Chips may be as tiny-sized as a coin, but today they’re grinding the automobile industry into a halt.
A chip is a tiny transistor built from silicon in natural minerals, mainly sourced from Mexico and Japan for semiconductor businesses. Chips are primarily made in China, Taiwan, and US states. They generally help computers, electrical appliances, and vehicles function. According to a BBC report, silicon alone serves a $500 billion chip industry. So it’s easy to imagine the scale of damage a chip shortage can potentially cause.
In this article, we consider why this is the case and further analyze the effects of the chip shortage on used car value trends in the last few months.
Featured Photo by Chris Reid
What Is Chip Shortage and Why Does It Matter?
The current chip shortage is all thanks to the COVID-19 pandemic, leading to an unprecedented surge in demand for personal electronics such as laptops and personal phones using chips. The demand was so high that the production of electronics couldn’t keep pace with it.
Additionally, as car dealerships, suppliers, and automakers closed in March 2020, they canceled orders for vehicle parts with chips. They feared that auto sales would plummet. True – sales did plummet initially, but not for too long as pent-up demand led to a surge in sales.
So when auto factories reopened after the covid-19 shutdown, automakers and suppliers placed orders for chips as usual. But by then, chip demand was already high for phones, video games, and computers that need chips as well. As such, the higher than expected demand for new autos outpaced their production. And up till this moment, it has yet to catch up.
Besides, a few Asia Pacific companies’ monopolies of global chip production severely affected the chip shortage. In the words of Joe McCabe, AutoForecast Solutions CEO, their “lights went off at the same time.” The implication is that companies could not build an inventory of solutions and products when the lights finally came back on. This led to a significant gridlock at every stage of auto manufacturing processes.
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Affects on the Auto Industry
The effect of chip shortage impacts different sectors of the auto industry.
- First, the automotive sector relies heavily on chips – from driver assistance systems to engine management systems, so it has suffered the most brutal blow. This explains why companies like Jaguar Land Rover, Volkswagen, and Ford shut down their factories in the heat of the shortage, slashed vehicle production, and laid off their staff. Also, the global production of passengers vehicles is estimated to be short by 5.2 million.
- Secondly, the chip shortage demonstrates the industry’s exposure to limited domestic production capacity, now a national security concern. As such, governments have begun to throw their weight behind smaller and local chips producers to mitigate future chip shortages and their effects on the auto industry. This is to the extent that some government officials are pushing for massive chip production from North America.
- Thirdly, automakers are tending towards more vertical integration in chip production. This explains why companies like Volkswagen are taking on high-volume contracts to guide against future capacity constraints.
- Fourthly, chip shortage is forcing some auto companies to leave out high-end features in vehicle production. Nissan is leaving out navigation systems; Ram has halted production of its intelligent rear-view mirrors in its 1500 pickups. Renault has removed its oversized digital screen at the rear of some steering wheels.
- Lastly, rental car businesses cannot buy their new cars, with companies like Enterprise and Hertz having begun to buy used cars instead of new cars.
So, what does this mean for the value of used cars generally?
How Does Chip Shortage Affect The Value of Cars?
Because of the semiconductor chip shortage, car companies are leaving out microchips in some vehicles. They are saving them for their more expensive models, thus driving up prices.
Additionally, because of limited supply, there are fewer newer car models on car lots, making it less likely for car dealerships to offer discounts and sales of new cars. And now, because the price of newer cars is skyrocketing, consumers are being driven towards used cars.
Now, because there is a rising demand for used cars and limited access, those prices are also rising. Ultimately it seems as though it is a seller’s market and an excellent time to sell your car for maximum income. For those looking to buy a new car, you can expect higher prices.
Finally, the chip shortage will end, but it’s unsure when.