Chip shortage leaves car buyers in ‘Tickle Me Elmo’ scenario
Don’t expect the usual summer blowouts at your local car dealership, auto industry experts advise. The semiconductor shortage is expected to impact 3.12 million vehicles worldwide, and Michigan car inventories are already shrinking.
In Ann Arbor, Varsity Ford has built its success on a large inventory of cars, but if the current supply rate continues, the family dealership will run out of cars by the middle of next month, the general manager said. Matt Stanford.
“This time last year we were wondering how we were going to sell all the vehicles we had with COVID and the shutdowns,” he said. “It’s exactly the opposite this year.”
The dealership has shrunk by more than half of its usual inventory, Stanford said. Supply and demand “mirror the real estate market,” he said.
While he doesn’t expect there to ever be a completely empty lot, Stanford said longer wait times and fewer options are already a reality.
Its dealership is answering calls from customers who have been looking for weeks without luck, hoping that Varsity Ford has its usual 1,000 to 1,300 cars on the lot.
For those who have a deal at Varsity Ford, the ordering time has been reduced from six weeks to ten. Leases have also been extended if there is no vehicle ready for existing customers, Stanford said.
As a result, buyers make decisions faster. At the risk of sounding too much of a pushy car salesman, Stanford advises market participants not to wait to buy a car.
“It’s like the Tickle Me Elmo,” he said, referring to the 1996 Christmas season craze for a popular toy in short supply. “If it’s on a shelf at Toys R Us, you better grab it because it won’t be there the next day.”
Globally, 2.07 million vehicles have been affected by production breaks, according to AutoForecast Solutions’ latest report from April 23.
Production volume forecasts estimate that a total of 3.12 million vehicles could be impacted in 2021, according to the report.
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The semiconductor shortage is the latest symptom of the pandemic’s disruption in the global supply chain, but it has also highlighted a reliance on semiconductor technology.
Semiconductor chips are essential components of most electronic circuits. They can be found in phones, computers, televisions, appliances, and solar panels.
Chips have become almost as essential as metal in the automotive industry. It’s not just stand-alone components like park assist or navigation and entertainment upgrades that rely on solid-state chips. The chips power the basic functions from wiping the windshield to locking the door to braking.
The United States accounts for 51% of the global market for companies that design, manufacture and sell semiconductors, but less than 15% of the assembly and testing market occurs in America, according to the 2020 Semiconductor Industry Association report. .
Almost 80% of semiconductor foundries as well as assembly and testing operations are located in Asia.
The Alliance for Automotive Innovation, which represents major automakers including General Motors, Ford and Stellantis, has pushed the federal government to step in and prioritize U.S. semiconductor production with a focus on automobile industry.
In a letter to the US Department of Commerce, John Bozzella, group chairman and CEO, wrote: “The current semiconductor supply chain crisis has certainly exposed the overall capacity limits of the semiconductor industry. semiconductors and revealed significant risks in the current automotive semiconductor supply chain. “
In the short term, the Auto Alliance suggests a tax incentive for investment in semiconductor manufacturing. Bozzella writes that an incentive can help companies offset the cost of creating new lines in existing facilities or reallocating current production to meet ever-changing needs.
Over the long term, Bozzella has supported policies that can encourage additional capacity and strong funding for programs permitted under the CHIPS for America Act.
In particular, Bozzella advocates that some of the funding within the CHIPS for America Act be reserved for the auto industry so that it is not left behind – a demand that US tech groups have opposed.
The semiconductor chips in iPhone and TVs are not the same as those involved in unwinding a car window. In fact, some automotive semiconductor chips are specialized down to the make and model of the car.
Globally, 33% of semiconductors produced are used for communication devices such as cellphones and 28.5% are used for computers, compared to just 12.2% for auto parts, according to the 2020 report. Semiconductor Industry Association.
The specialization and price of these chips has benefited from both a lean and global market, said John Taylor, director of the marketing and supply chain management department at Wayne State University.
Creating a supply based purely on demand avoids excesses and inflation and allows for product diversification, but it is not without vulnerabilities, Taylor said.
“It is based on certainty and if there is no certainty you run into problems very quickly,” he said. “They are not resilient enough to cope with uncertainty.”
Taylor said he was hesitant to locate the chip production. He is not convinced that this will add more security than it costs in innovation. Global outsourcing can also serve as a safety net if and when a natural disaster occurs in any part of the world.
Disruption, to some extent, is inevitable – 2020 has only been a particularly disruptive year.
“We have been hit by a pandemic, fires, geopolitics and unusual surges in demand that have left us in a bad position,” Taylor said.
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AutoForecast Solutions predicts that the shortage will primarily affect the first half of 2021 with a slow recovery in July.
Most of the volume effects resulting from manufacturer shutdowns for less than three weeks are expected to be fully recoverable during 2021 and should not impact total annual production targets, according to the report.
Part of that optimistic look at the recovery hinges on government involvement, said Joe McCabe, president and CEO of AutoForecast Solutions.
“I really think it has to come from that top down,” he said. “Investing in the local workforce, in the local production footprint and in our own ability in the United States to be more innovative.”
Semiconductor foundries can’t be built in just a few months, but going forward, McCabe believes the global attention this shortage has garnered will translate into better investments and lessons learned, including sourcing. direct and wholesale pre-purchase.
The recovery is also being boosted by manufacturers using a build and maintain strategy, resulting in parking lots filled with nearly full vehicles.
Globally, around 76% of vehicles affected by the shortage will be salvageable. However, the predicted sunk rate in North America is the highest of any region. The impact reported in North America is already higher and has lasted longer than in other parts of the world, according to Auto Forecast Solutions.
In Michigan, eight auto factories have reported production breaks. The lost production days range from two to 35 days and the lost volume ranges from 6,021 vehicles to 28,726.
In total, more than 79,000 vehicles would be affected, but only 4,000 would be completely lost in Michigan, according to AutoForecast Solutions.
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For the average consumer, production breaks can affect their purchasing habits. Brand loyalty has been dissolving for some time, so whichever company has the supply it will likely take the lead in sales, McCabe said.
“This dynamic of changing consumer tastes is really going to show up in a year,” said McCabe. “We’re going to have the same conversation of, ‘Who needs to turn on the tap fastest?’ and then “who benefited from the potentially additional sales?” “
The decrease in inventory will be more noticeable in crossovers and passenger cars, as they have been hit hardest by the shortage, McCabe said.
AutoForecast Solutions has kept tabs on the percentage of affected pickup trucks, which has increased dramatically over the past four weeks, McCabe said. These are the money makers, he said.
When the chips become available, McCabe predicts that automakers will push their high-profit vehicles like large SUVs and pickup trucks, rather than building up the lagging inventory of crossovers and passenger cars.
The April report estimates that 18% of North American pickup truck production has been affected. In comparison, crossovers account for 44% of the production impact and 28% come from passenger cars.
For now, low inventory will crush round-trip negotiations at the auto dealership and inflate used car prices, McCabe said.
“You’re going to see very small deals at dealerships right now,” he says. “If you want a vehicle and now you want it in the lower inventory, you’re going to pay for that right to get that vehicle.”
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