The Semiconductor Shortage Pt. 2 & Used Car Price Inflation

As we learned in our last semiconductor post, semiconductor supply for the auto industry has crippled manufacturers. With new manufacturing hurdles and other material shortages on the horizon, it doesn’t look like new car inventory will get any better any time soon. 

The newest development in the chip shortage comes from Taiwan, the largest supplier of advanced microchips. They are currently experiencing a huge nationwide drought. Being that 2,200 gallons of water are needed to manufacture a 30 mm chip, this presents a huge problem for supply chain recovery.

The impact of this shortage is so bad that it’s currently estimated 1.5 million to 5 million fewer vehicles will be made this year than originally expected.

The Cause Of The Auto Shortage

So what caused this shortage? We see it as a combination of pent-up demand for new vehicles combined with heightened demand for vehicles with more modern features.

Expensive new cars with modern, luxury, features is where consumers are focusing their attention. These advanced features all revolve around semiconductors. Some features include driver assist systems, wireless internet, advanced infotainment and display systems, and increased sensor usage throughout the vehicle.

On top of this, just look at where the market sits in general. Low interest rates, an improving job market, and the government stimulus all appear to be major factors. Additionally, it’s assumed consumers have saved more money this year due to the decreased spend on travel and restaurants, which could also be a reason for the pent-up demand.

How The Auto Market Has Adjusted Itself

Auto plants around the world are either running at reduced production or shut down all together. New car production is currently down 3.4 million vehicles in Q1 of 2021. With that, prices are going through the roof. It’s a typical market reaction when sales are strong and supply is limited.

Since the supply of new cars is completely shot, demand has shifted to the used car market. In fact, demand is so high that used vehicles are selling for an average of 26% more in the wholesale market. We’ve even seen the price for certain used vehicles rise higher than what it would cost to buy the vehicle new.

To make it worse, it’s becoming more and more difficult to even find a suitable used car, let alone one that’s at a reasonable price.

The Next Big Shortage To Expect — Tire Rubber

While a shortage in semiconductors has been the number one limiting factor in automotive manufacturing, we’re starting to see shortages in other critical materials. Mainly in natural rubber. In fact, prices for natural rubber are at a 4-year-high. 

This won’t mean just a shortage in tires, but other parts used to make vehicles including belts, hoses, suspension components, gaskets, and vibration-dampening fittings. 

There are a ton of complex issues working together to limit rubber supply. These issues range from disease in rubber producing trees, global transport issues (like the one we saw in the Suez Canal), and countries like China, starting to stockpile their supply. 

Currently, automakers aren’t feeling the squeeze just yet, but it’s something to keep an eye out for.

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