Before the pandemic, hundreds of new cars lined the lots of local dealerships on any given day. With cars available in every size, color and model, dealers could ensure that consumers were able to choose the vehicle of their dreams. Now, a car chip shortage has led to production cuts around the globe. While auto dealers wait to fill their barren lots, tens of thousands of new vehicles sit in parking lots uncompleted and waiting to be shipped.
Why is there a chip shortage?
As work from home and remote learning kicked off for most people as a result the COVID-19 pandemic, the demand for personal electronics using chips, such as cell phones and laptops, dramatically increased – so much so that production could not keep pace with demand.
Coupled with winter storms that forced closures of chip plants in Texas, a fire at the Renesas Electronics plant in Japan in April and a lack of water supply to feed semiconductor capacity at a factory in Taiwan, the chip scarcity compounded. Many factories that were able to keep at least some production online shifted their focus to support industries that thrived during lockdown, including phones, computers and video games.
How is this impacting vehicle production?
At the same time, automakers, suppliers and car dealerships closed down as the economy went into a recession. With the economy plummeting, automakers canceled orders for car parts with computer chips. From computer management of engines to driver-assistance features such as emergency braking, a single part for the modern, high-tech vehicle could use as many as 500 to 1,500 chips depending on its complexity.
When vehicle sales began to climb again, chip production wasn’t readily available to source. Without the proper parts, automakers have made production cuts. Some automakers have cut global production by 40%. In 2021 alone, around 2 million vehicles are expected to be lost from production. Meanwhile, thousands of unfinished cars continue to overwhelm automakers’ parking lots until the necessary chips come in.
What comes next?
As a result of extremely low inventories and extremely high consumer demand, vehicle prices are skyrocketing. In the first week of June, the average new vehicle retail transaction price reached $40,566, up from the previous high of $38,539 the month prior. Moving into July, prices for new vehicles surged to $42,736. This supply and demand balance is also driving up used car prices. Since January, the average used vehicle price rose by $900 to $20,400. Unless consumer demand slows down, both new and used vehicle prices are likely to stay high while supply for both older and newer vehicles remain low.
What does this mean for vehicle programs?
For those managing vehicle programs, buying fleet vehicles is going to continue to pose a challenge. As a result of the shutdown, fleet orders for the 2021 model year have been cut off much earlier than normal. Fleet managers who are currently looking to replace or add vehicles to their fleets will be unable to access new vehicles until supply bounces back. Even for those who choose to wait to purchase or replace vehicles until the 2022 model year, production constraints could still affect supply unless the car chip shortage improves.
What should companies be doing?
For those looking to buy fleet vehicles who are unwilling or unable to wait to provide this asset to teams, there are alternative options to company-provided fleet programs.
Fixed and Variable Rate (FAVR) programs reimburse employees for the business use of their personal vehicle. FAVR programs calculate reimbursements based on the fixed and variable vehicle expenses of operating a vehicle specific to their location. Those include insurance premiums, taxes and depreciation, gas and maintenance. As company fleets become increasingly unaffordable to maintain, FAVR programs also help prevent cost overruns, while providing flexibility and equitable reimbursements for employees.
Interested in learning more about alternative vehicle programs that exist? Read more about why FAVR is a better option to manage vehicle programs as we wait out the global chip shortage.