We all love cars. We love shopping for cars and we love selling cars. But if you have been in the market looking for a car, the past year or so, you would definitely have been shocked. Look at the market that was at the beginning of 2020 and look at the market now. Look how vastly they differ. Why is it so bad? Why are the prices so high? Why can’t you find your favorite GMC Sierra 1500 for a reasonable price? When will everything be normal? Are used car prices high too?
These are the questions most people would ask themselves if they are not aware of the current predicament. The pandemic has shifted everything for the worse. Not only the automobile industry but electronics and computers have also taken a massive hit. Prices have been sky-high in every department and there is no guarantee when they are going to come down. The demand was always there, it was just suppressed for a short period of time. Now that the floodgates have opened, the manufacturers can’t help but drown.
What is the cause of the problem?
Every issue has an origin. Some big, some small. In this case, it is a small thing that caused a big problem. A microscopic virus disrupting everything in the world. COVID-19 is the primary cause of the issues that we are facing today. It has completely left the economy in shackles and affected industries worldwide. The automobile industry in the USA has been adversely affected as well.
Semiconductor chip shortage is the number one cause of the shortage of supplies in the car industry. Why? Because semiconductors are the objects which are used to create electronics. Everything that you use today, that has a circuit board, is made out of a semiconductor. Now think about the impact of a semiconductor in a modern car. It is what enabled us to have power-adjustable seats, power mirrors, windows, touchscreen infotainment system, wireless chargers, navigation, etc. Without semiconductor chips, we would have none of that. Nobody would want to buy a car in 2021 without these basic features. You could also kiss safety features goodbye.
But what is causing the semiconductor shortage? Well, semiconductors are constructed in special “foundries”. There are very few foundries in the world and some of the world’s largest are located in Taiwan. TSMC is the largest semiconductor manufacturer in the world. However, due to the pandemic, people were forced to stay at home. Due to this, the semiconductors could not be manufactured in time. Hence, this has caused this massive shortage now. Another reason is the fact that people bought a ton of computers, laptops, video game consoles, and other electronics during the lockdown. This made the chip shortage even more drastic and left very little to be put inside cars. This is the primary cause.
However, there is also another reason. J.D. Power’s vice president of data and analytics, Tyson Jominy, said, “The incentives were kept on a little too high and little too long. As we came into May (2020), we were still running a lot of the 0%, 84-month offers, so the APR (Annual Percentage Rate) support was very strong. It became apparent that we should have backed off. By the time we got to the end of May, pickup inventory was very much depleted.”
What about the pricing?
With such a situation, the pricing of vehicles has also risen by quite a lot. When the demand is high and the companies are not able to meet with proper supplies, it results in a higher price. You might have noticed the ridiculous pricing of new cars if you were looking for one recently. According to Kelley Blue Book, the average transaction of a new car in 2021 is around $40,000. You can also expect to pay more than the MSRP of the car if the model is in high demand. Used cars are also in high demand. They are also selling for about $23,000.
If you are in the market for full-size SUVs and crossovers, you would have to dish out a big amount of extra cash. For smaller compact cars, the rate is not as high. However, the overall price has been increased for most vehicles.
Not all brands have been hit the same though. American automakers such as Ford, Stellantis (Chrysler), and General Motors have been some of the automakers who had the worst experience with the chip shortage and vehicle production shortage. Japanese automakers such as Toyota did not suffer as much as their American counterparts.
In fact, Ford is manufacturing vehicles without the semiconductor chips; and storing them in their lots. GM is manufacturing vehicles without the start/stop button and wireless chargers to make up for the shortage of chips.
When will everything become normal?
When the inventory will return to normal is a question that barely anyone has the answer to. It directly depends on the semiconductor shortage. If the supply of the chips improves, the inventory will also be replenished soon. If not, then it will continue longer.
Some believe that the supply of the chips is expected to become better from the mid of 2021 and become normal in Q1 of 2022. Others say it will take at least the middle of 2022 for things to get back to normal.
Jominy says that the chip shortage should last a couple more months, maximum. However, we seriously doubt if that is going to be the case. Every industry wants semiconductor chips. Even computer parts are in dire shortages. The situation is not improving now. But will it? That is a big question mark hanging over our heads. According to experts, it won’t be before 2022 that things will return to normalcy. The only way out is a miracle.
We can hope Q2 or Q3 to finally bear the good news that we have been waiting for. But as we mentioned, with the pandemic, nothing is concrete. Who knows, maybe the virus might attack back and cause another series of lockdowns. Maybe everything will go smoothly and everything will be normalized very, very soon.
Or if things keep on going at the rate that it is right now, then maybe we can expect mid-2022 to be the time when demand and supply would finally meet. If you are planning on buying a new vehicle, then we would highly recommend waiting until 2022 to see how the market looks like. You could be saving yourself a ton of money.