By Ken Robinson, Market Research Manager at Motus
Before the pandemic, local dealerships had hundreds of new vehicles lining their lots on any given day. Cars were available in every size, color and model, ensuring consumers were able to find the vehicle of their dreams. Now, however, a global chip shortage has led to reduced vehicle production and left auto dealers across the country with barren lots. While dealerships wait to replenish their inventory, tens of thousands of new unfinished vehicles sit idle in parking lots waiting to be completed.
Why is there a chip shortage?
The rise in work from home and remote learning as a result of the COVID-19 pandemic drove up the demand for personal electronics that rely on microchips, such as cell phones and laptops. This immediate and dramatic increase far outpaced chip production, and manufacturers were unable to scale operations to meet the market’s need.
In addition to the increased demand, further manufacturing disruptions compounded the chip scarcity. Examples include the winter storms that forced closures of chip plants in Texas, a fire at the Renesas Electronics plant in Japan in April and a lack of water supply to feed semiconductor capacity at a factory in Taiwan. The factories that were able to maintain some level of production shifted their focus to supporting industries that thrived during pandemic lockdowns, such as mobile devices, computers and video games.
How is this impacting vehicle production?
At the same time, the economic recession forced automakers, vehicle suppliers and car dealerships to shut their doors. As sales and demand plummeted, automakers canceled orders for car parts with computer chips. A single part for the modern, high-tech vehicle requires up to 1,500 chips depending on its complexity. These include everything from the components for computer management of engines to driver-assistance features such as emergency braking.
When vehicle sales began to ramp back up, chip production wasn’t readily available to source. The inability for automakers to procure the necessary parts for new vehicles led to significant production cuts. Some automakers have reduced their global production by 40%. In 2021 alone, approximately 2 million vehicles are expected to be lost from production. Meanwhile, thousands of incomplete cars continue to overwhelm automakers’ parking lots until the necessary chips come in.
What comes next?
The combination of extremely low inventories and increasing consumer demand has sent both new and used vehicle prices skyrocketing. The average new vehicle retail transaction price in the first week of July surged to an all-time high of $42,736, up from the previous record of $40,566 in June. This supply and demand imbalance has caused the average pre-owned vehicle price to rise $20,400 – a year-to-date increase of $900. Unless consumer demand slows down, both new and used vehicle prices are likely to remain at record highs while supply for both older and newer vehicles remain low.
What does this mean for vehicle programs?
For those managing vehicle programs, buying fleet vehicles is going to continue to pose a challenge. As a result of the shutdown, fleet orders for the 2021 model year have been cut off much earlier than normal. Fleet managers who are currently looking to replace or add vehicles to their fleets will find it difficult to procure new vehicles until supply rebounds. Until the car chip shortage improves, production constraints could still impact those who choose to wait to purchase or replace vehicles until the 2022 model year.
What should companies be doing?
There are alternatives for those looking to buy fleet vehicles and are unwilling or unable to wait to provide this asset to teams. For example, Fixed and Variable Rate (FAVR) programs reimburse employees for the business use of their personal vehicle. The FAVR method calculates reimbursements based on the costs of owning and operating a vehicle specific to their location. Those costs include insurance premiums, taxes and depreciation, gas, tires and maintenance.
The global chip shortage continues to impact the auto industry, and fleet managers are searching for ways to maintain business operations while simultaneously reducing costs. Striking this balance has proven to be increasingly difficult, but it doesn’t have to be. FAVR programs can help address the challenges associated with limited vehicle inventories while also providing flexibility to employers and equitable reimbursements for employees.