Cars are scarce and prices are up as chip shortage goes on

For the next few months, Charlie Gilchrist figures his 11 car dealerships in the Dallas-Fort Worth area will sell just about every new vehicle they can get from the factories – and at increased prices.

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In normal times, that would be cause for joy. Not so much now. A global shortage of computer chips has forced automakers to slash production. The result has been far fewer vehicles on dealer lots, just as the waning pandemic has fuelled a pent-up consumer demand for cars, trucks and SUVs.

Sheer lack of inventory

Given the robust customer demand, dealers like Gilchrist could sell many more cars and trucks, if only they had more. Even at elevated prices – the average new-vehicle sales price tops $40,000, up nearly 10% in two years – customer demand exceeds supply.

“It’s pretty evident when you pull onto our lots that there’s not much selection,” said Gilchrist, whose lots carry brands ranging from General Motors and Ford to Nissan and Volkswagen. “Our (sales) volume is falling because of the sheer lack of inventory. It will still fall during the next two or three months.”

Diverting computer chips

The across-the-board surge in auto prices contributed mightily to last month’s jump in U.S. consumer prices, the government reported Wednesday. A record 10% increase in used vehicle prices, in fact, accounted for roughly one-third of April’s overall rise in consumer prices – the sharpest monthly increase in more than a decade.

Ford expects to produce only half its normal number of vehicles from now through June. GM and others have resorted to halting production of some cars and smaller SUVs and diverting computer chips to higher-profit pickup trucks and large SUVs. Leading automakers are warning of diminished earnings.

Chip shortage has persisted

The vehicle scarcity and the soaring prices can be traced to the eruption of the coronavirus 14 months ago. As the virus spread, auto factories shut down for a couple of months. With millions more people working from home, demand for laptops and monitors led semiconductor makers to shift from autos to personal electronics. Soon, though, a faster-than-expected economic rebound boosted demand for vehicles, and auto plants tried to restore full-scale production. Yet chip makers couldn’t respond swiftly enough.

With production slowed, dealer inventories shrank. Now, as the chip shortage has persisted, the shortage of new vehicles has worsened, and analysts foresee no return to normal before next year.

New vehicles prices jumping

Yet so far, automakers have been earning big profits even with a depleted inventory, largely because many buyers have been willing to pay more to get what they want. With government stimulus checks and tax refunds in hand, Americans bought about 1.5 million new vehicles in April. That’s an adjusted annual sales rate of 18.5 million – the highest such rate since 2005.

“It’s like toilet paper was a year ago,” said Michelle Krebs, executive analyst for Cox Automotive. “Everyone is rushing to buy a car.”

Cox Automotive surveys suggest that 63% of potential buyers will stay in the market even with higher prices and a meager selection of vehicles. With new vehicles prices jumping, the cost of popular vehicles has become eye-opening. The average price of a new Chevrolet Silverado pickup, for example, is now just under $51,000.

Even so, the supply of vehicles is dwindling. Last month, the nation’s total new-vehicle inventory plummeted 42% from a year ago to 1.9 million. That’s enough to supply only 33 days of sales at the current pace – 88 days fewer than a year ago, according to Cox. At the same time, discounts fell 5% from March to April and 25% from a year ago to an average of $3,239 per vehicle.