Chip Shortages Slow Car Sales

US Car Makers Struggle to Meet Demand

The US automobile market is expected to cool off in the coming months, but not because of a decline in demand. Hampered by semiconductor shortages and supply-chain bottlenecks, vehicle manufacturers are having a hard time getting cars into their showrooms. That is expected to slow the pace of growth seen during the first six months of this year.

For the first half of 2021, new vehicle sales are forecast to reach 8.3 million units, which is 32% higher year-over-year and up close to 1% from 2019, a more normal period before the pandemic. Still, the sales rate slowed as the second quarter of 2021 winded down, coming in at about 16 million vehicles. In April, carmakers sold close to 19 million vehicles on an annualized basis.

Inventory Situation Worsening

The decline at the end of the second quarter is partially due to a lack of inventory at dealerships. In June, dealers had roughly 1.5 million new vehicles in their showrooms. That was down 42% from a year earlier and 23% lower than at the beginning of May. The lack of new vehicles is also driving prices higher, with the average cost for a new vehicle surpassing $40,000 in June, a record high.

Car buyers seem willing to absorb the price increases. Many have extra savings thanks to federal pandemic stimulus payments and months of being at home and not spending money. There are also low interest rates and high trade-in values for those purchasing new cars. These factors also point to the fact that supply issues, not a lack of demand, are driving declines in sales.

SUVs, Pickups Hard Hit

Among the vehicles hit hardest by the semiconductor shortages are pickup trucks and SUVs, which generate a lot of profits for General Motors (GM) and Ford (F). That has resulted in both companies reporting a decline in market share while Toyota (TM) and Honda (HMC) gained market share. The chip shortages have even prompted Ford to cut production across six US factories in July. That indicates supply-chain issues could take longer than expected to ease.

The US car industry is seeing unprecedented demand as consumers look to take advantage of extra savings and low interest rates. It will be interesting to see if this demand spills over into next year and how the carmakers respond.

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