Car Chip Shortage - What Dealers Need to Know in 2022

May 27, 2022

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Car Chip Shortage - What Dealers Need to Know in 2022

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We’ve all seen the news headlines: “Global Car Chip Shortage Expected to Continue into 2023.” But what does that actually mean and how will it affect your dealership? We’re here with an auto chip shortage update for dealerships.

The chip shortage has slowed the production of new vehicles significantly since the Covid-19 pandemic. This in turn has driven up demand and prices for new cars over the past two years. Ultimately, new cars are in short supply and in high demand. And this won’t change anytime soon. Good news for used cars right? Not exactly. With new cars in short supply, demand for used cars is high, but it’s also putting a squeeze on vehicle availability. 

Make no mistake, no one in the auto industry is immune from feeling the effects of the chip shortage. Yet, there are choices and options that can help us navigate this bumpy road. Below we’ll break down the vehicle chip shortage, why dealers should care, and share some advice on how to maintain customers despite it. 

What are Chips?

The chips everyone’s talking about in the automotive industry are tiny transistors. These microchips are the brains behind cars. They control the car’s safety features, its infotainment system, its fueling system, and even its battery if it's an electric vehicle.

Each car can easily have up to three thousand of the little things. However, cars can’t function without them. The new car industry relies on these computer chips to manufacture cars. Subtracting them from the equation grinds production to a halt.

These chips are also prominent in computers, cellphones, and most other smart devices. This means they’re always in high demand. 

Semiconductor chips are made out of silicon, a raw material found in grains of sand. Silicon is a natural conductor of electricity and is abundant in nature. So there’s no shortage of materials needed to make the chips. The shortage starts with the chip manufacturers themselves. 

What Caused the Chip Shortage?

The global chip shortage is a product of many different problems that all came together as a perfect storm. While the Covid-19 pandemic absolutely started the chain reaction, the lockdowns are not the only reason for the shortage. 

There are six primary reasons for the auto chip shortage. No one thing is to blame, but rather all of them share equal responsibility. However, because the weak links are so spread out, it’s proven difficult to remedy. 

The Pandemic

Many chip factories operated at a reduced capacity during the height of the pandemic. A few even had to shut down completely because of Covid outbreaks. This disrupted manufacturing and severely limited the chip supply coming out of factories in 2020. 

However, even once the chips were manufactured, they still had a long way to travel. Covid affected the shipping ports as well. Many shipping ports temporarily closed during the pandemic, causing cargo to pile up on the docks. When shipping resumed, there were bottlenecks because there was more cargo than freighters. 

Further, China also limited exports and the U.S. put sanctions on imports from many countries to slow the spread of Covid. This meant it took even longer for chips to get to U.S. automakers. 

Canceled Orders at the Start of the Pandemic

Microchips aren’t made on-demand, but rather auto manufacturers have to order them at least a year in advance. At the start of the pandemic, many automakers looked at the declining market and canceled or reduced their orders for the next few years. 

While the demand did drop temporarily, there was never a full recession like automakers anticipated. No one could’ve predicted that car sales would pick right back up. Not only that, the demand for cars has risen because of the safety of traveling in a personal vehicle during the pandemic.  

Car manufacturers are still suffering from these canceled orders. They freed chipmakers to take even more orders from other electronic companies, which in turn put car chips on backorder.  

Factory Shutdowns due to Natural Disasters

The past two years have been rife with natural disasters that have impacted chip production. For a chip plant to keep up with demand, they have to run 24/7. So even a few days offline can put a wrench in the entire supply chain. Combine that with the wild number of disasters, and you have a microchip shortage based on natural disasters alone. 

  • Between 2020 and 2021, three chip factories burned down in Japan.
  • In 2021, Taiwan had a drought, which damaged and closed multiple plants.
  • In February 2021, the Texas winter storm shut down three plants. 
  • In February 2021, an earthquake caused a blackout at a Japanese plant.
  • In September 2021, a power outage in Germany temporarily closed three factories.

The War Between Russia and Ukraine

The war between Russia and Ukraine has additionally created many shortages. Specifically, Ukraine is home to two major suppliers of neon. Automakers need this raw material for the lasers that make the chips. With the devastation in Ukraine, there’s now a worldwide neon shortage. 

When Will The Chip Shortage End?

The automotive chip shortage and supply chain vulnerability have been slowing car production for the past two years. Semiconductor manufacturers will continue to be behind for the foreseeable future.

Because chips are not produced on demand, the shortage can’t just be fixed by placing new orders. The delays have to play out and wait for factories to produce the new orders of chips. Multiple chip manufacturers say it could take up to two years for their output to meet demand. 

Despite that, some experts were projecting an end to the shortage in 2023, but that was before the war in Ukraine. Now, there’s not a clear end in sight and there won’t be until the war in Ukraine is resolved. Even once the war ends, it may take years for Ukraine to recover to the point where they can produce enough neon to meet the demands. 

What Does This Mean for Dealers?

Ultimately, new cars aren’t manufactured at a rate that matches their demand. This stems from the missing chips that automakers can’t get enough of. Because of this, car prices are at an all-time high, often a couple of thousand dollars over the manufacturer's suggested retail price (MSRP). The demand has had both a positive and a negative impact on dealerships:

  • Positive: New vehicles that dealers can get their hands on, sell fast and usually well above MSRP. 
  • Negative: Car dealers have a hard time getting their hands on new vehicles. 

However, since new vehicles are hard to stock and keep on the lot, dealerships should pivot their car-selling strategy. There are a few ways to build and maintain customer loyalty that doesn’t involve selling new cars. 

Stock Via Online Car Auctions

Filling your lot with used vehicles has never been more important. Since new cars are limited, it’s a great time to purchase wholesale cars from auto auctions. Wholesale auto auctions like ACV support the automotive industry by buying and selling used cars online. You can be competitive if you know the wholesale value of a car. 

Don’t worry if you don’t know how to get into dealer auctions. Since ACV is online, it’s an accessible option for dealerships anywhere. Further, buying cars at online auto auctions gives you 24/7 access to nationwide inventories. This makes stocking your lot with the right vehicles for your customers easy. 

Market Used Cars

Consumers understand that new cars are so hard to come by right now. Leverage this as you market your used vehicles. Whether you’re getting used cars from trade-ins, buy-backs, or online car auctions, having more stock on the lot will help you remain competitive. 

Many car buyers are open to buying used or new depending on what’s available in the car market. So don’t hesitate to load your stock with quality used vehicles. They’re selling like hotcakes!

Stock Different Brands

Some brands are more affected by the shortages than others. In December, Kelley Blue Book conducted a survey where they found that Toyota, Kia, and Honda dealers had about 20 days of inventory. Alfa Romeo, Dodge, and Jeep dealers averaged three to four times that inventory.1

If your dealership tends to only stock certain brands, it may be time to branch out. You can start by stocking models comparable to your best-selling vehicles. 

For example, if an SUV like Toyota’s RAV4 gets a lot of traction at your dealership, consider stocking the Jeep Cherokee or the Ford Escape. Buyers are more open to comparable models because of the chip shortage.

Offer Creative Auto Services

Many dealerships are pivoting to being more than just a place to buy a car. Offering different services is a great way to stay relevant and build customer loyalty. This is even when they’re not actively buying a car from the dealership. 

Consider brainstorming with your dealership employees to decide what’s realistic for you. After all, each employee has a different experience and may share insight about customer needs. Here are a few ideas to get you jump-started. 

  • Offer maintenance packages that new or used car buyers can add on. This may include oil changes, tire alignments, or other tune-ups. 
  • Offer vehicle inspections.
  • Sell aftermarket car parts to customers.
  • Create a roadside assistance plan to tow and otherwise assist drivers. 

Get Creative to Stay Competitive 

Ultimately, the semiconductor chip shortage of the past few years is complicated. It stems from a host of geopolitical conflicts and sanctions, the pandemic, incorrect market projections, and natural disasters. Because of the many factors, the chip shortage is not something that can be easily (or quickly) resolved. 

With no clear end in sight, patience is the key. For now, dealers should focus on finding creative ways to stock their lots and build customer relationships. 

Start finding great inventory by registering below. We look forward to working with you at ACV Auctions

Sources

  1. Kelley Blue Book. “Buying a New Car During The Chip Shortage” Retrieved May 2022 from https://www.kbb.com/car-advice/buy-car-chip-shortage/