A seller’s market
Evans ponders an unusual situation in the North American automotive sector…
The last 18 months have proved to be a very strange time for most of us. Covid-19 upended just about everybody and certainly when it came to business and commerce, things were literally turned on their head. The motor industry was no exception. In North America at least, the first ripples were felt when auto manufacturers either slowed or temporarily suspended vehicle production in an effort to limit the spread of the novel coronavirus.
On the retail side, a number of jurisdictions forced dealer showrooms to close and service departments/independent repair shops to modify practices to limit physical contact between staff and customers. Given how technology has advanced over the last couple of decades this enabled new sales and service processes to be adopted, including things like virtual showrooms and online scheduling, as well as digital vehicle inspection and repair processes.
Fast forward to today, and while things have opened up and you can now go into a showroom to purchase a vehicle and chat with your mechanic in the service bay, there’s another major issue – an absence of cars to sell and in some cases service too.
Drive by any dealer lot stateside right now and chances are it will look almost empty. A few weeks ago I was on a regional drive with a good friend of mine who was dropping off his leased Ram 1500 to a dealer since he needed a smaller vehicle. When we got to the lot, there were six pick-up trucks for sale – this from a store that normally would have 30 or 40 in inventory at any one time. Across the country, dealers are having the same problem; they can’t get vehicles and when they do, demand is so strong that many go for well over sticker price. And it’s not just new vehicles, but also used. In some cases, a four-year-old truck or SUV is trading hands for more than it cost brand new.
So what is going on? Simply that those production slowdowns that were instigated during the beginning of the pandemic saw many OEMs cut back orders from suppliers, including semi-conductor chips. Given that today’s vehicles have essentially become computers on wheels, and that automakers are also competing with consumer electronics firms and a whole raft of others for semi-conductors, there are, right now, simply not enough computer chips to go around. With the bulk of chips coming from two suppliers, one in Taiwan, the other in South Korea, and the fact it takes time to ramp up production, this situation could last well into the second half of this year and possibly 2023 as well.
Not surprisingly, this situation is causing a radical rethink regarding the entire automotive supply chain. A little over a decade ago, when we were faced with the great recession, many OEMs and dealers suffered with too much inventory and not enough buyers. Today the situation is completely reversed. The chip shortage and supply chain disruptions, including parts sourced from overseas, have exposed just how fragile the so-called ‘global’ village is when it comes to manufacturing and logistics, certainly in the automotive sector. While there are those that are advocating for a true return to the ‘Made in America’ scenario when it comes to many consumer goods such as cars and trucks, achieving that could prove very difficult given how ‘global’ the automotive sector has become. There’s also the question of how much this could impact pricing as well. For decades now, consumers have been spoiled with generous incentives on many products including new cars, a scenario that with the pandemic and the chip shortage has all but evaporated.
Going forward it looks like vehicles, both new and used, are likely to remain more expensive and while this is going to hit most of us in the wallet, higher prices will dictate several things. One, that people are likely to hold on to their existing vehicles for longer. Two, that more of them will require service and repairs over that longer period of time, providing more work and revenue for the aftermarket; and three, with higher prices, producing newer vehicles will also be more profitable. Given that in North America at least, the auto industry is a 9-to-1 job multiplier, this could be very beneficial for the economy over the next decade.