The New Car Market is Insane

The entire auto industry has been hobbled for months by the worldwide shortage of semiconductor chips, which has prevented manufacturers from producing enough vehicles to meet the demand from Americans eager to spend their pandemic savings and stimulus checks. As a result, many dealerships are practically barren of inventory, and new rides are fetching record prices.

The cost of used vehicles, meanwhile, has rocketed into the stratosphere, F9-style. On Tuesday, the Department of Labor reported that the retail price of pre-owned cars and trucks jumped a record-breaking 10.5 percent in June, after rising 7.3 percent in May and 10 percent in April. It doesn’t matter if your heart is set on a tricked-out new Ford F-150 or you just want a lightly used Honda Civic to inconspicuously cart you from point A to point B. The market is brutal for everybody.

How long will we be stuck with these shortages? Is the car biz’s COVID hangover destined to linger on? Or will the industry, like the rest of our once-dreary-eyed economy, soon return to normal? When I asked, industry analysts told me that shoppers will likely have to wait until 2022 for the auto industry to settle, though exactly when is hard to say. Some of the pain, especially in the used car market, could begin to ease up earlier. But it could be well into next year before prices fall back to earth and customers see the sort of selection they’re used to at dealerships.

“I think we should see a little bit of relief by the end of the third quarter,” Jessica Caldwell, executive director of insights at Edmunds.com, told me. “But it will take time for chips to make their way into vehicles and vehicles to make their way into the market. And that’s why we aren’t out of the woods yet.” Charlie Chesbrough, a senior economist at Cox Automotive, agreed: “There are more and more folks saying it’s going to take a few quarters or a year to get back to those more normal levels” of inventory.

The automotive sector’s current troubles date back to the start of the coronavirus crisis, when car manufacturers shut down their factories and canceled orders from their suppliers, including chip-makers, in the face of nationwide lockdowns. Instead of waiting around for Ford, GM, and the rest to restart production, semiconductor firms simply went and found new customers, selling more product to smartphone- and other electronics–makers whose business was suddenly booming.

Once the auto companies turned their assembly lines back on, they discovered that there were no longer enough chips to go around. The shortage effectively kneecapped their ability to produce cars, since modern vehicles are heavily computerized, with each containing thousands of chips.

“If you’re at a party, and you leave the room for a while, there’s no guarantee that your seat will still be there when you return,” Bernard Swiecki of the Center for Automotive Research told me. The auto industry, which is a relatively small customer for most semiconductor-makers, effectively lost its seat at the bash. “Nobody out of the goodness of their heart is going to hold that capacity just for you.”

The industry’s chip famine has forced automakers to idle plants and cut back production throughout 2021, while scrounging for pieces of silicon wherever they can find them and occasionally cutting features like wireless phone charging to economize their semiconductor rations. The situation has been exacerbated by a fire at a Japanese chip-maker and the winter freeze in Texas, which put further strain on the world’s semiconductor supply.

The shortage of new cars has had the knock-on effect of sending used car prices soaring to unprecedented heights, so that some owners are finding that their older-model vehicles are now worth more than when they were purchased. The specific factors involved are varied and complicated. Rental car companies, for instance, aren’t selling their older fleet models back to dealers, because they can’t get new replacement sedans or SUVs. The customers who’ve been pushed out of the new car market are often wealthier, and so they can afford to spend more. There also appears to be a lack of cheap, much older vehicles on lots, because car sales were depressed in the aftermath Great Recession. But most of the factors flow from the chipocalypse and general dearth of new cars.

It’s not entirely clear at this point whether the worst of the chip shortage is fully behind the industry, or how long the problem will take to fully solve. Just recently, Audi’s CEO said that the issue could dog the company until the end 2022. Based on those kinds of announcements, Swiecki told me that he’s concerned that “the root solution seems to be trending further off in the future rather than closer.”

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