Here’s a Crisis the Government Can’t Solve

By TradeSmith Editorial Staff

In late 2019, I bought a new SUV. It was a first model year, early purchase kind of thing.

Little did I know it would turn out to be a lemon. It’s been at the dealership for over a month for a repair they keep attempting to make.

Outside of work travel, I haven’t been driving all that much during the pandemic. However, the economy is reopening. Interest rates remain low. And my family is ready to hit the road for vacation this summer. We simply need one thing: A reliable SUV.

I’d been looking for a reasonable new car for several months. I’ve checked out all the buyer websites. I’ve made a few phone calls.

Back in 2008, we bought a GMC Acadia. It had its problems, but it was a great vehicle for our family. So I went to test drive a 2021. But I wasn’t ready to hear the news about the GMC Acadia I’ve been eyeing.

A salesman at a dealership said that he had 50 of these vehicles just sitting on the lot. So good old “money Keith” decided it was time to haggle a great deal.

I was told there’s nothing to be purchased.

“WHAT?”

The salesman went on to tell me that those SUVs will likely sit idle in the dealer’s lot for the next five months.

What’s even crazier to me was the reason why.

They all need new semiconductors.

You may have heard about the semiconductor shortage in the news, but what does it mean for your money moving forward?

New car supply is down and prices are surging. In fact, I just read an article about how General Motors is lowering supply, pushing folks to buy vehicles sight unseen, and has even raised prices of SUVs by 20% over the last year.

That’s astronomical. This feels like more bubble-popping will be coming our way …

Trade-In Demand Surges

The ongoing semiconductor shortage has also fueled a rise in used-car prices as well.

If you own a newer vehicle and bought from a dealer, check your inbox. You’ve likely received a letter pushing you to trade in your vehicle and upgrade.

Why the buying frenzy from the dealerships?

It goes back to the massive semiconductor shortage. And when supply is down, people decide they HAVE TO HAVE what’s missing. Humans!

A lot of car manufacturers drastically reduced purchases of semiconductors at the start of the pandemic. This decision was driven by an expected drop in auto demand in 2020, and caused semiconductor manufacturers to pivot their customer focus. They started selling semiconductors to other technology companies, including manufacturers of computers, smartphones, webcams, and other gadgets.

This shift required a change in the production lines and impacted the auto industry’s supply chain. And unfortunately, you can’t turn the semiconductor supply on and off like a bathroom light switch.

Semiconductor plants pump out chips 24 hours per day, 365 days a year, but changing the production line from one that serves an automotive customer to a major tech firm (and vice versa) can take weeks or months.

One year later, the automotive industry has bounced back in the wake of the pandemic much faster than expected, and semiconductor shortages have rocked the entire automotive supply chain.

In short, the order cancelations by large automakers and their suppliers in 2020 have fueled this shortage, and now, auto companies are struggling to build new cars.

For example, Ford Motors (F) just slashed its second-quarter production forecast by 50%. The company has removed 70,000 new vehicles from its production schedules.

Ford isn’t alone. General Motors and Volkswagen have also shut down production lines over the last few months due to the semiconductor shortage. They also experienced long delays in procuring parts.

You might think that these chips are only relevant to the guidance system.

But it turns out that they impact nearly all functions of newer, more tech-enhanced automobiles. Manufacturers need the chips for lighting displays, powered head rests, roof windows, and other power features.

According to NBC, a new car typically uses 100 or more semiconductors.

The network says the semiconductor producers don’t have capacity right now to increase production.

What Can Be Done?

President Joe Biden did sign an executive order to review the nation’s supply chains. And he has called for a big uptick in spending to identify ways to eliminate the shortfall.

But this isn’t something the White House can fix overnight.

Due to production challenges, shortages of container ships, raw material shortages, and other factors, it could take up to two years before supply and demand hit its equilibrium.

As if that all weren’t enough, the ongoing crisis has affected almost every other supply chain that goes into vehicle production.

Three companies that supply vehicle seats for Ford – Lear Corp., Magna International, and BorgWarner – are likely to slash production this year, according to Reuters. Lear reduced its global production forecast from a 12% increase to a 9% increase. It also projected a 9% decline in Q2 revenues.

The results are what you’d expect.

Inventory levels will likely remain lower in the near term. IHS Markit projects that Q1 2021 production of cars and vans around the globe fell by 1.3 million units.

Consumers are likely to pay higher prices for auto parts and vehicles.

It appears we are still in the early innings of this crisis. Though it will take time to normalize, semiconductor companies will remain attractive investments for the foreseeable future.

I think what will happen over the next six months while chip makers catch up is that you’ll see more profits and leaner manufacturing in the U.S.

Then we’ll see new and used car prices plummet when there’s way too much supply.

For now, be careful in your vehicle decisions.

If you have an extra vehicle, go sell it for top dollar while you can. If you need to make a purchase, you’re probably better off waiting until the beginning of 2022.

Invest in this trend and watch it so you can get out in time. Enjoy your Wednesday.