Americans trying to buy a new vehicle will end up paying more.
By Wolf Richter for WOLF STREET.
The auto industry runs on far-flung supply chains and just-in-time inventories. Production is planned a long time in advance, and the whole industry is dependent on flawlessly operating supply chains. Cars are computers on wheels, with lots of plastic and thousands of semiconductors in each vehicle, controlling everything from the windows to all aspects of the entire powertrain, and of course the infotainment system. If a supplier runs out of just one kind of chip, they can’t build the component, and the vehicle cannot be assembled and the assembly plant has to shut down.
Then came the historic spike in demand for durable goods, powered by stimulus payments and the shift of consumer spending from services – flights, hotels, cruises, theaters, sports events, restaurants, and the like – to durable goods, such as appliances, laptops, video consoles, smartphones, computerized exercise equipment, and new vehicles. And they all have lots of semiconductors in them. And it had this effect:
Supply chain disruptions due to semiconductor shortages started dogging automakers and component makers late last year.
Then with impeccable timing in mid-February came the horrendous winter storm that rolled across a big part of the US and slammed into Texas, causing major blackouts for days, and other damage. Four semiconductor plants in Austin shut down; two of them, the Samsung plants, remain shut down to this day, pushing the chip shortage to the next level.
And now there are plastic shortages cropping up because petrochemical plants along the Gulf of Mexico shut down as a result of the Texas freeze, and many plants remain offline – thereby hitting the supply of plastics.
This came on top of the crippling turmoil in the shipping industry. Container ships are balling up near the ports along the West Coast for days and are not able to unload because ports are backlogged and are struggling with bottlenecks and other issues. With numerous container ships hung up, there is now a shortage of ships and containers in Asia for shipping goods to the US.
Automakers have announced plant shutdowns and production cuts because of the shortages of chips, components, and plastics, and damage to the assembly plants during the winter storm.
Honda said today that it would halt production next week at most of its five plants in the US and Canada. It blamed the chip shortages, supply chain issues – such as components hung up on container ships waiting off the coast – and the cold weather that resulted in broken pipes at some of its plants.
Toyota said today that it would halt production at assembly plants in North America. It blamed the shutdown of its plant in Kentucky on a shortage of petrochemicals. It also announced production cuts at the plant in Mexico that assembles the Tacoma pickup truck.
Volkswagen said this week that it lost production of about 100,000 cars worldwide due to the chip shortage, and that it is sitting a large backlog of unbuilt vehicles due to the chip shortages and the problems caused by the winter storm in Texas. It told the Wall Street Journal that it would try to catch up on its vehicle production in the second half of this year!
On Monday, GM shut down the plant that assembles the Cadillac CT4, Cadillac CT5, and Chevrolet Camaro. In February, it shut three plants in the US, Canada, and Mexico due to the chip shortage. The plant in Mexico will remain shut down through the end of March. The assembly plants in Fairfax, Kansas, and the CAMI plant in Ontario will remain shut down at least till mid-April.
These production cuts hit numerous models, but GM is trying to protect the production of its highly profitable full-size pickup trucks and SUVs, and those plants continue operating.
Ford has by now shut down or cut production at half a dozen assembly plants. In early February, it said that it would cut production of its F-150 pickup truck, the bestselling vehicle in North America. This is an immensely profitable product for Ford. It cut production by eliminating entire shifts.
Tesla reportedly halted production of its Model 3 in February and early March for two weeks at its Fremont plant in California. A month earlier, Tesla had said that it was trying to mitigate the effects of the chip shortages.
This is happening amid hot demand for semiconductors in China where consumers, now largely barred from spending money on overseas travels, are, like Americans, splurging on durable goods, including cars. And this comes on top of efforts by Chinese companies to stockpile semiconductors in the era of trade restrictions.
For Americans trying to buy a new vehicle, this is going to be a mess over the next few months or perhaps for the remainder of the year and further out. These production cuts will be felt – and some are already being felt – on dealer lots, particularly with popular models.
Now new waves of stimulus payments are being sent out. Stimulus payments make perfect down-payments for new vehicles. With this money in the bank, people will feel empowered to go shopping. And dealers won’t feel any urge to make deals on popular models in short supply, knowing that consumers feel empowered to buy. And consumers will pay more.
Consumers paying more for new vehicles was already the case late last year, as documented by the largest dealer chain in the US, Auto Nation, which reported a huge jump in per-vehicle gross profit on soaring prices.
This type of inflation, triggered by bottlenecks and shortages, is what Fed Chair Jerome Powell refers to as “temporary” inflation – assuming that it won’t become embedded. And it comes on top of the regular inflation that is now working its way through the economy. Whatever it’s called, for Americans it means life is going to get more expensive.
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