Log In

Reset Password
  • MENU
    Sunday, February 25, 2024

    Ongoing chip shortage shakes up car buying with fewer choices, higher prices and big profits for some dealers

    Both new models and used cars are for sale at Gregory Hyundai dealership, Nov. 15, 2021, in Highland Park. (Erin Hooley/Chicago Tribune/TNS)

    The semiconductor shortage has disrupted the auto industry throughout 2021, halting production, reducing inventory and raising prices, a formula that has left some frustrated buyers searching for any tires to kick.

    For some Chicago-area dealers, the scarcity of new cars has made for a surprisingly good year, as demand outstrips supply, and profits soar.

    “The nice thing is that we’re selling cars before they hit ground,” said Greg Mauro, 61, owner of Gregory Auto Group, which has three dealerships in the northern suburbs of Chicago, including Hyundai, Mitsubishi and Infiniti. “We’ve had people literally follow transport trucks to our locations and say, ‘I want that 2022 Tucson on the truck, and I hope it’s not spoken for.’ It’s kind of crazy, but we try to make it work.”

    The auto industry seemed to be recovering after surviving plant shutdowns at the onset of the pandemic in 2020. But a dearth of semiconductors, which control everything from collision-avoidance sensors to infotainment systems, has stalled auto production again this year, with plants shutting down for weeks, and in some cases, months at a time, for want of the crucial chips.

    The pandemic-driven global supply chain crisis has created a growing list of shortages, from fast-food containers to stuffed animals. Semiconductors are among the tiniest links in the chain, but the fallout from the chip shortage has been enormous, curtailing technically advanced products such as smartphones, home appliances and automobiles.

    “Nowhere is this more acute, our supply chain problems, than in the semiconductor industry,” Commerce Secretary Gina Raimondo told the Economic Club of Chicago last month.

    Congress is weighing a measure to allocate $52 billion to boost semiconductor manufacturing in the U.S., the birthplace of an industry that has since migrated primarily to Taiwan. It can’t come soon enough for the auto industry, which is projected to produce 7.7 million fewer vehicles and lose $210 billion in revenues globally this year due to the semiconductor shortage, according to consulting firm AlixPartners.

    New vehicle sales in the U.S. declined precipitously in 2020 as production ground to a halt at the start of the COVID-19 pandemic, dropping from about 17 million vehicles the previous year to 14.6 million — the lowest total since 2012, according to car shopping website Edmunds.

    Edmunds is projecting about 15 million new vehicles will be sold in 2021, a number that was revised downward as the semiconductor shortage persisted throughout the year.

    “Consumers still want cars,” said Ivan Drury, senior manager of insights at Edmunds. “They just can’t buy them because of the semiconductor shortage.”

    Earlier in the year, industry analysts expected the semiconductor shortage would ease by the fourth quarter, but it now looks like it will last well into next year, Drury said. The ongoing shortage has meant significant manufacturing interruptions at auto plants around the country.

    The semiconductor shortage has shaken up the traditional car-shopping process. Haggling is a thing of the past, buyers are preordering vehicles or taking what they can get off the lot, and dealers are scrambling to find cars — new or used — to sell, in what has become a less frequent but increasingly lucrative transaction.

    Last month, new vehicles sold at an average of $513 over sticker price, according to Edmunds. During October 2019 — before the pandemic — new cars sold at a discount of $2,673 below the retail price.

    “It’s a new business model: sell less, make more,” said John Webb, 55, a partner in Packey Webb Ford, a nearly 60-year-old Downers Grove, Ill., car dealership started by his father, Patrick “Packey” Webb.

    Packey Webb Ford has about 37 new cars on its lot — far below the 400 or so new vehicles it typically kept in stock before the pandemic and semiconductor shortage disrupted auto production. Webb said of the 20 new cars recently delivered to the dealership, 17 were sold before arrival.

    For the dealership, the build-to-order model means lowering carrying costs. For the buyer, it means the end of the impulse purchase, Webb said.

    “You see a shiny new car in the showroom, you want to buy it right now,” Webb said. “They’ve got to wait three or four months now to get an order.”

    Gregory Hyundai in Highland Park, Ill., has about 60 new vehicles on the lot — less than a third of its normal inventory. Cars are selling at sticker price and orders can take up to four months, Mauro said. Customers who can’t wait are taking what they can find, and in some cases, going to great lengths to get first dibs on newly arriving vehicles — including following the delivery trailer to the dealership.

    Mauro said the current environment is a lot harder on customers than dealers.

    “Our gross margins are higher than I’ve seen in 40 years,” Mauro said.

    With demand exceeding supply, Mauro said he has resisted charging above the manufacturer’s suggested retail price. He has also rejected offers to sell his cars at a premium through brokers from other parts of the country, where supply is even more scarce.

    Instead, Mauro is focused on his existing customer base and other local buyers, hoping to make up any lost sales revenue on the service end of the business, an increasingly important profit center for dealerships, which can pay dividends for years after the sale.

    But that end of the business proved challenging this year, when dozens of Chicago-area auto dealers had to navigate an eight-week mechanics strike that shut down service in August and September.

    There are signs that the worst of the semiconductor shortage may be in the rearview mirror.

    Ford and GM both recently said they were pursuing strategic partnerships to produce semiconductor chips down the road. Auto industry analyst Drury said the semiconductor shortage seems to be in a trough and is “not getting any lower,” offering some hope that the production pipeline can accelerate in the coming months.

    While 2022 models are beginning to filter into circulation, it may be another relatively rare vintage, with new cars expected to be in short supply for some time, Drury said.

    “As far as getting enough units within the market to start seeing some semblance of normalcy, you’ve got to give it a year,” Drury said. “I mean, we can’t even backfill what people are wanting to buy today.”

    ©2021 Chicago Tribune. Visit at chicagotribune.com. Distributed by Tribune Content Agency, LLC.

    Comment threads are monitored for 48 hours after publication and then closed.