Microchip manufacturer Micron Technology told investors this week that its market had “weakened considerably in a very short period of time.” Additionally, Volkswagen CEO Herbert Diess told employees this week that the world’s second-largest automaker expected to ramp up electric vehicle production soon because a microchip supply crunch was ending.
Is the microchip crisis coming to an end?
How We Got Here
A worldwide surge in the price of new cars over the last year and a half was triggered partly by a worldwide shortage of microchips.
Today’s cars can contain as many as 150 tiny processors, controlling everything from engine timing to turn-by-turn directions. A strange combination of events caused the automotive industry to lose much of its supply of the little chips early in 2020.
As the COVID-19 pandemic triggered travel restrictions, demand for new cars plummeted. Automakers trimmed their production plans and reduced their orders for new microchips.
But chip factories didn’t slow down. Consumers, many working and attending school from home for the first time, went on electronics buying sprees.
When the availability of vaccines began to lift the lockdowns, automakers tried to spool up their chip orders. But chip factories were too busy to accommodate them.
Building new microchip factories is a slow process. That has left automakers unable to build cars fast enough to meet demand and pushed prices to record highs.
What’s Changing: Consumer Spending is Dropping
Just as a combination of forces triggered the problem, a combination of forces is starting to ease it.
Global consumer spending is slowing down.
Ironically, COVID-19 again plays a role. Reuters reports that recent disease-related restrictions in China “slammed consumer demand and boosted inflation in the world’s second-largest economy, resulting in a steep fall in sales of smartphones and PCs.”
Meanwhile, the U.S. Federal Reserve has enacted two historic increases in its benchmark interest rate to curb inflation. That, Reuters says, “has increased the risk of recession and is leading to job cuts and tightening budgets.”
What’s Changing: Chip Production is Catching Up Slowly
Meanwhile, chip production is starting to expand.
A crucial, easily missed point about the chip crisis is how automakers don’t need the latest, most advanced microchips. The chips that litter car design are older, less-powerful models than those found in computers and smartphones.
To meet automaker demand, the microchip industry needs to improve its capacity to build inexpensive, light-power chips. Electronic Engineering Journal reports, “there’s been a real boom in building” these less-powerful models recently. EEJ cites a new report from Semi, the industry association that serves electronics manufacturers. The report notes that capacity for building these older chips “increased 6% in 2021, is expected to increase by 5% in 2022, and will increase again by another 3% in 2023.”
It’s Not Over Yet
The trends don’t mean the crisis will end soon.
Pre-pandemic, Americans routinely bought more than 17 million new cars per year. In 2021, we bought just over 15 million.
Kelley Blue Book parent company Cox Automotive recently trimmed its forecast for 2022. It now predicts Americans will buy as few as 14.4 million this year.
More Chips Don’t Necessarily Mean More Cars
Chip production may recover. That doesn’t mean automakers will return to the old days of building so many cars that dealers mark them down to sell them.
Automakers want to avoid building a glut of cars and having to lower prices. Some have signaled that they plan to keep inventories low indefinitely. Ford, one of the largest, has publicly toyed with moving to a business model where Americans order cars before they are built.
Dealer groups, too, say big inventories and hefty discounts may not come back.
So, even if the chip supply improves, that may not drive new car prices down.
Automotive News notes that European automakers cut their production targets by 25,000 cars last week alone to keep from building up a stockpile. Asian automakers followed, cutting 23,000 from their weekly plans.
With automakers scaling back their plans, Cox Automotive says, there is “no clear timeline for any notable recovery in new vehicle inventory levels.”
Cox Automotive Senior Economist Charlie Chesbrough says, “Lack of supply is still the greatest headwind facing the auto industry today.”
That headwind has helped drive prices near record highs — which isn’t a bad thing for the automakers.
“It is a sellers’ market,” Chesbrough says. The sellers may decide they like it that way.
