The average new car weighs 4,000 pounds and is largely composed of heavy metal. Yet it’s a shortage of tiny silicon chips weighing less than an ounce that’s made it hard for automakers to produce enough of them.
Sales at auto dealers fell in July for the third month in a row, the sort of thing that usually happens in deep recessions. Even during the worst of the pandemic last year, sales only declined for two months before recovering.
Falling sales is not the result of Americans suddenly shunning Ford trucks, Chevy Silverados or Honda CR-Vs. It’s the result of a global shortage of semiconductors needed to complete new vehicles and ship them to dealer lots. Production is down 3.5% from recent peak in January.
New cars have far more electronics than vehicles from even a decade ago. Computer chips are used to connect to the internet, spit out dashboard information, handle entertainment systems and control key functions of the engine such as fuel injection.
Automakers slashed purchases of chips early in the pandemic on the assumption that car sales would slow for a while. They did, but only briefly.
Chipmakers filled the temporary void in sales to automakers by selling lots more semiconductors to makers of computers, iPads, cell phones and other consumer electronics whose sales soared. Tens of millions of people around the world went to work at home or sought personal forms of entertainment while they were hunkered down.
Now with automakers back as big buyers, chipmakers can’t keep up with global demand for semiconductors. Adding to the problem are pandemic-related disruptions at shipping ports and manufacturing plants around the world. It takes longer to get the needed parts.
The problem is likely to fester for months before easing.
“The automakers canceled their usual July shutdowns to churn out cars and trucks,” said chief economist Gus Faucher of PNC Financial Services. “Even so, the computer chip shortage continues to weigh on auto production.”
In the meantime, auto buyers can expect to find high prices and a limited selection of vehicles on dealer lots. The cost of buying a car hit a record $42,736 in July, according to Kelley Blue Book.
What’s more, the auto industry’s woes are likely to act as a brake on retail sales for the foreseeable future. Car purchases account for 20% of U.S. retail sales and the industry is a big part of the economy.
The good news? Americans are still eager to buy plenty of cars. Sales are still up almost 16% from a year earlier despite higher prices and fewer models being available.