Why are car prices so insane right now?

You asked and we delivered… this week we’re breaking down the microchip shortage and what kind of havoc it’s wreaking on the auto industry. If you’ve looked into buying a car recently, you probably know that car prices are insane right now. But why is that? And when can we expect things to go back to normal? We’ll break it all down for you right here.

Articles Referenced:
https://www.popsci.com/technology/global-chip-shortage/

https://www.asml.com/en/technology/all-about-microchips/microchip-basics

https://www.thoughtco.com/what-is-a-microchip-1991410

https://www.freep.com/story/money/cars/2021/06/15/car-chip-shortage-2021/7688773002/

https://www.erieinsurance.com/blog/car-chip-shortage-2021

https://www.motorbiscuit.com/what-do-semiconductor-chips-do-in-cars/

Transcript

Discussion

Ask a Question (explain why we chose topic)

• What is a microchip? Why are they important? Why is the shortage happening? What are the implications of the shortage?

Hypothesis / Unique Angle (state our angle on the topic/data)

• Various facets of the pandemic (such as increased time at home and therefore demand for electronic devices, increased savings for some households that inspired people to buy cars, production shortages from factories being shut down, shipping lead times, etc.) created the microchip shortage
  • As a side note I think this may change the way some companies do business seeing how fragile the supply chain is

Analyze Data (deep dive into data)

What are microchips

• A microchip (or a semi-conductor chip) is a set of electronic circuits on a small flat piece of silicon, which is a precious metal found in most minerals on the earth's surface. 
• The microchip can contain a set of interconnected electronic components such as transistors, resistors, and capacitors that are etched or imprinted on a tiny, wafer-thin chip.
• They allow computers, smart phones, appliances and other electrical devices to function. Vehicles also, of course, need these microchips to function. 
• Every part of the vehicle uses these microchips, from the touch screen to the safety / air bag mechanisms to the engine. Basically these chips are the “brain” of the device.
• The raw materials for the semiconductor business often come from Japan and Mexico, with the chips made in Taiwan, China and some in the U.S.
• Their construction involves multiple steps, days, and experts on hand. 
• They are used in just about everything such as phones, computers, cars, washing machines, electric toothbrushes, refrigerators, etc.

Why is there a shortage?

• There’s 2 key reasons why there is a chip shortage in the auto industry presently
• First, modern vehicles are using more chips than ever before
  • Every car is having more and more safety requirements (for ex: most cars must now meet a safety criterion of having back up cameras, car detection sensors in the mirror, etc). These requirements require more and more of these chips
• Second, the COVID-19 pandemic, surprise surprise
  • Even before the pandemic, demand for the chips exceeded supply
  • Taiwan and Korea control the lion’s share of chip production today
    • In 1990, 37 percent of chips were made in America, says James Lewis, senior vice president and director of CSIS’s Strategic Technologies Program. By 2020, that number was only 12 percent.
  • As the world shut down because of the COVID-19 pandemic, many factories closed with it, making the supplies needed for chip manufacturing unavailable for months. 
  • Increased demand for consumer electronics (phones, appliances etc.) caused shifts that rippled up the supply chain.

• We have a graph showcasing lead times for the chips. In 2018 there was also a spike for these chips, peaking at a 14 week leadtime in August of 2018. Presently, in January of 2021 we’ve already surpassed this leadtime of 15 weeks and it’s been climbing ever since. 
•  (Noreen note: when I went to look at cars the lead time was 8-30 weeks)
• The pandemic caused an explosive surge in demand for devices. People were at home, using more tablets, phones and other streaming devices than ever before, and the need skyrocketed beyond what manufacturers could provide.
• Bad decisions by the auto industry also added to the shortage. Car companies have to predict the amount of chips they will need to produce their cars and order them in advance from one of the chip manufacturers. 
• When COVID started, many companies canceled their orders for chips because they assumed the economy was about to take a lengthy hit. These car companies cancelled orders, so chip companies switched to making chips for consumer products, attempting to meet the explosive demand caused by the pandemic. Having retooled their plants to make chips for consumer goods instead of cars, a shortage of car chips ensued.
  
  
  

Why can’t manufacturers just make more chips to meet demand?

• Building microchips is extremely complex, expensive and time consuming. Only a handful of chip manufacturers in the world. All these manufacturers are therefore already working at max capacity
• They can add manufacturing facilities, but that takes time with regard to plan, train, build manufacturing space, not to mention billions of dollars in investment
• According to the Semiconductor Industry Association, it takes about 12 weeks to manufacture an average semiconductor (advanced chips can take up to 20 weeks to build!). Add in time to ramp up production and transport the finished product, and it’s estimated that the lead time for a new chip order is about six months.

How is this shortage affecting car prices?

• Shortage of semiconductor chips has directly translated to shortage of new vehicles on car lots. 
• Unfortunately many automakers have shut down production due to the lack of these semiconductor chips.
  • It’s even been reported that Ford has filled parking lots across Detroit with nearly completed F-150 trucks, awaiting chip installation before they can be shipped to dealers.
• A shortage of inventory yields increased demand, which of course drives up the prices for what inventory these manufacturers have. 
• Nowwwwwwwww we see that because people are less likely to shop the over-inflated new car market, they are driven to the used car market which is now also seeing a surge in prices
• According to industry data from Edmunds, the average transaction price for a used car was $25,410 in the second quarter of 2021. That’s up from $20,942 from the same time last year – a 21% increase!

What are the effects of the shortage?

• Higher prices
• Cancelled orders or delayed orders
• The auto industry is getting hit hard, with estimates saying US manufacturers will make at least 1.5 to 5 million less cars this year. Ford and General Motors have already limited production. Tesla revised its own software to support alternative chips to maintain its production levels.
• “It’s gonna be a tough holiday season,” says Patrick Penfield (professor at Syracuse U). “One thing I would caution consumers on is you probably won’t see the variety that you’re accustomed to. If you can buy before the holiday season really gets going, I think you’re going to be in good shape.”

Conclusions on Data (our opinion on what data says)

• Basically sell your car
• Basically this whole issue boils down to low capacity for manufacturing these chips, combined with a rapidly improving autoindustry dusted with a lil global pandemic
• Now seems like it just may not be the time to buy a car, unless absolutely necessary.