Why is there a Shortage of New Cars?

April 1, 2022

Why is there a Shortage of New Cars?

During the pandemic, many dealerships began to offer online sales options as an alternative to buying in person. Some dealerships had to close because of pandemic preventative health measures, but others might have offered online options for customers who just weren’t comfortable venturing outdoors.

The pandemic has shifted buying habits, and it’s also caused supply issues, too. Limited selection of new cars at dealerships have forced many buyers to choose different makes or models or make trade-offs on the features of their dream car. Why is there a shortage of new cars?

There are four factors that have led to the shortage, and they all dovetail on the other:

  • Chip shortages
  • Plant shutdowns
  • Supply chain upheaval
  • Buyer demand
Why is there a Shortage of New Cars

Computer Chip Shortages

The major factor that has impacted the supply of new vehicles is the computer chip shortage. During Covid, USA Today explained that chip factories shut down like many industries then opened to booming orders. 

While automakers also were facing shutdowns during the pandemic, the tech industry was snapping up chips for laptops, personal computers and other gadgets. Chip suppliers then focused on the tech industry. Employees were working from home, and school was virtual, too. The world needed tech!

Unfortunately for the auto industry, they discovered that they needed those computer chips as they began to reopen factories and get back to business. However, when they needed to get back to producing the vehicles that consumers were demanding, the chip supply wasn’t plentiful. 

Plant Shutdowns

During Covid, businesses were shutting down to comply with health guidelines and regulations related to the pandemic. However, some businesses also had to cease operations because of worker illnesses and lack of employees. The auto industry also was forced to shut down plants because of illnesses and Covid outbreaks.

The chip shortage also impacted production. Modern vehicles require computer chips to operate numerous features. Even the mechanics of the vehicle utilize these chips. If plants didn’t have access to computer chips, production faltered.

Back in September 2021, the Detroit Free Press reported that General Motors had to close nearly all its North American production plants because of the chip shortage. Ford also closed its Kansas City plant for a few weeks because of the shortage; this impacted the production of pickup trucks. In addition, Nissan also closed a plant in Tennessee for two weeks.

The computer shortage and Covid both impacted the industry. However, the chip shortage was likely greatly exacerbated by Covid and perhaps by the auto industry’s incorrect predictions on business and sales during the pandemic.

Why is there a Shortage of New Cars

Supply Chain Upheaval

New car buyers might be noticing a pattern; the factors impacting the supply of new cars are all dovetailing on the other. Covid exacerbated the chip shortage; it also led to illnesses of workers that closed down some plants as well as closures caused directly by the chip shortage.

Supply chain upheaval also has worsened the supply of new cars. The chip shortage has affected the supply chain and the production of new vehicles. However, there have been other supply chain issues, too.

Consumers have read about supply chain limitations that are causing prices to skyrocket. Unfortunately, while the biggest supply chain issue for the auto industry is related to computer chips, those chips aren’t the only limitation. CNN reported that auto paint is affected because of a titanium dioxide shortage.

If the industry wasn’t already feeling the burn of supply crunches, news sites reported that a ship that carried thousands of luxury cars—including Lamborghini, Porsches and Bentleys—sunk in the Atlantic Ocean. The sinking was reportedly due to a fire.

Buyer Demand

Production of some new cars has been stifled for a number of reasons. Yet, there is one final and very important factor that is putting even more pressure on the auto industry and dealerships: buyer demand.

A low supply means that more buyers are clamoring for what is available. While the auto industry might have assumed that Covid would push sales lower, business bounced back much quicker than the industry’s expectations. Buyers wanted new cars, and now they are faced with dealerships that could offer limited supply.

When supply is low and demand is high, though, there is a bit of a benefit for the dealerships and manufacturers: higher prices. Consumers are facing higher prices in the grocery store for food and essentials, those who are looking for new homes also are paying much more than in the past, and consumers who want a new vehicle also will be paying a higher sticker price.

Low supply coupled with higher demand causes higher prices. While the economics is unfair, those with the financial means will be in a much better position to compete in a market with limited resources. Individuals who have a more limited budget could be priced out of the new car sector and focus on the used or pre-owned options instead.

Why is there a Shortage of New Cars

Is there a Car Shortage? Why Used and Pre-Owned Inventory are Priced Higher, Too

Low supply of new cars, though, also means that more buyers will focus on the used market to find the car they want. As the supply of new automobiles is in shorter supply, that supply crunch is putting the pressure on the used market. Is there a car shortage for used inventory? 

Buyers of used cars also are facing higher prices. In fact, USA Today reported that even cars that are nine years old have seen a price increase of more than 40 percent and that the average used car price is almost $30,000.

The prices of used cars are now—on average—about the equivalent of what many buyers would have paid for a new car pre-Covid. While dealerships might be making more on those vehicles, there could be less of them to sell.

Although the prices on the sticker might be much higher, there is a bright side for buyers. Those with a trade-in might be getting premium prices for their older cars. As the price of used cars has increased, trade-in values also reflect the industry’s supply crunch.

In fact, buyers might find that their old car might be worth far more than they would expect. When preparing to purchase a new car, those with a trade-in should research the value of their vehicle via Kelley Blue Book (KBB).

The site provides an easy tool to help car owners better understand the trade-in value of their car. Car owners will need to enter the make/model, odometer information and other features about their vehicle. Be honest about the condition, too.

Car owners who want to sell their car privately, though, also can use KBB to understand the resale value of their car, too. This value is typically higher than the trade-in value. Some cars could be worth nearly as much now as they were the day they were purchased!

Buying a New Car During a Vehicle Shortage

Should buyers wait to purchase a new car? That’s really a personal decision. Some buyers need a car now and simply cannot wait. Others, though, might be able to hold out until the vehicle shortage corrects and prices become more reasonable.

For buyers who need that new car now, the search might be a bit more research-heavy. Before visiting the dealership, buyers can research their new car options online. Some buyers might know exactly what they want, but others might not be so sure.

Some models—like certain pickup trucks—might be harder to find. Buyers might make a list of a few options to help simplify the process. If the top choice isn’t available, then buyers might focus on their second best option.

Buyers also might not be able to be as picky related to their dream car. A dealership could have the right model but not the right color. In some instances, buyers might have to make a few trade-offs. What features do they absolutely need? Is color a deal breaker?

Car buyers also might be able to work with dealerships to order their vehicle. Production in many auto factories is getting back to normal. While a custom order might take more time, this also could be the best option for buyers who have strict preferences for their vehicle.

Price also could be an issue for buyers on a tight budget. If prices of new models are simply out of the budget, the pre-owned market could be a more affordable option. However, buyers who have a trade-in also can offset their purchase price with the trade-in.

What’s the outlook for the auto industry? Do experts have any idea when prices will begin to correct and the supply will become reinvigorated with options? AP reported back in September 2021 that the delta variant of Covid caused illnesses in chip factories abroad.

The auto industry may continue to face a chip shortage, and consumers may feel the financial sting. While experts might not know exactly when the industry will bounce back, hopefully 2022 brings some relief for both manufacturers and consumers.