If you’re in the market for a new or used vehicle, you really need to do your homework these days.
Component and computer chip shortages and other supply chain disruptions have drastically reduced new vehicle production worldwide. This has caused a decrease in new vehicle supply that is happening along with an increase in demand as we come out of the pandemic.
“Our business is really good, but it’s the most unusual I have ever seen in my 30 plus years in the industry,” says Ken Ganley, president and CEO of the Ganley Automotive Group, Ohio’s largest automotive retailer. “I have some stores that would normally stock over 500 new vehicles, but today they have only 25. I’ve never seen it where supply is so short.”
“People were still buying cars during the pandemic, but now with the market freed up there are even more people out looking for vehicles. So you have increased demand at the same time you have lower supply,” explains Louis A. Vitantonio, president of the Greater Cleveland Automobile Dealers’ Association, who recently participated on an industry roundtable on the lack of computer chips available to automotive manufacturers. “Many of the vehicles coming into dealerships or in transit are already sold, which leads to less inventory and less selection. So if you find a new vehicle that you like at a dealership, you need to commit to it right away, or it will be gone in the next day or two.”
However, the increased demand has spilled over into the used car market, says Vitantonio. With fewer new vehicles being sold, dealers have fewer trade-ins to sell. Fleet owners, including rental car companies seeking to rebuild their fleets due to increased demand, have also entered the late model, low mileage used vehicle market. This has resulted in a dramatic increase in the value of used vehicles.
“It’s made the used car market a little crazy,” Ganley adds. “The supply of used cars is very tight, which has driven up the value of those cars considerably. The public is starting to hear about it, and they know. The car they have is worth a lot more today than it was maybe only six months ago.”
The bottom line? If you go to a dealer for a new vehicle, you’ll find less selection and fewer (if any) incentives. The good news is that your used vehicle offered as a trade-in could be worth as much as 25% more than even your most optimistic estimates.
So the market today offers buyers a unique opportunity to get into a new vehicle, especially if you are upside down on your current vehicle loan, meaning the amount you owe is more than the actual value of the vehicle. The same is true if you are in a new vehicle lease and you are expected to go (or already over) the allotted mileage on your lease.
Another new car market dynamic to consider is that automakers are shifting production and available resources to models that meet the highest demand or, in many cases, vehicles that offer them the best profit margin. So there will initially be a better selection of larger models like SUVs.
There are also some brands like Kia and Hyundai that appear to be in a better inventory and production positions because their supply chains are better and, more specifically, they have better access to computer chips made overseas. Another issue impeding automotive manufacturing is that chip suppliers are selling their product to other industries such as cell phone and computer manufacturers that are willing to pay more for the chips.
Think of it this way, if you make a product like a glass of lemonade and sell it for a nickel and someone offers you a dime for that same product, you’ll likely sell it to the person that offers you a dime, to paraphrase Vitantonio.
Yet another market dynamic to consider is that many manufacturers have cut back on factories and switched over to just-in-time manufacturing, building inventories to meet more closely with demand.
“And if anything happens on a supply chain with just-in-time manufacturing, then everything stops,” says Vitantonio.
So it will take time for all automotive manufacturers to get back on track.
“In my crystal ball, I think things will normalize within about three to six months,” says Ganley, “but there’s no guarantee of that.”