The Expert Podcast

If you're a consumer looking to purchase a vehicle or even if you're a car dealer wondering about the future of automotive retailing with regard to available inventory, here's an article that has some bad news for everybody. The biggest supplier of chips, Bosch, which is a large German company, has news nobody wants to hear.

For the last year or two, people have been saying, "Well, the chip shortage is temporary, and it's going to get better in the next year." So, getting back to pre-2020 levels—right? 2020 is the year when chip availability really started being a problem, and everybody thought it was temporary. Most manufacturers and even dealers expected things were going to get better.

Well, let's take a look behind the front-page articles and see really what's going on. The short answer is: the chip shortage ending is unlikely. Consensus right now is that the inventory could see some improvements, but a new wave of crisis could hit in 2023. So, even though it might get a little better this year, in 2022, it's going to get worse again in 2023.

Why is that? Why can't we just go back to making chips? Well, part of the reason is the crisis is unlikely to come to an end because chipmakers don't have the machines to even build chips. The new versions of the devices that go into automobiles never really had the capacity to build as many as they're needed. It's not like things got bad because of the pandemic—it was an intrinsic supply chain problem.

The companies are in the process now of evolving to make new types of chips. The result is supply bottlenecks could continue until 2024. The biggest problem is the lack of equipment required in the production of chips. The machines and manufacturing facilities that make these chips aren't something you just build once and then run for 50 years. Chip manufacturing equipment changes every few years.

The new types of computer chips that do more complex management of vehicle navigation systems, even lights in a vehicle, are more complicated now than they were even three years ago. It used to be that you flipped a switch on your car dashboard and it connected electricity right to your light bulb. Now, there are computers that control all of these devices—things like power seats, heating, and air conditioning systems in your car.

There are more chips now in a car than there ever were. The newer controllers in automobiles are a new evolution of devices that didn't exist three or four years ago. There was some manufacturing supply of these types of chips in 2018–2019, but the beginning of 2020 saw a problem. The issue wasn't so much that the pandemic cut back on production—it cut back on the development of new manufacturing facilities.

It's not something you can magically turn on overnight. These facilities were expected to be built during 2019, 2020, and 2021. The pandemic, first of all, cut the workforce and, second of all, cut the supply chain for those manufacturing plants and the machines that build the chips. It kind of put everything behind, and it's like a domino effect. It takes many years to bring that back up.

This is the real underlying problem. The prediction last year was, "Well, by 2021 or 2022, it'll be back to normal." Now they're saying 2024. I suspect, if you really peel back the layers of the onion of what's happening with this supply chain of chips, it might even be four or five years.

In fact, many manufacturers aren't going to put a lot of money into these because most automotive companies are transitioning to electric vehicles (EVs). So, why build a billion-dollar plant to build chips for gasoline vehicles if you're going to be building EVs anyway? It's very likely the gasoline vehicle chip supply is never going to be better than it is now, and it may never return to normal.

So, the current level of new car inventory, whatever that is, may never get better than it is today. Think about that. If you look at a new car dealership and see 10 cars on the lot where there used to be 200—or go to some small-town dealers that have zero or one new car, where they used to have 50 or 60—that may be the permanent inventory expectation for the dealers, for buyers at the dealerships, and for the automotive industry for gasoline vehicles.

How does that affect the used car market? Well, the used car market has spiked in value. There's a video that will post in the next couple of days showing it's 40% higher—or $10,000 higher—than it was a year ago because of the lack of new cars. Most people think that's temporary: once there are more new cars, the used car values will go back down. But what if there are no more new cars?

What if the new car inventory volume never gets back to where it was? Chips are required in new cars. In fact, some manufacturers have shown, in articles and YouTube videos, that some new cars were given a credit on their sticker price for a couple of hundred dollars because they didn't have something like a backup camera, a heated steering wheel, or even heated mirrors. These small items were removed because the chip wasn't available for that option.

Certain small systems can be disabled or not installed on a vehicle, but there are probably 50 or 60 crucial chips required for the car to even operate—you can't deliver a car without them. Tens of thousands of vehicles from some manufacturers are sitting, waiting for chips. That may never get better because the plants that produce them just don't exist at the volume currently needed.

It's not a matter of just hiring people back—the plants and the machines to build them aren't even in existence. So, plan for that if you're a dealer, a consumer, or in the used car business. The inventory of vehicles may never get better until EVs become more adopted. That requires a domino effect of charging stations and infrastructure.

It's not going to be quite this bad, but think about the vehicle industry in Cuba during the embargo in the 70s and 80s. New vehicles weren't allowed to be imported, so all you had were 1950s and 60s cars that kept getting fixed and repaired. It may not be that bad here, but think of that analogy.

Used cars’ lifespan may need to extend longer, and their values may stay higher because there are no new cars. People still need cars—every day, more people need cars as they turn 16, form households, or immigrate. With not enough new cars being produced, used cars will have to do.

That's something to plan for if vehicle acquisition or buying and selling is part of your business model or lifestyle. Let us know what you think in the comments.