Everything You Need to Know About the Semiconductor Car Chip Shortage
This is the story of how tiny computer chips have had a huge impact on the new and used car markets.
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Of all the knock-on effects of the global COVID-19 pandemic, the fact that a shortage of semiconductor chips has made headlines worldwide is one of the strangest. But once you learn about the
What Caused the Car Chip Shortage?
In the early phase of the pandemic, in the spring of 2020, many automakers thought the infectious disease and the related lockdowns around the world would reduce demand for new vehicles. Since the automakers and their suppliers expected lower sales, they canceled some of the orders they had in place for new semiconductor chips. At the same time, tech companies realized that there would be increased demand for personal electronics like video game systems, computers, and mobile devices, so they increased the number of chips they ordered from the electronic component manufacturers.
The total number of chips that can be produced in a given amount of time is not as flexible as automakers and tech companies might want. When automakers realized that demand was rebounding, they tried to reinstate their chip orders. But the future supply of new chips had by this time been reserved by electronics companies, which meant automakers had to join the back of the line and wait their turn to place their new orders.
The car chip shortage is a problem without a quick fix. Increasing chip production means mining more pure silicon and then growing the crystals into wafers that become microchips. Also, chip suppliers can't quickly increase production because their plants are running at capacity, and it takes time to build new manufacturing lines.
The shortage hit the auto industry hard because most companies use just-in-time (JIT) manufacturing, which means they have only a small quantity of parts in stock at any moment. If the trucks stop delivering parts, there’s no way to keep building cars. Some automakers use different strategies, which is why the chip shortage affected some automakers more than others. Toyota, for example, realized JIT supply chains can be a liability after a massive tsunami disrupted its production in Japan 10 years ago. The automaker shifted its strategy to stockpile some important parts after that event, and was better able to keep building vehicles in 2021 than some of its competitors.
How Has the Chip Shortage Affected the New Car Market?
With fewer chips available to put into new cars, automakers have been forced to build vehicles without some features or curtail production altogether. As the Toyota example shows, the details differ between companies and regions. Taken as a whole, the effect has been massive. IHS Markit said in October that it estimates the chip shortage and other COVID-related impacts reduced global vehicle production by 6.2% in 2021, or more than 5 million vehicles. This has resulted in fewer new cars on dealership lots.
With more buyers than vehicles, some dealers have raised prices on new cars, a practice called “dealer markup.” Of course, dealers have been selling cars for more than the manufacturer's suggested retail price (MSRP) since well before the pandemic started, particularly on popular models. Still, the lack of new vehicles on dealer lots has driven desperate customers to spend thousands of dollars more on their new car than they otherwise would have. News reports of people paying well over the sticker price are easy to find, from $3,000 extra for a 2021 Subaru Outback to almost $7,000 for a 2022 Honda Civic Si. The hottest new vehicles, such as the Ford Bronco, can command markups of tens of thousands of dollars. iSeeCars.com noted that new cars were listed at an average of 11.4% more than their MSRPs at the tail end of 2021.
How Has the Chip Shortage Affected the Used Car Market?
When new car shoppers can’t find or can’t afford the vehicle they want, they turn to the used car market, driving up demand and prices. Exact numbers are tricky because used car prices are affected by the vehicle’s age and condition, as well as external factors like the chip shortage. Anecdotes about people selling cars they bought a few years ago for the same price or more than what they paid for it are common, and older cars in excellent shape or with low miles can be sold for well above the prices they commanded before the pandemic began. As an example, the Washington Post reported on an auction from October 2021 for a 2019 Honda Civic. It sold for around $21,000 when new. As a two-year-old used car with 4,000 miles, it sold for more than $27,000. According to Car Gurus, the average price of $30,057 for a used vehicle in December 2021 is 32% higher than it was in December 2020.
When Will the Car Chip Shortage End?
How long will car buyers face high prices and short supply? Analyst predictions have come and gone over the past year, but many experts and automakers are now saying the chip shortage is likely to end sometime in the second half or 2022 or early 2023 or, well, some other time. The boss of Nissan, Makoto Uchida, recently told the BBC, "I can't give you a date."
The automakers are doing what they can to bring about an end to the shortage. Ford, for example, made a deal with chip manufacturer GlobalFoundries in November to increase the automaker's supply. That same month, General Motors said it would work with seven chip suppliers to develop new chip microcontrollers to reduce the unique chip designs needed in future vehicles by 95%.
