The Microchip Shortage Bounce Creates a New False Market

The microchip shortage is causing issues that are rippling across the automotive industry. As soon as we think we’re out of the woods with Covid-related problems, this happens. Then the issue was exacerbated by a March fire at a microchip factory in Taiwan, a plant responsible for 20% of the world’s production!

It’s affecting everyone. General Motors and Ford announced on April 9 that they will be extending their plant shutdowns. Toyota, Nissan, Jeep, Volkswagen, Mitsubishi and Honda have all been shut down at some point over the last few months. Hyundai-Kia is finally feeling it, too, even having stockpiled chips at the beginning of the Covid shutdowns. It seems like no one is safe from this shortage.

If you want to learn more about why this is happening, check out our blog on how the shortage is affecting the auto industry from a few months ago. It looks like our predictions from February are proving true.

Limited inventory means that dealers are pretty much stuck with whatever stock they’re given from the factory. Large stores that typically have 300 new cars on the lot are down to 60. While this can make it difficult to satisfy consumers’ wants and needs in a vehicle, it’s continuing the increased revenues as prices drive upward. It’s business basics. As availability decreases, price increases. No more rebates, incentives or discounts. Consumers are paying full sticker, and they’re happy to do it because they’re just thankful to have found what they were looking for. The average price for a new car went over $40,000 at the end of 2020.

This is also driving up the price of used cars. Cox Automotive’s index of wholesale used car prices reached a new record of 194.0 in April.

• Every vehicle is worth more because of new car shortages.
• Trade-ins are worth more, 21% more in fact compared to the same time period in 2020. Dealers have to pay more for them, so they charge more.
• People are getting priced-out of new cars, so dealers are flipping them to quality used and CPO vehicles.

If a dealer isn’t scoring BIG profits right now, then they should positively consider exiting the business.

Just like the Covid Bounce, this Microchip Bounce will be fleeting. We estimate that dealers will continue raking it in for the next 6-9 months, and then things will level out, much like they had begun to do in January before this new false market started taking shape. 

We also believe that stimulus money helped to fuel both bounces, but as that money fizzles out, the market will begin to return to some version of normal. We in the auto industry are in a bubble, and it will burst rather rapidly as this money dries up, especially considering that dealers are literally running out of stock. 

Dealers are making double and sometimes triple margins right now! Savvy dealers realize this will be over soon and suddenly. They are already taking steps to protect their business when the market bottoms out. Many are only keeping the currently higher-priced used cars in stock for 30-to-40 days tops. Prices will drop with a big thud, and dealers could get stuck with used units in stock way "underwater.”

While the chip shortage is expected to extend into early 2023 (yikes), prices will normalize much before that as supply and demand level out by the end of 2021. We hope you’re riding high on this profit wave crest but also preparing for the impending drop into the depths of the trough.