Microchip shortage to blame for cost, lack of inventory

Here’s why new and used car prices are so high

Shawn Fenwick, a technician in a detail shop, cleans the windows of a 2018 Nissan Titan that was a trade-in at the Jones Junction car dealership in Bel Air, Maryland period. 

BALTIMORE — When Jeanette Coury and her husband shopped for a car in late May, it took only about a week to search online, test drive a 2018 Nissan Rogue and drive away the next day with a “really great deal.”

The Towson couple found themselves back in the market about a month later, after the Nissan was hit, then totaled. Searching for a similar SUV, they were shocked at how fast the market had turned on its head.

“The experience was the exact opposite,” said Coury, who went back online and made the rounds to the same dealers. “I knew what I wanted, and I knew what I wanted to spend, and I couldn’t find a blessed thing.”

With thin inventory in both new and used vehicles, consumers are finding sparse selection, higher prices, longer than usual waits and little wiggle room for negotiating.

Some vehicles cost thousands of dollars more than the manufacturer’s suggested retail price, or MSRP. Cars viewed online are sold in no time. Some popular used models are fetching more now than they did a couple of years ago.

Worldwide shortage

Industry experts blame a worldwide shortage of semiconductor chips, necessary not just for car parts but for appliances and a range of consumer products.

“It’s supply and demand right now,” said Charlie Chesbrough, a senior economist at Cox Automotive Inc., the company behind Autotrader, Kelley Blue Book and other brands. “People want cars, and the industry has been unable to give them to them. The market is starting to hit a brick wall in terms of inventory.”

That has meant “you can’t go to a dealer and find the vehicle you want or the color or trim you want,” Chesbrough said. “The dealer doesn’t want to negotiate on price. If you don’t want to buy it, there’s somebody behind you that will.”

Demand has been fueled by pandemic-weary consumers looking to resume activities and spend stimulus money.

Inventory levels, meanwhile, were already low after factories closed during last year’s virus outbreak. This year, the chip shortage has “significantly” hurt vehicle production, “causing available supply to be at a critically low level,” Cox Automotive said in a July 27 report.

‘It’s getting worse’

New-vehicle availability fell to a record low 25 days’ supply at the beginning of July, making it more difficult for a buyer to find the exact vehicle, type, color and trim they have in mind, the report said.

For Coury and her husband, weeks passed before they found a vehicle that met their requirements, a 2018 Hyundai Tucson.

A salesperson promised to text them if someone bought it before they arrived at the dealership, and, to their relief, it was waiting for them. They had to spend much of the day waiting for a minor repair because the dealer had no similar vehicles but felt it was worth it. And they resigned themselves to having to pay $2,500 more than on a similar vehicle just weeks earlier.

“I feel for anyone who’s trying to buy a car now,” Coury said. “I feel like it’s getting worse.”

The supply chain struggles differ from past shortages that may have affected only specific manufacturers or certain geographic regions, said Peter Kitzmiller, president of the Maryland Automobile Dealers Association.

“I don’t think there’s a franchise or manufacturer that hasn’t been affected,” Kitzmiller said. And like everywhere else, “dealers in Maryland are extremely short of inventory.”

Much of the product that’s being shipped in is sold already, and for certain cars, buyers are lined up on waiting lists, Kitzmiller said.

The shortage is unfolding as the average age of cars on the road has climbed to a higherthan-normal 12 years, Kitzmiller said. That’s put more buyers in the market to compete for fewer choices.

Continued sales drop

Too few products have caused the pace of sales to drop sharply over the last two months, and that could last through August and September, according to Cox Automotive.

For new cars and trucks, the seasonally adjusted annual rate — or estimate of sales for the year at the current monthly rate — dropped to 14.8 million in July, from 15.4 million in June. It was the third consecutive monthly decline, following a peak in April as the pandemic waned, and compares with an average of nearly 17 million units a month through May.

The supply of used vehicles has constricted as well, in part because fewer are trading in due to the supply of new cars, experts said.

The chip shortage stems from last year when automakers canceled chip orders and closed factories in March and April, assuming vehicle demand would fall during the pandemic. It did, for a while.

By the time demand picked up in midsummer, the chips had been scooped up by makers of computers, gaming systems and appliances, said Jessica Caldwell, executive director of insights at the automotive website Edmunds.com.

“Demand (for chips) is at such a high level, we just don’t have the supply to keep up, so prices are higher,” she said.

Record prices

The estimated average transaction price for a new vehicle in the U.S. hit a record-high $42,258 in June, analysts at Kelley Blue Book reported, up 6.4% or $2,527 from June 2020. June’s average sales price was 99.9% of the average manufacturer’s suggested retail price. By contrast, the average price in January represented 95.3% of MSRP.

Prices of used vehicles are setting records too. At the end of June, average listing price topped the $25,000 mark for the first time, hitting $25,101, according to a Cox analysis. The average used vehicle price has soared 26% since June 2020 and nearly 30% in two years.

That’s a silver lining for used car sellers or for those trading in popular models.

“You could have owned a car for two years and lost no money,” Caldwell said.

Inventory is especially tight for pickup trucks, which along with SUVs have grown in popularity, Caldwell said.

Ford, for one, has struggled, reporting a 32% drop year-overyear in new-vehicle sales in July. At the end of the month, General Motors reportedly reacted to

the chip shortage by temporarily halting most of its full-size pickup production.

Some foreign automakers such as Hyundai and Kia, based in South Korea along with most of the chipmakers, have fared better, Caldwell said.

Cox’s Chesbrough believes the crisis should start easing with increased chip production later this year. But lean inventory could persist through next year, he said.

“It’s going to take a while,” Caldwell agreed.

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