and switch to a used car lot and here you will find a high demand of buyers just like you, looking to buy a low miles used car. As we all know when demand goes up, the price goes up. This is certainly not the best time to buy a car as the market is highly affected and unpredictable because of production plants recovering from pandemic pauses and the reallocation of resources to produce newer cars.
How and why a tiny chip can cause all these troubles to the new and used car market, is what we are going to find out.
Why Are These Chips So Essential To Produce Cars?
To start things off, the supply shortage of microchips started right after the first Covid-19 pandemic. More people had to stay at home, meaning more electronics would be used. This new chain of sitting on the sofa, watching TV, or working from home skyrocketed the sales and production of electronic devices. Now, remember, the same microchip that goes in the assembly of a smart device like a smartphone or microwave can be used in the production of a navigation system for your next truck. ECU’s for example are essential, as the main computer of any modern car. They are responsible for the driving dynamics of the car together with how much fuel and air shall mix in the combustion chamber, and with no chips to assemble these smart electronic devices, things like fuel injection, start-stop features, and air conditioning are unobtainable.
Fun Fact: Most automakers have already announced that the 2021-2022 model years will not carry all the premium features, like start-stop or other optional add-ons and those will be retrofitted at an extra cost when the supply of microchips goes back to normal.
If We Can’t Get New Cars To Dealer Lots, The Used Car Market Will Remain Relevant To Its Original Sticker Price
During the first quarter of 2021, Ford, GM, and Toyota had to shut down their production plants temporarily due to the microchip supply shortage. This has a direct effect on the dealership lots, special offers in older model years, and the sale numbers.
For dealerships to remain open to business they need to make a profit out of their in-hand inventory, which right now is one of the most unstable the auto-industry has ever seen.
Buyers desire new car leases and dealerships have to remain profitable, yet somebody has to pay the appreciation cost. To be more precise, cars like the Toyota Tundra, a pickup truck most buyers are looking to buy used and low miles, not only held its sticker price but it did appreciate in value: 20% more across dealerships in the US. Mating the appreciation cost of used cars there is also a high demand from new buyers to the used car market. According to NYT, the reason behind the increasing demand for new and used cars is the new life-cycle of buyers. People have been isolated, which means no eating out, fewer expenses, and greater savings, mated with president Joe Biden's policy of the $1.9 trillion American Rescue Plan he signed in March. Simply, people have more money to buy cars and cars are scarce right now.
The Global Chip Shortage Will Be Around For A While
The auto industry makes up 10% of the microchip pie, the bigger slice goes into day-to-day devices, which are likely not going to stop or slow down production anytime soon. Supposing you bought a Toyota Tundra with a V6 in 2020 before the pandemic outbreak, after a year of use, dealerships would call and ask for the car back at the same price: meaning you as a buyer or seller had a free Tundra for a year without losing a penny. Using this strategy to fill dealer lots, many private owners hesitate to sell their car at a price lower than their original sticker price, sometimes for maybe selling at a premium: despite the car being used.
In addition to that, getting a new car or truck is very limited and expensive right now. Getting over the standard options list is difficult and comes at a very high price - making buyers turn around to the used car market as the best go-to option. Furthermore, digitalization has transformed the way buyers of used cars look at the buying process, a simple rebuild can make buyers go famous on TikTok by sharing simple videos. Online auctions have also made it easier for buyers around the world to access the used car market in the US, demanding more used cars and increasing their realistic value because labor outside the US is cheaper, or it might likely be used as a spare part car.