Chip Shortage Could Be Worse than Previously Predicted

The cumulative effects of the ongoing pandemic are still unclear. When the world began shutting down in early 2020, some industries flourished while others went into hibernation. A great many people have spent the last year and a half working from home. As it turns out, this seemingly benign decision has brought on a whole range of unforeseen consequences, including a debilitating shortage of chips in the automotive industry.
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Consoles Over Cars

The past year has been a real game-changer when it comes to the way we understand work. Many went from working in an office to working from home. While this change may not be all that bad, especially for the countless employees who dread that 2-hour commute to work, it has had an impact on various industries.

For one, having more free time meant that more and more people needed some form of entertainment. The demand for consoles, PC graphics cards, tablets, smartphones had soared to levels where the silicone industry isn’t really able to keep up.

Coincidentally, the automotive industry took a massive hit right around the same time. The entire supply and manufacturing chain experienced tremors from China locking down its borders, but also the almost immediate drop in demand for new cars.

Not Enough Sand For Everyone

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The V shape drop and recovery in demand that has been seen in the automotive industry aren’t at all unique. Many other industries have seen the same type of demand anomaly, and most of them have managed to adapt.

So why is the automotive industry in trouble now? The answer lies in the Just-In-Time manufacturing strategy that was first pioneered by Toyota, only to be adopted by just about every car manufacturer around the world.

Just-In-Time, or JIT for short, implies making orders as they come. That way manufacturers don’t have to deal with inventories they can’t use, nor do they have to float cars that no one wants anymore. Under normal circumstances, JIT works far better than trying to project demand across the entire supply chain.

When the first ripple effects of the pandemic hit the auto industry, car manufacturers cut down on orders. The moment they did that, semiconductor giants shifted their resources elsewhere.

Now, the entire automotive industry is nearly at a standstill. Demand is back up, but now there is no inventory. Dealerships are doing their best to reserve cars for their clients, but most prospective buyers are looking to postpone their purchase until things settle down.

Used Car Markets

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Another byproduct of this semiconductor shortage is the spike in the prices of used cars. According to Business Insider, prices of used cars are up a record 40% at their peak in May, indicating a bubble that is still in effect.

Those looking to score a reliable, used car are going to pay a premium unless they’re willing to ride out the storm. The good thing is that used car prices are slowly settling coming down, indicating that the market is recovering. However, there is still no word on when the chip shortage will end.

On top of that, we’re potentially entering a new round of pandemic countermeasures, which could potentially solidify the used car markets in their current trend.

When Will Car Chip Shortage End?

The short-term prognosis isn’t looking good at the moment. Back in April, Cisco CEO, Chuck Robbins told BBC that we’re 6 months away from things going back to normal. Now in September, that projection isn’t looking great. 

Federal Reserve Chairman Jerome Powell was quoted saying that the chip shortage will last until late 2022 at the very least. In other words, if you’re counting on buying a new car (or a new GPU for that matter) anytime soon, expect to run into delays.

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