The chip shortage is making cars more expensive
New cars are getting more expensive thanks to the global semiconductor shortage. And the price of used cars is going up, too.
About 13 percent of people who bought a new car in the US in April paid above sticker price, according to Jessica Caldwell, director of insights at Edmunds. Last year, only 8 percent of buyers paid more.
New vehicle prices have been on the rise for a while now, but the shortage is only worsening the trend. Automakers are temporarily shutting down production lines around the world. The chips they are able to source are going into the most popular new vehicles — the ones that make the most money. To make matters worse, demand for new cars and trucks is increasing, leading to markups. This has pushed more consumers to the used vehicle market, which is… driving up prices there, too.
General Motors said this week that its new full-size trucks cost 10 percent more than they did last year, and its full-size SUVs cost more than 20 percent more. Ford’s new vehicles shot up in price by $1,900 more than the average industry increase in 2019. But overall sales are way up.
“Prices are just soaring,” Caldwell says. “And as high as the prices go, it seems like it doesn’t really deter people.”
Prices will likely keep climbing as the chip shortage keeps thinning supply. Automakers like Ford and Volkswagen have said they expect to take an even worse hit to production this quarter. Ford will only make half as many cars as it originally expected, the company said this week during its quarterly investor call. “We are, for sure, in crisis mode,” Volkswagen boss Herbert Diess said about the next few months.
Some, like GM, have said they think lower output won’t be a huge problem. But the supply of new cars will further dry up for other reasons. Up until now, dealers were working with a cushion of inventory that was built up before the production halts began. The summer months are typically when seasonal demand for new cars really starts to rise, Caldwell says, and this is also no typical summer. Millions of people received stimulus checks, and vaccines for the coronavirus have finally been widely rolled out. “I imagine this year [demand] will be even higher because people are itching to go out, go places, go on road trips, go back to school,” Caldwell says.
The price of a new car was already increasing in the US as consumers flocked to larger SUVs and trucks with more advanced features, so the chip shortage has supercharged the trend. There are other contributing factors, too. Higher sticker prices became easier to swallow once automakers and banks started offering loans with 84-month and 96-month terms. Those extra-long financing options got even more palatable when automakers started offering zero-percent financing deals to boost sales early in the pandemic.
The high demand for new cars could be tested as more automakers are starting to sacrifice certain features due to the chip shortage. Some Dodge Ram pickups will no longer have an intelligent rear view mirror as a standard feature, and Nissan is eschewing navigation systems in many of its vehicles. GM decided in March that it would keep making its most popular trucks without a particular module that normally increases fuel economy, meaning the trucks will pollute more and guzzle even more money.
But there is already such an inventory crush, and so many people buying, that these changes might not matter much, Caldwell says. “I think [those features] can delight you and probably move you closer to a vehicle purchase, but people don’t drive different cars all the time and may not be savvy enough to know what should or shouldn’t be there,” she says.
With wages relatively stagnant, Cox Automotive executive analyst Michelle Krebs says she worries this will make it even harder for average buyers to get into newer, safer cars. “The average household income used to be enough to buy a new car, but it’s not anymore. It’s more like a 14 year old used car,” she says. “It’s the opposite of what Henry Ford envisioned — people who make the car can’t afford the new cars, right?”
But used car prices are going up, too, aided in part by the chip shortage. Higher average selling prices for new cars paired with increasingly low inventory means more people are turning to the used car market, which is causing more competition between buyers.
Used car prices were already on the rise for a few other reasons. Rental companies typically sell into the used car market, but they dumped much of their inventory last year as the travel industry flatlined. Now, with travel recovering as more people get vaccinated, rental companies are bidding against used car buyers to get some of those vehicles back, which is pushing up prices.
Newly off-lease cars are another usual source for the used car market, but automakers have been encouraging some customers to extend their leases because of winnowing new car inventory, says Krebs. A decline in repossessions during the pandemic has also weakened the supply of used cars.
The chip shortage has exacerbated many of these pricing trends, but it may have temporarily reversed one that previously seemed irreversible. According to data compiled by Ward’s Intelligence, sedans actually picked up a few percentage points of overall market share in the US in April. Karl Brauer, executive analyst at iSeeCars.com, tells The Verge his team sees the same thing. That could mean some buyers are considering a much different middle-ground option between fighting to buy the new trucks and SUVs that are in demand and scouring the used market: settling for a smaller, more traditional new car.
While that trend would be better for pedestrian safety and greenhouse gas emissions in the long run, it’s not likely to stick. US automakers have all but abandoned sedans, and even the foreign automakers who’ve been happy to fill that vacuum for the last few years are also focusing more on pickup trucks and SUVs. Long term, Krebs says, consumers are just willing to pay more for bigger, more well-equipped vehicles.
“The one thing they are not willing to do, they will not go from a sport utility vehicle to a car,” she says. “That is just dead on arrival.”