The economy of the United States continues to rebound from the pandemic slump. The impact of COVID-19 in the economy affected many sectors, including the automotive industry. Automakers have to face many challenges as the virus outbreak persists. They have to find a solution regarding the accumulating issue of vehicle production shortage and backlogs.
Keeping up with technology
As technology advances, various sectors have to keep up with the demand for modernization. Different consumer products rely on computer chips—from appliances, computers, vehicles, and a lot more. People call it by other names like semiconductors, semis, or microchips.
The semiconductors power a broad scope of products for entertainment, connectivity, performing specific tasks, and transportation. Millions of consumer products have these microchips. However, the demand for it has risen steeply in recent years.
Governments enforce lockdowns, so the people are requested to stay at home as much as possible. The mobility of the people in public spaces is limited to prevent the spread of the virus. Due to work from home setup and homeschooling, the market for electronic products grew significantly. Computers, smartphones, video game consoles, smart appliances, and other electronic products increase rapidly.
As the demand intensifies, chips continue to be in short supply. It affects various vehicle manufacturers as they are feeling the pinch in their production and sales.
Global chip shortage
The pandemic set enormous pressure on the global semiconductor supply chains. When the surge for microchip supply started, the chipmakers were not ready for the unforeseen demand. The need for chips is more extensive than the chipmakers could produce in the third and last quarter of 2020. Therefore, many vehicle manufacturers have to deal with a backlog of orders.
Several manufacturers try to ride out the storm by hoarding a considerable supply of chips. They were concerned about supply chain security, so some chip-buyers resorted to double booking. It is now harder for other companies to hold their share. The authorities sanctioned the hoarders to prevent overbuying of the microchips.
The auto industry obtained the worst hit from the chip shortage. The chips are critical for producing cars, trucks, SUVs, vans, or other vehicle products. They are the most vital component of the computer management of the engine, electronic controls in the dash, and driver assistance systems.
U.S. production and assembly plants, including other foreign car manufacturers, struggle to get more chips because they compete with other industries. Without a sufficient supply, companies will reduce production hours. But if worse comes to worst, they have to close the production plants.
The ongoing global microchip supply is hurting the auto industry. Since April, many automakers have decided to suspend their vehicle production.
In December 2020, Ford had to halt their production in Kentucky. The production of Toyota Tundra in Texas and Honda Motors assembly plants were also affected. The chip shortage triggered temporary idling and extension of downtimes at some plants in North America.
The production cuts are their way to reduce operating profit by 1.5 billion to 2 billion U.S. dollars. The issue seriously impacts the workers in the production and assembly plants as well. The closure means no work and no wage for the employees.
Problems causing more difficulties
The pandemic plays a big part in the global supply shortage and production hours of vehicle manufacturers. Many chip factories were shut down early last year due to the surge of COVID-19 infections. When they reopened, they had a long list of backlog orders to fill.
After nearly a decade of steady sales decline, the demand for electronic products spiked quickly in 2020 due to lockdowns. Schools and universities in countries worldwide have remained primarily closed since March 2020. Students attend their classes remotely, while some have recourse to blended learning. Moreover, millions of office workers in different parts of the world do their jobs from home. Many companies changed their work setup to adapt to the current situation.
The severe winter weather also affected manufacturing as they froze the pipes and plants in Detroit and across the central U.S. Some plants also have low to no supply of crucial materials such as petrochemicals, plastic components, and semiconductors. These supplies are essentials in building interior and exterior car and truck parts.
The economy last year was more substantial compared to what is happening now. There has been a steady decline in the demand for sedans in the last few years, which seems like an early sign of bottoming out.
It is unsurprising to see such high prices on brand-new vehicles. The auto industry has diminished its production under the pressure of microchip scarcities. The cost of brand-new vehicles goes up due to the low volume of production.
The pent-up demand for pickup trucks, SUVs, sedans, and even the fluctuating stocks of available units, enable the automakers to charge high prices. Indeed, the automotive industry faces various snags, but they can still make big profits on what they can veritably sell.
However, larger vehicles like pickup trucks and SUVs have carried the industry since 2018. A large part of the sales came from full-size models. Many customers are interested in buying more spacious yet more expensive vehicles, but only for those who can afford them.
Grand Cherokee got the old Jeep parts redesigned. It is one of the brand’s best-selling models. The Wrangler is still the top-selling Jeep model with over 118,000 units in 2021, including their 80th Anniversary limited edition.
Sold out trucks
Here’s another case of supply problem but on a positive note. The unavailability of pickup trucks in showrooms happened not because of the chip shortage. Even before the virus outbreak began, many customers wanted to buy pickup trucks.
The dealers did not expect that customers would rush and sweep their pickup truck inventory. That didn’t only happen to some popular pickup brands. The sales for these vehicles were astonishing, as they sold some truck variants completely.
Nowadays, it’s harder to get a hold of a brand-new pickup truck. Interested buyers have to pre-order and reserve a unit, then wait for a long time for their truck’s release. That’s why most buyers who can’t afford brand new ones choose to purchase used vehicles.
The cost of used cars surged to 21 percent in April 2020. A year later, the used car market attained another 10 percent increase, currently reaching 30 percent. Used cars are still in demand, and it continues to grow, but there’s no steady flow of new vehicles on hand from the dealers.
Used pickup trucks don’t sound bad, especially if you purchase one in excellent condition from the inside out. They’re also a great option if you plan on towing a camper or RV. Don’t forget to check the engine before signing the deal.
Chip crisis ongoing
Some companies worry that the disruption could last into the coming years. The auto industry will have to endure these challenges.
To keep future difficulties at bay, chipmakers need to be transparent about the demand and communicate with the industries needing the chip supplies. The auto industry must think of a long-term solution, not just stockpiling the materials to recuperate from this crisis.