With chips still in short supply, car and truck prices keep surging. When will it end?
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Car shopping sticker shock
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Buying a car or truck has always been tricky, from negotiating price to making sure you get exactly what you want.
But rarely has it been as challenging for buyers as it is now.
Two years after the pandemic upended the economy, car dealerships have low inventory despite high demand for vehicles. Even with fewer overall sales this spring, dealers are pocketing record-high profits on new cars and trucks, an average of more than $5,000 profit per vehicle, according to J.D. Power. Consumers sometimes have no choice but to purchase vehicles at or above MSRP, or even without certain features they want.
In April, the average transaction at dealerships was expected to reach $45,232 per new car or truck, up 18.7% from a year ago, J.D. Power reported. And average monthly payments were about $685.
How did we get here?
“It started with the hand sanitizer and toilet paper two years ago, and this is what it’s turned into,” said Ivan Drury, senior manager of insights at Edmunds, the online auto research and review site. “We’re kind of primed for shortages, unfortunately, they’re now getting to be very expensive.”
What happened with computer chips?
Semiconductor computer chips are “essential building blocks” for everything from your cell phone and washing machine to the many electronic components, gauges and “smart” features of your car, not to mention other critical goods such as medical devices, the U.S. Commerce Department says.
A “perfect storm” of factors led to what became the global shortage.
Before the pandemic began in early 2020, chip manufacturers were already having trouble obtaining components and equipment used to make chips, while growth in electric vehicles, 5G and other technology was driving demand.
Then came COVID-19. “The pandemic exacerbated these trends by dramatically increasing demand for products that require semiconductors of all types,” the Commerce Department reported in January. “Simultaneously, supply was disrupted by a series of black swan events such as factory fires, winter storms, energy shortages and COVID-19-related shutdowns.”
The shutdowns and abrupt switch to remote work and school drove demand for consumer electronics, which require chips. Meanwhile, demand for new cars plummeted, with April 2020 sales being the lowest on record and the year ending down nearly 15% from 2019, according to the National Automobile Dealers Association. Many automakers canceled microchip orders, because they weren’t moving vehicles— a move that would later prove to be costly.
The market rebounded as automakers enticed consumers with sales, incentive packages and 0% financing for several months. And their efforts were met with consumer’s open wallets.
“The inventories were then depleted almost, I don’t want to say immediately, but overnight you saw a lot of vehicles just disappear from dealers’ lots,” Drury said.
People wanted cars and dealers were happy to sell, signaling that maybe there wasn’t going to be a lull in vehicle purchasing during the pandemic, Drury said.
With dealers’ vehicle inventories depleted, automakers ramped up production. Sticking to COVID-19 safety protocols during the initial stages of manufacturing was an issue, as were supply chains, Drury said.
With production back in full swing automakers needed chips but found themselves at the back of the line. Other tech-focused companies took priority. The automotive industry buys a small fraction of chips compared with companies that manufacture smartphones and computers; the sudden move to remote working and school created high demand for new electronics.
Automakers have continued to produce fewer vehicles this spring because of shortages.
Things would be different if there were a car seat shortage, because only the automotive industry would be reeling from that, unlike the global demand they’re facing with chips, Drury noted.
“That has disrupted the flow of new inventory clearly all the way up until today, but it’s going to extend all the way out the rest of this year,” Drury said.
No chip? No problem
Several automakers have begun selling vehicles without certain unessential chips. These chips have nothing to do with the safety of the vehicle but could be seat heaters, steering wheel options or rear air conditioning controls.
Automakers have promised to install the chips and restore these functions when they receive the materials, but that could take anywhere from six months to a year. The dealer can sell you a car, but it’s still missing one or two components.
“If it’s going to be something a little more important then they can’t sell you anything at all,” Drury said. “You don’t want that though either, right? That’s a little too risky for a new car.”
If consumers have to purchase a vehicle soon, they need to be certain what they’re actually buying. Don’t assume an electronic feature is included on the car, Drury said.
“Got to make sure you’re paying for what you’re actually paying for and that goes without saying in any sense, but especially when it’s this expensive,” he said.
When will the chip shortage end?
Not any time soon, and almost certainly more than a year out.
Automakers still rank low on the priority list for chip manufacturers. And even if U.S. manufacturers ramp up or begin making chips, that’s going to take a long time, Drury said. Right now it’s a waiting game as manufacturers fight global demand and have to choose if they’ll continue to skip non-essential vehicle features.
Last week, Intel CEO Pat Gelsinger told CNBC that he now expects the industry will be dealing with shortages until 2024.
Gelsinger pointed to constraints on key manufacturing tools, which are preventing factories from expanding capacity.
“That’s part of the reason that we believe the overall semiconductor shortage will now drift into 2024, from our earlier estimates in 2023, just because the shortages have now hit equipment and some of those factory ramps will be more challenged,” Gelsinger told CNBC.
Are vehicles still being sold despite all of this?
Vehicles are flying off dealer lots.
In April, an estimated 56% of vehicles were sold within 10 days of arriving at a dealership, according to an analysis by Thomas King, president of the data and analytics division at J.D. Power. The average time a new vehicle is in a dealer’s possession was about 18 days, compared to 49 days a year ago.
“Even at these record pricing levels, vehicles continue to sell quickly and a significant number of vehicles are being ordered—or purchased—by buyers before they arrive at the dealership,” King wrote in a forecast in late April.
Like the housing market, in some cases new vehicles go to whomever is willing to pay more.
Instead of negotiating with five people about why they need a certain vehicle, a dealer can continue to raise the price until only one customer remains, Drury said.
That’s why consumers have been seeing substantial “market adjustments” to new vehicle prices, on top of MSRP. If buyers weren’t standing at the ready to buy, dealers would back down on price.
“Money talks,” Drury said.
Tips if you’re buying
It may seem daunting to buy a new vehicle now, but time and research can help.
Research dealerships online and read reviews to get an idea of how they operate.
Looking online for the vehicle and features you want can help you act quickly when you find a car or truck.
When ready to buy, make sure the vehicle includes all the features agreed upon with the salesman, or make a note about anything that will be fulfilled in the future.
Take time but also move quickly if a desired vehicle is readily available. Vehicles are being sold at record rates, so knowing what is desired will help.
If going for a test drive or to look at a vehicle, call ahead and make sure the dealership has it on the lot.
If selling a used vehicle, cross shop around and see how much retailers are willing to pay. Any dealer who is willing to sell a car will look at a used vehicle because they need inventory.
Normally negotiating for a new vehicle was just a part of the buying experience, and consumers should still try, but be reasonable, Drury said.
Asking for half off the sticker price will likely get consumers nowhere as dealers might have another interested buyer lined up. But if the dealership is charging multiple thousands of dollars as market adjustments, try to negotiate there.
See if the dealership can throw in certain protection plans or small upgrades to make up for the marked up rate, Drury said. It will cost the dealer more to fulfill those needs, but at the same time the consumer is at least getting something out of the deal.
