The global chip shortage has already had a major impact on the automotive industry with major manufacturers having to dial back production as a result.
Less availability of new vehicles has helped push the demand for used cars higher. Couple that with stimulus checks and a reopening economy where people are going back into work and used car sales are at record levels. The growth in demand for used vehicles has led to higher prices at the same time that new cars are being sold with far fewer discounts and incentives than usual.
Shortage Timetable
The lack of inventory at dealerships has led to many consumers and even some commercial buyers pivoting to used cars over new models pushing prices up as demand increases. The global semiconductor shortage has led to many auto plants having to shut down and which is potentially costing those companies billions of dollars in lost sales. Many analysts originally expected the chip shortage to only be a short-term problem for these manufacturers but recent delays are not helping matters. Tim Fiore, chair of the Institute for Supply Management Purchasing Manager Index survey, recently said he expected the shortage to have a significant impact on production until the fourth quarter of this year.
The Cons
Not only is this shortage leading to fewer available vehicles at dealerships around the world, but new car prices are rising as well. Sales and incentives are down as well since there is a shortage of available new cars and auto manufacturers don't have to provide as many sales to get those cars off the lot. Average transaction prices are now over $40,000 as companies are focusing on higher trim levels as feature-packed vehicles provide more profit over base models.
Many of the largest automotive companies have been attempting to "catch up" after having to shut down plants last year as a result of the coronavirus. The chip shortage has only further hurt the ability to catch back up to demand as people are looking to buy new cars.
While this chip shortage is certainly causing many problems, it has not been all bad for the sellers or buyers.
The Pros
Demand for new and used cars is rising and manufacturers have not been able to meet it, which is really not the worst problem to have. Having more customers who want to buy your product than you can satisfy is frustrating for sure, but the good thing for these producers is that it is affecting all of them. Another car manufacturer can’t just increase production and take over a competitor’s market share since they all are affected by the chip shortage. Additionally, these firms don't have to market their products as much, which provides some cost savings. Companies are spending less on marketing and gross profit for each vehicle is higher due to the higher trim levels and reduced discounts.
Meanwhile, consumers have not been able to purchase new cars as much as desired and prices are higher than usual. However, the rise in demand for used vehicles has led to higher trade-in values for customers either looking to purchase another car or just selling their current one. Dealers want to fill their inventory and are willing to pay more for used cars especially as demand for those used vehicles are higher due to the chip shortage. As a bit of side note, the rising demand and inability to reach that by producers are positive signs for how the economy is recovering as people are able to willing and able to purchase a new car.
How To Play It
While automakers aren't making the profits they could be, margins are still high. Mary Barra, the CEO of General Motors (GM) sounded optimistic about the company's ability to navigate the shortage. But the real winners here are large used-car dealers. There have been reports recently that rental car companies are buying used cars to try to bulk up their fleets.
Autonation (AN) is one of the country's largest auto-dealer networks, owning dealerships that sell new and used cars as well as running several auto auctions where used cars are sold wholesale. CarMax (KMX) is another nation-wide auto dealer. While a singular used-car lot may do well in this environment, dealers with large networks that can move inventory around to better meet demand will likely do even better, especially as they're trying to make sales to commercial buyers who are seeing their own businesses suffer from not having vehicles available.
