The global automotive industry has been facing an unprecedented shortage of new vehicles over the past couple of years. This has led to long wait times and marked-up prices for car buyers. But is the car shortage really as bad as it seems? There are conflicting views on whether the low vehicle inventory is a temporary bottleneck or a sign of a more concerning, long-term decline in auto manufacturing capacity. To make sense of the confusion, we need to look at the various factors contributing to the diminished supply of new cars.
What is causing the car shortage?
The most immediate factor is the chip shortage. Semiconductor chips are essential components in new cars, used in everything from power steering and brake sensors to entertainment systems. The COVID-19 pandemic wreaked havoc on chip supply chains, as factories shut down and demand for consumer electronics surged. This left automakers down the priority list for the limited supply of chips. Without enough chips, auto plants have been unable to assemble new vehicles at their usual pace.
Beyond the chip shortage, other supply chain issues have also disrupted production. Factories have faced shortages of other key parts and raw materials, from wiring harnesses to steel and aluminum. The war in Ukraine has further constrained access to materials like wiring, palladium, and neon gas used in chip production. With global supply chains still recovering from pandemic upheavals, parts shortages continue plaguing automotive manufacturing.
Has demand for new cars decreased?
Despite low vehicle inventory at dealers, demand for new cars has not slowed down dramatically. Part of what makes the car shortage feel so acute is that consumer demand has remained relatively resilient.
After an initial decline early in the pandemic, auto sales have rebounded robustly. In 2021, new light vehicle sales in the U.S. totaled 15 million units, the highest level since 2006. While 2022 sales are expected to drop a bit, many project a strong market going forward, with pent-up demand from consumers who delayed purchases during the pandemic. Many analysts say demand is not the primary issue, as eager buyers are feeling the inventory crunch.
Rising prices have also not seemed to deter people from seeking new cars, though higher interest rates could dampen demand moving forward. Consumers have been willing to pay substantially more for new vehicles amid low supplies, keeping demand afloat despite inflation.
How long will the car shortage last?
It’s unclear precisely when inventory levels will return to normal, but constraints could persist for some time. Automakers and suppliers expect semiconductor shortages to continue through at least 2023, likely keeping inventories low next year as well. Investments to increase chip manufacturing capacity are underway, but it takes years to build new foundries.
Other supply chain issues also show little sign of abating in the short term. Factors like the war, COVID-related disruptions, and availability of raw materials continue generating uncertainty about parts shortages. With so many elements still constraining output, most industry observers caution that vehicle supplies are unlikely to increase substantially any time soon.
Overall auto production may start recovering next year, but not fast enough to rapidly replenish low inventories. Dealerships will likely continue facing tight supplies through 2023 and into 2024. Constraints may ease somewhat, but longer wait times and limited model availability will persist.
Are there risks of a more structural decline?
While the chip crisis feels temporary, some worry about the shortage hinting at a more lasting diminishment of global auto manufacturing capacity. There are concerns that closures and cutbacks among parts suppliers during the pandemic could restrain output going forward. If suppliers lack capability to meet automaker demands as the market rebounds, inventory could stay tight.
There are also worries of a brewing capacity shortage as automakers accelerate the transition to electric vehicles. Ramping up EV production requires automakers to retool factories and secure specialized batteries and parts, potentially hampering overall output levels in the near term. As the industry undergoes a fundamental transition, structural restraints on growth could emerge.
However, the auto industry has weathered volatile periods of change before, and most suppliers anticipate eventually scaling up to meet demand. And while the pivot towards electrification brings complications, it also promises to stimulate substantial investment and innovation in coming years, likely expanding productive capacity over time.
What explains the regional differences in shortages?
Although the shortage is widespread, some markets have seen larger decreases in inventories than others. In the U.S., vehicle supplies were down around 75% at the lowest point, while in Europe the decline was less drastic. Why have shortages been more acute in some areas?
Regional infection rates and lockdown policies caused automotive factories in different countries to suspend operations for varying lengths of time early in the pandemic. That led chip supplies to be disrupted more in certain markets. These uneven pandemic impacts generated differences in semiconductor shortages and production cutbacks between regions.
Varied product mix also contributed to the divergent inventory situations. Pickup trucks and SUVs dominate U.S. sales, requiring more chips per vehicle on average. As supplies grew scarce, automakers disproportionately cut production of chip-heavy trucks, severely diminishing U.S. dealer supplies. In contrast, overseas automakers rely more on sedans, easing chip pressures.
Stronger consumer demand in markets like the U.S. also played a role. Americans have been on a hot streak of vehicle purchases and trade-ins, seeking both new and used models. Robust sales have left U.S. supplies especially depleted.
How are automakers adapting production?
Facing scarce chip supplies, automakers have made difficult choices on where to direct components. Some brands prioritized high-margin trucks and SUVs over less-profitable cars and hatchbacks. For example, Ford temporarily stopped taking retail orders for the Focus to preserve chips for pricier models.
Companies have also adjusted assembly processes, pulling out high-tech features to use fewer semiconductors per vehicle. Brands like Tesla and BMW omitted touch screens on some models, while Toyota nixed features like GPS and reduced sound insulation. Chips are being focused on essential functions.
To maximize efficiency, automakers are concentrating chip usage in bestselling variants and directing supplies away from slow-selling items. They are also allocating components to the most popular configurations, so buyers may not get desired add-ons. Vehicle mix is being optimized for profit.
In some cases, brands have shipped models to dealerships without certain parts, relying on subsequent installations to fill gaps. They are getting incomplete vehicles to market faster while chips are scarce.
How are car prices being affected?
Scant inventories have shifted leverage to sellers, allowing dealers to drive up prices. The average new car transaction price in the U.S. jumped to over $46,000 in December 2021, up nearly $6,000 from 2020. The ability to get full sticker price or higher let dealers reap record profits last year.
For buyers, inflated MSRPs and negligible discounts meant much pricier rides. And with used car values up sharply too, upgrading to a new vehicle got much costlier. Interest rates and monthly payments also rose amid vigorous inflation and Fed tightening.
That said, U.S. price growth is expected to moderate moving forward, particularly if supply constraints ease somewhat. Though still elevated, new car prices could stabilize. However, with production costs up, automakers are unlikely to return to pre-shortage pricing anytime soon.
Are fleets and rental companies affected too?
The shortage has not only impacted retail sales, also severely curtailing bulk orders from corporate and government fleets along with rental car companies. These businesses typically receive big discounts, but with consumer demand so high, automakers have not prioritized fleet sales.
Many fleet operators report receiving only a fraction of the models ordered for 2021. For example, rental car companies got around 700,000 vehicles last year, down from a typical 2 million. Without enough cars, they have had to delay expansion plans. Limited fleet deliveries have exacerbated tight supplies in the used car market as well.
Chip shortages forced brands to make trade-offs on directing scant components. Retail customers willing to pay top dollar took priority over less profitable fleet sales. But as constraints potentially ease, fleet allotments could rebound, incrementally helping supplies.
What tactics are dealers using during the shortage?
With customers clamoring for scarce new vehicles, some dealers have turned to controversial sales methods. Some have charged over MSRP, added dubious fees, or refused to sell at listed sticker price.
Others have required add-ons like extended warranties and accessories as a condition of purchase. Forced add-ons let dealers boost profits on thin inventories. However, consumer advocates argue these practices take advantage of buyers.
Markups and mandatory add-ons incentivize customers to avoid high-demand models in favor of more available alternatives. For instance, there are fewer reports of Ford F-150 markups than for the Telluride. Availability and flexibility improves when avoiding “hot” vehicles.
Dealers with ample used car supplies have also benefited by steering buyers towards pre-owned models. Prices for used vehicles rose substantially during the shortage as well.
What relief is in sight for car buyers?
With cramped inventories not disappearing overnight, purchasing delays will remain necessary for many buyers. Placing factory orders for custom configurations still involves long waits, and popular models sell quickly. Being flexible on color, trim, and options makes acquisition easier.
For now, those with the luxury of waiting may want to postpone big-ticket purchases until supply conditions improve. Though timelines are hazy, constraints should gradually start to ease in 2023.
Meanwhile, buying from high-volume dealers with less pricing pressure helps avoid headaches. Reconsidering needs and looking at less popular models opens up possibilities as well. For used vehicles, shopping beyond local listings expands selection.
While still challenging, the market should gain some breathing room in coming months and years. By next year, the car shortage could finally start transitioning towards a new normal.
Conclusion
The confluence of ample demand and tortured supply chains has created a devastating car shortage over the past couple years. Though supply constraints may persist for some time, the gap between auto production and sales is unlikely to stay so vast for long. As conditions improve gradually on multiple fronts, from chips to parts to consumer budgets, inventory levels should tick higher month by month. Automakers have navigated downturns before, and the industry will work feverishly to rebuild output capabilities. For car shoppers frustrated with fruitless searches and long waits, the tides will eventually shift in their favor. Staying flexible and delaying major purchases provides the path forward for now. But with progress on expanding manufacturing capacity, the extreme vehicle shortages pummeling the auto industry should finally start fading rather than worsening as time passes.
| Factor | Effect on Car Shortage |
|---|---|
| Semiconductor chip shortage | Directly reduces new car production |
| Other supply chain issues | Constrains automotive parts supplies |
| Resilient consumer demand | Keeps upward pressure on low inventories |
| Factory cutbacks | Could limit auto industry capacity |
| Transition to EVs | Slows production as retooling occurs |
