How the Chip Shortage Impacts the Car Industry

July 8th, 2021 by

The re-opening of economies worldwide has resulted in supply chain issues for just about everything. Paper goods, electronics, food products, and more have gone through what supply they had, and even though they continue to manufacture and distribute, they currently struggle to keep up with demand. Unfortunately, the automobile industry wasn’t spared from this supply chain phenomenon. So let’s take a closer look at how the recent chip shortage has affected the car industry and why.

What Caused the Chip Shortage?

Why is there a chip shortage?

“CCD Chip” licensed under CC BY-SA 2.0 via Flickr by fox-orian

Recent market conditions have impacted the automobile industry in ways we’ve never seen before. The snowball effect began when automobile factories shut down for several months, through no fault of their own. This shutdown resulted in lower inventory levels as people bought many available vehicles as businesses reopened.

Another snowball effect occurred when those chip manufacturers transitioned their production from supporting the auto industry to the computer segment. All those people that had to work from home needed computers, monitors, modems, phones, and more. Now that the auto manufacturers can start production, they face the problem of not having the parts to complete the process, including electronic chips, because the chip manufacturers have spent the last year trying to keep up with the computer segment demand.

The auto industry represented a small percentage of the chip manufacturing industry before the shutdown. With the additional demand for phones, computers, and other electronics, the chip manufacturers have struggled to keep up with worldwide demand. Political leaders have lobbied their counterparts in those countries with the most production, but the simple fact remains that demand has risen higher than current production rates. Many countries, including the United States, have created stimulus plans to encourage companies to build new factories, but that won’t immediately impact the current situation.

Weather and fire have played a role in the chip shortage. Taiwan experienced severe drought over the last months. The chip manufacturing process requires large quantities of pure water, severely impacting Taiwan manufacturers’ ability to produce chips. Storms in Texas forced three semiconductor factories to close temporarily. Even a recent fire shut down one manufacturer in Japan responsible for making chips in support of the auto industry.

Why Are Computer Chips Important for New Cars?

You might remember when your most sophisticated piece of electronic equipment in your vehicle was your car stereo or maybe that dash-mounted radar detector. That’s not the case any longer. Modern cars have more technology than ever before, and we can expect in-vehicle, safety, and entertainment technology to continue to grow in the auto industry.

You’ll find electronic chips in nearly every element of your car. Transmissions now use electronic technology to shift gears and deliver power. Advanced driver-assist systems use various sensors to collect information and rely on computer chips to process the data and communicate that to other vehicle systems like braking, steering, suspension, and more. And all those systems have electronic components, too.

Most infotainment systems feature new technology that syncs your iPhone or Android with Apple CarPlay and Android Auto. These systems rely on chips to link and operate your smartphone, so you can make hands-free calls, access your favorite apps, and stream your playlists while you cruise to and from work. Built-in navigation systems need processing chips to link to satellites and download traffic data and routes.

A recent article in the New York Times cites that the average modern vehicle uses over 3,000 chips to make systems work, from fuel injection to anti-lock braking systems and even your headlights. If one car requires that many chips, you can imagine the impact of a chip shortage on the entire auto industry.

How Has the Chip Shortage Affected the New Car Industry?

The impact of this chip shortage impacts the new car buying experience in several key ways. For starters, the IHS Markit consultancy group reports that the auto industry production as a whole has dropped by 1.3 million vehicles over the first three months of this year because of the shortage.

Delivery Delays

Because of the chip shortage, auto manufacturers currently can’t keep up with the demand. If you were to order a new Ford, you’d get a quote for somewhere between 8-10 weeks for delivery. In some cases, buyers experience up to 12 weeks of delay in getting new orders.

Reduced Availability on Certain Models

Like Daimler’s Mercedes division, some manufacturers have temporarily shut down factories that produce their lower-priced C-Class sedans. Mercedes has some chip inventory to work with, but has to triage which vehicles get those chips, and they’ve decided on using them in their higher-priced models. If you want a C-Class sedan, you’ll have to wait until the factory re-opens, and that likely won’t happen until the chip shortage ends.

Reduced Features

With all the technology installed in vehicles today, some manufacturers have found zero chips to support some special features in their production. One prime example would be Porsche, which has told customers that they can’t get the 18-way power-adjustable seat in the Macan SUV for several months because they don’t have the chips to operate the seat.

Increased Prices

Supply and demand always drive pricing, and this shortage has undoubtedly had its impact. While no manufacturers have raised prices above the MSRP, many have done away with promotional offers and sales gimmicks because they don’t have to right now. Customers that want a new car have very few dealers that can still deliver variety amongst their latest models.

How Has the Chip Shortage Affected the Used Car Industry?

With new inventory down and no immediate relief in sight, many people purchased used cars instead. This resulted in another inventory shortage in the used-car market. Because of this, used vehicle prices have gone up, sometimes above their actual value. Dealerships have to pay top dollar for trade-ins or pay more at auctions to keep up with demand. This benefits consumers looking to purchase a new car and trade in their old vehicle. At Ike Honda, we pay top dollar for your trade, and you can use our online trade evaluator to see how much value is in your car.

Honda continues to produce cars, trucks, and SUVs at a high rate, and Ike Honda in Marion has benefited from this with a steady inventory flow. We encourage you to browse our cars online or visit our dealership. It’s never been a better time to trade in your car, and we have the inventory to find you a new vehicle that fits your needs and your budget.

Posted in Car Industry