A global shortage of microchips is hammering automakers.
The chip shortage.
The chip shortage. Growing number of companies sounding the alarm over global chip shortage.
Dealerships have a sliver of the inventory they normally have.
Lots are full of unfinished cars awaiting the chips that will make them sellable.
Meanwhile, demand is high and automakers are forced to sell cars without features like
heated seats, considered essential in colder climates.
On a market like ours, that's a highly desirable option.
You know, I know just personally speaking, it's one of the first things that I fire up at this time of
year and both on the wheel and on the seat.
And so I think it's a sacrifice that a customer would have to make.
General Motors has been directing the supplies it does have to its most profitable vehicles, but the
carmaker has also said it plans to retrofit cars with heated seats as soon as they are available, and
GM is not alone.
All automakers are having to make tough decisions about which features to cut so they can deliver
vehicles to customers, and there isn't really a clear end to this in sight.
The interesting thing here is that we think that there's some magical time coming where there's enough
chips and then all of a sudden everything goes back to normal and we go back on incentives.
But it feels like that process is going to take a long time because right now we're seeing inventories
down about 75-80 percent on aggregate, and you just don't come back from those numbers quickly.
Today's cars have features that might have seemed unimaginable to previous generations.
Vehicles today have ventilated seats that can be heated, cooled and adjusted in a mind boggling
variety of ways programed for different drivers.
A growing number of seats can even offer massages.
It was actually a General Motors employee, Robert Ballard, who was responsible for the earliest known
patent for heated seats, filed in 1951.
And GM's top shelf brand Cadillac, was the first to offer heated seats, just as it was the first to
offer so many other innovations.
The first standard heated seat was offered on a Saab in 1972.
It engaged automatically when the temperature dipped below 58 degrees and shut off when it rose above
82. Creature comforts: sophisticated climate control systems, power windows, power locks,
improved sound systems, artfully designed cabin lighting even TV screens have all become a lot more
common, even in mainstream vehicles over time.
Almost none of this would be possible without microchips.
The earliest examples of computerization date back, at least as far as the 1968 Volkswagen,
depending on how you define computer.
As microchips have become cheaper to produce, automakers have made increasing use of them to
control nearly everything in a vehicle.
Even safety features such as headlights.
The microchip shortage has left these automakers struggling to fill their vehicles.
Global light vehicle production in 2021 is expected to finish at 75.5 million
units, a paltry 1.2 percent improvement over 2020 levels, said IHS Markit in
December. So many carmakers have been making tough choices.
Normally, when a car rolls off the assembly line, it is immediately spoken for, purchased by a dealer and
then transported as soon as possible to that dealership.
But now, many vehicles sit build-shy on lots awaiting completion.
Dealer inventories are a fraction of where they were prior to the pandemic.
Demand is extremely high and supply is extremely low.
I think it's challenging for us.
We'd love to have a greater balance of having more inventory to be able to supply to our customers, but
it's out of our control.
Car companies have been pushing their chip supplies toward the most profitable vehicles, and customers
are paying more than ever for their cars.
Data from automotive shopping and information website, Edmunds, reveals that average transaction
prices for new vehicles have hit record levels in recent months.
For example, they climbed to $45,872 in November 2021, compared
to $39,984 in November 2020.
Buyers are paying above MSRP for new vehicles in November.
The average MSRP was $662 less than the average transaction price on a national level.
Edmunds experts also note that vehicles available for sale are richly equipped with more features.
In 2016, the average vehicle cost 30 percent above MSRP, in 2021 that figure was on trend to
reach 38 percent.
The pandemic really created additional demand for people that no longer want to use public
transit or have left big cities and so need a vehicle, so the overall size of the park has grown.
The average age of vehicles as a result is older, and OEMs and dealerships in
particular have really benefited from the ability to charge higher prices, not provide the types of
incentives that they've had to.
And combine that with very low interest rates.
Again, people buy on payment more than they do the cost of a vehicle.
And so that's also gone a long way toward providing a big boost to OEM profitability.
And that's been true, certainly in the U.S.
and Europe as well.
Paul Zimmermann runs Chevrolet and Toyota dealerships in the Detroit, Michigan area.
And I would say normally pre-COVID, and I'm speaking just at Chevrolet for a moment, you know,
somewhere between 800-1,000 new cars on on the ground or end or in transit, either on a
car hauler or a rail car in route to our facility.
As we sit here currently, we have 48 in stock, five percent, essentially, of what we would normally
carry.
In November, GM said it was going to remove heated seats and heated steering wheels from vehicles.
And they said they were getting rid of heated seats.
And people who live in northern Michigan, like me, said that's utterly ridiculous because we use them
eight months out of the year.
So in fact, Saturday morning I got up, it was minus four up here.
You know, to get in a leather vehicle and that kind of temperature is nuts.
A few days after that news broke, the company said it planned to retrofit vehicles, with the features
starting in the second quarter of 2022.
Still buying a car without an option like that can be a tough choice, especially for shoppers heading to
dealers, like Zimmermann, in the middle of Michigan.
Heated seats has become one of those options that folks have just gotten so used to, and sometimes I
think it's based on the climate in terms of where they live and just getting into that car that, you
know, immediately warm your car and 20 degree weather is a big thing.
And I think others, you know, they throw that thing on because they might have a back issue.
And based on age and just muscle relaxation, they put that on for five minutes and it helps their
commute in terms of being in that chair for X amount of time.
So hopefully, you know, we're talking about a five or six month sacrifice that folks would have
to go through in terms of the life cycle of that vehicle.
And then once those retrofits are available, they'd come to the dealer and then we'd take care of the
install for them.
Zimmermann also said that a lot of his customers are leaseholders and their leases are coming due.
They need new cars.
So he and his staff have been trying to be proactive.
Team members have been reaching out to the customers ahead of time, whether it's five or six months before
their lease is due, to make sure that they know what the landscape of the inventory and
then their options look like and really just prep them for what's going to lie ahead.
Because in past times, you know, a customer could show up a week before their lease
matured and have a pick of a thousand vehicles.
You know, they don't have that option now.
On the other hand, is it really too much to ask consumers to live without heated seats?
In fact, a lot of customers have been quite understanding, Zimmerman said, making the messaging a
bit easier.
There's an understanding from a lot of folks that, again, these are unprecedented times and this is
unusual. Everybody's been affected one way or another.
Zimmermann has been selling cars for decades and has seen the product become incredibly sophisticated, but
he also has seen how important cars have become to people.
A lot of the options on cars nowadays, and I almost feel like, geez, this is, you know,
the lap of luxury. There's so much stuff in this thing.
You know, I almost feel guilty using it.
But having said that, the older I get, the more I realize that if it can be built and it can be
executed well, why not?
Of course, GM is far from the only manufacturer that has had to make these kinds of choices.
Any option that might not be highly sought after or might not be considered essential for performance,
safety or basic comfort could be on the chopping block.
One example is infotainment systems and onboard navigation modules—anything that does basically the
same job as a smartphone can do.
But there are others.
There are other car companies that have had seat memory modules is a good example where the
electronics weren't available.
So you have vehicles that have a button for that feature, but that button doesn't do anything.
So they're not the only ones.
It's pretty pervasive.
The industry is not expecting relief anytime soon.
Even though a lot of positive comments came out end of last year/early this year, now most
automakers are seeing, and analysts are saying 2023 before we start to see some more relief.
Already, this is showing up in annual sales forecasts.
As of late January, the seasonally adjusted annual rate of sales the common metric used by the industry,
was a lot lower than had been expected.
The SARS being predicted about 15.2.
When we first entered this pandemic, we thought by 2022 it'd be back in the 17 millions.
So you can see the impact is already at two million.
That's mainly semiconductors.
But it remains to be seen.
We've become more pessimistic as the weeks go on, and we have to see also on the customer side, with
the average transaction price going up so drastically to over $45,000.
People are priced out of the market.
One interesting development is how consumers have responded to the situation.
First of all, they seem happy to pay more.
We did a survey not too long ago, and a pretty small amount of consumers said that they felt that they
paid too much. And I'm looking at the transaction prices thinking that's not the case.
A lot of you definitely paid, probably too much, but it all, you know, it really is just about the optics
of the situation that they don't feel that they got a bad deal.
They're also willing to wait longer, and they show an interest in custom ordering cars.
This is a common way of buying cars in other countries such as Japan, but it is far rarer in the
United States. Americans tend to like buying cars off the lot.
Ordering a car up front lets a buyer choose a car to spec, but typically comes with a waiting period of
several weeks. There's also no opportunity to haggle over the price,
So we did ask about the build-to-order concept basically described it, we didn't necessarily call it
build-to-order.
And over half of the respondents were into the idea, even if they had to wait 8-10 weeks.
And I thought the number would actually be a lot less.
I thought that American consumers were a bit too antsy for their vehicles for that, but it seemed like
a lot of people responded favorably to the concept.
And it probably is related to the fact that people have to wait right now anyhow, so you might as well
get the car that you want at a price that is guaranteed versus kind of the environment now where
you're trying to scramble for a vehicle, maybe paying a bit too much, not getting the exact vehicle
that you want.
The chips ordeal has spurred conversation about whether more of these supply chains should move back
to the United States, or at least be more widely distributed throughout the world.
I'm for small intervention with the government, but I think there needs to be some quick
and effective work done to try and bring some of this
manufacturing for these chips back onto American soil and to be
completely dependent on primarily Asia, 95 percent of these, you see the risk.
The U.S. Senate passed the Chips Act in 2021, but the bill was stuck in the House of Representatives.
The act would set aside $52 billion for chip manufacturing in the U.S.
and establish a National Semiconductor Technology Center.
Microchips were invented in the United States, but Asian manufacturers became dominant.
The U.S. made about 37 percent of the world's chips in 1990, but only makes about 12 percent in
2021. Intel, TSMC and Samsung are all developing chip plants in the U.S., but it will take
years before they are producing at full capacity.
Some say the geographic concentration of these factories is not really the issue.
At the end of the day, it is just a heated seat, and it is important to understand that for decades
drivers got along just fine without them.
But these little comforts add up to an experience that can really set one car apart from another.
Well, I can completely understand General Motors trying to figure out how come when you sell these
vehicles and these are the sacrifices that we have to make just to get some vehicles out the door.
I'm sure that they want to get those back as soon as possible because those creature comforts are what
really delight people.
And I think that when you're happy in your car, you're also more likely to tell people about it and
be that evangelist that auto companies want to have for their brands.
In the meantime, drivers will have to bundle up and rely on heat coming out of the vents.