Auto Inventories: Pass the Chips

I started contemplating a vehicle purchase at the start of the year when my growing children began to have trouble fitting their legs into the back seat of our compact second car. Headlines of rising used car values caught my attention, so I shopped around for bids on my compact car. I was stunned to get a trade-in offer above what I had paid for the car three years ago. I took the occasion to upgrade to a new, larger vehicle—for which my options on dealer lots were limited, and I paid dearly.

While some of the ups and downs of reopening after the pandemic were foreseeable, few predicted the disruption experienced by the automotive industry. As the economy shut down last year, auto sales plummeted, often for the simple reason that dealerships were closed. Drivers had fewer places to go for work or leisure; auto insurers gave rebates as accident rates fell in light of reduced driving. Rental car agencies culled their fleets as travel stopped, flooding the market with gently used cars. The outlook was grim for auto manufacturers, and they reduced their production accordingly.

But the recovery that began last spring was rapid and had unusual characteristics. Social distancing made driving more appealing than public transit, and families moving into single family homes to gain space for remote work had a greater need for cars than before the pandemic. Stimulus payments gave consumers money that could help with a major purchase like a car. Demand rebounded, draining inventories.

Automakers and their suppliers could not adjust their output quickly enough. When auto sales were soft, semiconductor makers diverted their shipments to other technology products that were in high demand, like consumer electronics. Chips may be small in size, but without them, vehicles cannot operate. From visible in-cabin comforts to hidden safety and engine control modules, even the most basic vehicle is a high-tech product. Hybrid drivetrains and electric vehicles require even more technology.

Throughout this year, chip shortages have caused manufacturers to idle plants, with some even going so far as to build partially-finished vehicles that are set aside, waiting for the necessary electronics to finish the product. Automakers’ industrial production remains well below potential.