Because the chip shortage progresses, vehicles are scarce and costs are rising

DETROIT (AP) – Charlie Gilchrist expects his eleven dealerships in the Dallas-Fort Worth area to sell nearly every new vehicle they can get in the factories over the next few months – at higher prices.

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

With supply dwindling and demand robust, dealers like Gilchrist could sell a lot more cars and trucks if only they had more. Even with prices increased – the average sales price for new vehicles is over $ 40,000, which is an increase of nearly 10% in two years – customer demand exceeds supply.

“It’s pretty obvious when you pull on our lots that there isn’t a lot of choice,” said Gilchrist, whose lots run from brands from General Motors and Ford to Nissan and Volkswagen. “Our (sales) volume is falling due to the sheer lack of inventory. It’s still going to fall for the next two or three months. “

The general rise in car prices contributed significantly to the surge in US consumer prices last month, the government reported on Wednesday. A record 10% increase in used car prices actually accounted for around a third of the April consumer price increase – the largest monthly increase in more than a decade.

Ford expects to produce half of its normal number of vehicles by June. GM and others have resorted to ceasing production of some cars and smaller SUVs, and redirecting computer chips to high-profit pickup trucks and large SUVs. Leading automakers are warning of falling earnings.

The shortage of vehicles and rising prices are due to the coronavirus outbreak 14 months ago. As the virus spread, car factories were closed for a few months. With more millions of people working from home, the demand for laptops and monitors led semiconductor manufacturers to switch from automobiles to personal electronics. Soon, however, a faster-than-expected economic recovery increased demand for vehicles, and automobile plants sought to restore production to full capacity. However, the chip manufacturers could not react quickly enough.

As production slowed, traders’ inventories shrank. Now that the chip shortage persists, the shortage of new vehicles has worsened and analysts predict there won’t be any return to normal before next year.

So far, automakers have made big profits despite their inventory being depleted, largely because many buyers have been willing to pay more to get what they want. With government economic reviews and tax refunds, Americans bought about 1.5 million new vehicles in April. That’s an adjusted annual sales rate of 18.5 million – the highest rate since 2005.

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

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

Nevertheless, the supply of vehicles is dwindling. Last month, the country’s total new vehicle inventory fell 42% year over year to 1.9 million. That’s enough to deliver just 33 sales days at the current rate – 88 days less than a year ago, according to Cox. At the same time, discounts fell 5% from March to April and 25% year over year to an average of $ 3,239 per vehicle.

Jeremy Smith sees price increases on both ends as he buys and sells pickups for his commercial vehicle sales project near Buffalo, New York. In March, he bought a used diesel 2020 Chevy Silverado crew cab with 21,000 miles for $ 61,000. Comparable trucks are now listed on websites for $ 68,000 to $ 70,000.

At the same time, he is charging $ 13,995 for a 2011 Silverado crew cabin with 178,000 miles, a far higher price than he would have thought a few months ago.

“You sell high, you buy high,” said Smith, who often buys trucks for his business. To get one now, people need to act quickly to place bids on dealers or property owners.

“If you’re not there,” he said, “those things are gone.”

Given the lack of supply, almost everyone expects new car sales to decline soon. This would mean fewer trade-ins, which would further reduce the supply of used vehicles. For consumers who can wait, analysts say it might be wise to postpone buying a vehicle until next year or even beyond.

An index measuring US wholesale prices for used vehicles from the Manheim auction house rose 53% year over year in April to hit a record high. Car dealers buy used vehicles at auctions; The average price there was almost $ 18,000.

Merchants raise wholesale prices when selling to consumers. The average list price of a used car last month was just over $ 22,000, 14% higher than a year ago.

Dealers are now looking for used cars and are hoping to sell them to keep the cash flowing through the summer when supplies of new vehicles run out. Richard Bazzy, who runs four Ford and Lincoln dealerships in suburban Pittsburgh, said he had formed a team to buy used vehicles.

“Every car dealer in the world is blocking auctions and trying to fill their shelves because of a lack of new car stocks,” he said.

Bazzy said he hopes his business does well with used sales and parts and service revenue. But he wants any used cars they buy now to be sold by August, when he expects the vehicle inventory to return to normal.

Cox’s Krebs said it was difficult to predict how long the chip shortages and supplies will last. Morgan Stanley analyst Adam Jonas warned investors not to expect extremely high car prices beyond the end of this year as new car deliveries rebound.

The pandemic and the shortage of chips have also made rental cars scarcer, prices skyrocketed, and long waits when people go back to travel. Landlords have struggled to get new cars because automakers have steered vehicles away from fleet buyers in order to make more profitable sales to consumers. The increased demand has sent some rental companies to the used car market to find vehicles.

Whenever the auto shortage ends, GM, Ford, and others say they will run their business models off of huge inventory levels. GM has been considering regional distribution centers that could send vehicles to dealerships within days. Ford CEO Jim Farley talked about delivering factory orders quickly. Both companies hope to cut high inventory rates and keep discounts low.

“I think we are on the verge of a possibly different vehicle distribution paradigm,” said Krebs.

Still, competition could thwart these plans once factories return to normal production.

Bazzy normally has 400-500 pickups at his three Ford dealerships but only has around 100 left. He’s confident that if they order a truck and receive it in four weeks, he can keep customers happy. But he fears losing the business to competing brands with huge inventories.

“If the guy across the street has 300 (trucks) and my guy has to wait four weeks,” Bazzy said, “I’m going to lose him.”

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