Pandemic and Chip Shortage Create Turmoil for Car Sales

The combination of the pandemic and a shortage of microchips has created a nightmare for both buyers and sellers of new and used automobiles.

In the pre-pandemic years, automobile manufacturers and dealers had developed all sorts of incentives to buy new cars, such as low-cost and no-cost financing plans. No more. Today, you’re lucky to get a car for the suggested manufacturers retail price (SMRP).  There are even stories of dealers selling ABOVE SMRP.

According to Car and Driver, the combination of strong demand for new cars and tight inventories has created a “perfect storm” of high vehicle prices. Many buyers in 2021 are paying far more for new vehicles compared to last year, and the global microchip shortage continues to affect production for many models.

Car and Driver (May 5, 2021) adds that Cox automotive reports new vehicle inventory is currently down 25% (compared with last year at this time) and soon could be down as much as 40%. General Motors said that its transaction prices rose by an average of $3,500 per vehicle in the first quarter of 2021. Ford claims that its high average transaction price of $43,600 in April 2001 was driven by a greater mix of more expensive SUV and truck models, which now comprise 94% of sales since the company dropped most of its passenger car models.

The May 13, 2021 edition of Forbes reports the across-the-board surge in prices contributed in a big way to the recent jump in U.S. consumer prices — the sharpest monthly increase in more than a decade.

Forbes goes on to report that vehicle scarcity and soaring prices can be traced to the eruption of the coronavirus 14 months ago. As the virus spread, auto factories shut down. With millions more people working from home, demand for laptops and monitors led semiconductor makers to shift from automobiles to personal electronics. The faster than expected economic rebound suddenly boosted demand for vehicles, and auto plants tried to restore full scale production. Unfortunately, the chip makers could not respond fast enough.

The nightmare scenario extends to used cars. Consumer Reports (July 13, 2021), reports that used car prices jumped dramatically in June 2021 over the previous year.

In June, used cars and trucks showed both the biggest year-over-year as well as month-over-month gain across all categories, according to Nick Woolard, an analyst in TrueCar, a Consumer Reports partner.

There is a silver lining, according to Consumer Reports: trade-ins will never be worth more, and that may put buyers in a better position to purchase a new car if and when they become available.

The third unpleasant scenario concerning the car industry is the cost of repairs and the inability of the average car owner to pay for those repairs. According to the American Automobile Association (AAA), one-third of car owners (some 64 million American drivers) cannot pay for vehicle repairs without taking on debt.

The recent AAA study showed the average car repair bill is $500-$600. The AAA estimates the cost of owning and operating a car is $8,500 a year and that millions of Americans are failing to set aside funds for car repair.

Post-Pandemic America clearly has become a rough ride for car owners.