A worldwide shortage of microchips has left automakers shutting down factories, customers paying full price for cars they used to buy at a discount, and dealerships enjoying record profits. But investors and analysts think the effect is temporary.
AutoNation, America’s largest dealership chain, reports gross profit per new vehicle soaring 61.2% last quarter. Profit per used vehicle is up as well, to 17.3%. Lithia Motors, the third-largest automotive retailer in the nation, reports that profits are up 33.6% for new vehicles and 9.3% for used. The numbers wildly exceed analyst expectations.
The average price paid for a new car crossed the $40,000 threshold for the first time late last year and has stayed there (though prices of electric cars fell last month).
Chip Shortage to Blame
The culprit is a worldwide shortage of semiconductors. The average new vehicle uses anywhere from 50 to 150 microchips, controlling everything from engine timing to cabin temperature. During the COVID-19 pandemic, consumers worldwide bought new electronics, but not new cars. The chip industry worked overtime to meet the demand for laptops and web cameras. As consumers started to emerge from lockdown and go car shopping again, the capacity to build new chips for cars fell behind.
The shortage affects nearly every automaker. Most are dialing back production of some models. Others have paused factory production until the chip supply catches back up. The result is scarce supplies of some cars, which is driving up prices.
It’s nearly a perfect situation for dealerships. Not only is their revenue up, but their expenses are down.
Dealerships generally don’t own the cars on their lots. They’re making their own payments on their inventory. That’s why they’re anxious to sell older models and are often willing to take a lower offer for a car that has sat unsold for some time. In this market, though, they are often selling cars even before they get them.
“I’m selling about 150% of what I have on the ground,” Mike Bowsher, owner of several dealerships in the Atlanta metro area, told Reuters. “We are selling stuff so far up in the pipeline that they’re putting money down on ‘in-process,’ which is in the plant.”
For a dealer, selling a car while it’s being built means collecting profit on it without ever taking on much expense for it.
Shortages To Continue
Analysts expect these market conditions to last through the next two quarters and possibly beyond. Some say the chip shortage won’t pass until 2022. Yet, investors aren’t bullish on the dealership industry for long.
The Wall Street Journal reports that, shortly after both AutoNation and Lithia reported their amazing quarterly results, their share prices actually declined. Investors are concerned that “auto dealers might have already seen their peak quarter of profitability this year.” Investors worry that dealers can’t sell cars that aren’t being built.
“So far, both AutoNation and Lithia Motors have been making up for some of the new-car supply shortage by selling a high volume of used vehicles. But even that supply is finite,” the Journal notes. Analysts are predicting a spike in used car prices this year.
Tight Inventories a New Normal
Dealerships began carrying lighter inventories as a business strategy during the sales slump triggered by the COVID-19 lockdown. They could continue shrinking their supply on purpose.
In Europe, dealerships rarely keep many cars on hand. Instead, customers are accustomed to ordering the exact car they want and waiting for the factory to produce it before they take delivery. Only a radical realignment of the auto industry could get American car shoppers and dealers comfortable with such a model. However, the conditions that make it normal are now developing.
Should the chip shortage go on long enough to get Americans used to the idea that a car is something you order custom-built and wait for, dealerships might not be eager to go back to paying for large inventories. They could even save money by selling off some of the land they currently use to house a new car supply.
Change comes slowly to the auto industry. Today, car dealerships are among the most land-intensive businesses in many towns. They’re even taxed differently than other businesses, in most states, to accommodate their special need for large lots.
But the past decade has already seen radical change. Tesla continues its long and successful lobbying campaign in many states to change laws that prevent automakers from owning their own dealerships. Large outside forces are beginning to push on the industry, including a massive government program to help Americans buy electric cars. It’s not unthinkable that the next big change is a move toward a build-to-order model like that found in Europe.
In the short term, though, the big news for car shoppers is negative. Expect to pay more, and to wait. Researching your purchase is now more important than ever, even down to knowing the inventory available near you.
