AUTOMOBILE DEALERSHIPS
Still Low on New Vehicle Inventory? Here’s Why…
Benjamin DeForest Manager, CPA
12 April 2021

The automotive industry faced many challenges at the beginning of the COVID-19 pandemic, including keeping dealerships sanitized, complying with business limitations due to state regulations, and administering new federal relief programs. Despite the seemingly endless list of challenges that dealerships battled during the pandemic, there is one that continues to plague dealerships across the country in 2021: lack of inventory.

At the beginning of the pandemic, consumer demand for vehicles dropped off and automakers shuttered production and scrambled to implement new COVID safety measures in their factories. By the time consumer demand rebounded in the second half of 2020, production of new vehicles continued to lag. As vehicle production played catch-up, interest rates plummeted to historic lows and continued to drive customer demand through the end of 2020. The combination of reduced vehicle production and increased customer demand led to some of the lowest vehicle inventory levels seen in years. Prices soared for customers as dealerships struggled to keep popular vehicles in stock, particularly pickup trucks and SUVs.

As automakers attempted to catch up to demand in late 2020, a new problem emerged in the form of a global semiconductor chip shortage. Semiconductor chips are the “brain” of all electronic devices and are being relied upon more heavily than ever as technology expands to every part of life, including automobiles. These semiconductor chips are required to operate many automobile systems, including infotainment, brakes, and power steering. Some high-tech vehicle models may use hundreds of semiconductor chips to process complex vehicle technologies. Due to their obvious necessity in today’s modern vehicles, the shortage of semiconductor chips created doubt about profitability expectations for auto manufacturers in 2021.

To understand why the semi-conductor chip shortage continues to plague the automotive industry in 2021, it is helpful to go back to its inception. When the pandemic began and vehicle assembly plants ceased operations, semiconductor chip manufacturers diverted chips away from the automotive industry and toward consumer electronics as there was a heightened need for personal computing devices when more people began working from home. The automotive industry rallied faster than expected but with consumer electronics still booming, semiconductor chip manufacturers did not pivot as quickly back to production of automobile chips. With semiconductor chips taking up to 26 weeks to produce, catching up with the automotive demand was difficult for the chip manufacturers and the shortage began. In addition to the challenges related to COVID, chip producers around the world were disrupted due to several unusual disasters such as a freezing winter storm in Texas, an earthquake in Japan, and a fire at a chip factory. These issues only compounded the difficulty of meeting the voracious demand for chips from automakers in their effort to produce inventory.

Another hurdle for the automotive industry is competing with thousands of companies worldwide for the limited number of semiconductor chips produced. It is certainly difficult for the auto industry to compete for attention from chip manufacturers when the entire automotive industry spends approximately $40 billion on semiconductor chips per year while consumer electronics company, Apple, spends approximately $50 billion by itself on semiconductor chips each year. This disparity has led the chip manufacturers to prioritize the consumer electronics companies with whom they do significantly more business year-after-year.

Due to the chip shortage, several manufacturers have stopped production on certain vehicles in 2021 as they await supplies to arrive. These manufacturers include Ford, GM, Honda, Hyundai, Nissan, Toyota, and Volkswagen, among others. Many manufacturers are attempting to maximize the use of their semiconductor allocation by using their chips on hand to produce their best-selling models. This strategy comes with its own challenges as many of the high-end, popular vehicles do not use the same chips as the less popular models.

Although some manufacturers project lost revenue of $1-$2 billion due to the semiconductor chip shortage, the automotive industry is poised for another strong year in 2021. The semiconductor chip situation is fluid and while dealerships continue to struggle to maintain inventory in the early months of the year, many industry experts believe the shortage will slowly come to an end during 2021 as the chip producers get caught up. These experts expect vehicle production to rebound in the second half of the year once semiconductor chips are more readily available. The good news for dealerships is that customer demand for vehicles continues to soar as interest rates stay low and customers are armed with their freshly minted stimulus checks. With a bounce back in inventory levels, the future looks bright.

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