New Car Shortage? That’s Just the Short-Term Problem

Supply chains are stretched to the breaking point. Will the auto industry ever be the same again?

Episode Summary:

If you’re shopping for a new car right now, you’re in for a shock. New and used car prices are up, way up in short term the situation isn’t going to get better. Covid 19 is one reason why, but the fact is, the supply chain issues that are crippled the auto industry, although triggered by Covid, aren’t the long-term industry challenge. Jim Anderton explains why.

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Transcript of this week’s show:

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A recent CNN headline said it all: “Automakers problems are much worse than we thought.” Well, no kidding. According to an AlixPartners forecast quoted in the story, automakers will build 7.7 million fewer vehicles globally than they would have if they had access to functioning supply chains, and the vehicles not built represent about $210 billion in lost revenue. And with increased part and raw material costs, each vehicle will cost about $2,000 more to build. Disaster, right?

Well, not quite, as something like 90 million vehicles a year are produced worldwide, and in America at least, vehicles are still sold through retail dealerships. Dealers buy and maintain inventory, creating an accumulator effect in stock vehicles to soften the blow of supply shortages. But it’s still a market, and prices for new and used vehicles are up. Computer chips are widely cited as the key problem, but the fact is that Covid has simply accelerated some structural problems which should have been apparent for some years.

Labour shortages are critical problem not just for the auto industry, but in the thousands of Tier 1 and Tier 2 suppliers that feed them. Trucking companies can’t get enough drivers to haul the raw materials and parts even when they’re available. The transportation issue is especially difficult, because disruptions here cause systemic problems where things like shipping containers are trapped at ports, creating a shortage of shipping capacity where those containers can’t be emptied and cycled back onto vessels for return to exporters. There was a time when it wasn’t worth shipping empty containers from the West Coast back to Asian ports. No more.

Chips are one problem, yes, but the real problems facing the auto industry are long-term, and they’re going to hit a critical mass after the Covid crisis ends. Interest rates are at record lows, and average transaction prices for American new cars are now pushing $40,000. With a median annual income for full-time employed Americans at about $38,000, it doesn’t take a rocket scientist to figure out that many consumers are buying more vehicle and they can truly afford. How?

With longer-term financing, forcing them to keep the vehicle longer. And with the near inevitability of carbon taxes on gasoline and diesel fuel, the resale value of an internal combustion engine vehicle bought today might be minimal seven or eight years from now, when the expensive vehicle is paid off. And an EV replacement is expensive. Has the industry setting itself up for a crash?

Of course, it’s hard to tell, but longer ownership cycles, combined with the inevitable effects of normalized interest rates, and they will return to normal, is going to influence sales. And that problem is going to be harder to fix than making more chips.

Written by

James Anderton

Jim Anderton is the Director of Content for ENGINEERING.com. Mr. Anderton was formerly editor of Canadian Metalworking Magazine and has contributed to a wide range of print and on-line publications, including Design Engineering, Canadian Plastics, Service Station and Garage Management, Autovision, and the National Post. He also brings prior industry experience in quality and part design for a Tier One automotive supplier.