During a normal year, car dealerships would be the ones receiving back-to-back phone calls to set up test drives with prospective buyers — but this is not a normal year. Now phones buzz and ring in homes across the United States with car salesmen waiting on the line to ask their old customers if they can buy back the cars that they recently bought from them.
This is not because of a national recall on the make and model. This is not because the salesman suddenly decided that he wanted the car for himself. This unusual behavior is the result of the dealership’s shrinking inventory. In a frenzy, salesmen flip through their files and find people who bought cars from them in recent years. American home garages are their new sources of inventory.
What Is Happening in the Industry
Due to the pandemic, car manufacturers are experiencing a severe shortage in car microchips, causing the release of new vehicles to slow. These microchips are responsible for car displays, driver-assistance features as well as other applications that contribute to vehicle convenience. Companies like Intel Corp., Qualcomm Inc. and Nvidia Corp. are not producing enough microchips to keep up with increased consumer demand.
Car companies took it upon themselves earlier this year to move ahead in manufacturing the basic structures of their cars and then simply storing them until the microchips were ready to be installed. Toward the beginning of the summer, General Motors was reported to have about 20,000 unfinished vehicles sitting in storage, each one awaiting its final piece.
Ford is another company that was significantly impacted, as they are currently selling less than half of their pre-pandemic numbers. Earlier this summer, their cars sold before they even hit the pavement at the dealership; back orders were standard and expected.
Why Is It Happening
The consumer expectation of advanced digitalization in cars means that manufacturers must wait to receive the microchip before distributing the vehicles. Many buyers insist that their cars include voice control, GPS, music streaming services and other applications available at the click of a button while they drive.
Therefore, in light of the lack of inventory to pull from, dealerships are staying afloat with creative means.
Calling old customers to buy back their cars may not seem like an economically wise move. After all, they are buying a car that is in worse condition than the last time they sold it. Surely they will lose money.
But not if one remembers the rule of supply and demand.
Because of the lack of inventory, car prices have risen significantly across the country. When dealerships purchase back used cars, they can match the new sale price to one that matches the car’s new value. Perhaps the car sold the first time for $18,000, but now, with the increased rarity of cars, the salesman may be able to re-sell the same vehicle for more money.
There has not been as dramatic of a difference between supply and demand for decades. Industry executives claim that the current crisis of supply and demand is only comparable to the end of World War II.
Impact on Consumers and Companies
While there are legitimate reasons for the rise in car prices, there are also companies like BMW and Mercedes who have taken advantage of the desperate situation. Despite receiving an adequate supply of microchips, they have chosen to keep their prices steepened.
“We will consciously undersupply demand level[s], and at the same time, we [will] shift gears towards the higher, the luxury end,” Harald Wilhelm, the chief financial officer of Daimler, told The Financial Times.
While this may be positive for the company itself, the move to keep vehicle prices high will only perpetuate the current trend. As demand continues to rise, these companies can continue to raise their prices and intentionally manufacture cars more slowly.
However, if one was looking to sell their car right now, cars.com says that it is an excellent time to do so. Many people are looking to buy a car and dealerships may be the right connection between their old cars and a potentially new owner. In this way, the current vehicle market is not a tragedy for all car owners.
In contrast, dealerships have experienced a gut punch this year, as evidenced by their desperate need to buy back cars from their customers. While almost-ready cars are parked in storage until they get their microchips, car salesmen have resorted to recycling their merchandise within just a couple of years of their original sale.
What Can Be Expected for the Future
To see where the industry could go, it is helpful to glance back at where it has been this year. The current microchip crisis has gone on for more than a year and there are no quick solutions. However, the Wall Street Journal reported in September that executives from car companies and executives from chip companies are working to build tighter relationships and better synchronize their production.
This is expected to lead to an improved vehicle industry as well as new technological advances. By joining forces and getting on the same page, car manufacturing may become streamlined and those in the market to buy a new or used car could have a better chance of getting one at a reasonable price.
