Is there a shortage of cars? The car industry has seen huge changes over the last decades. Components of modern cars are no longer limited to large parts like steel frames, an engine, a transmission, a steering and suspension system, tires, and brakes. Nowadays, many electronic components are necessary for the functioning of a basic car. In addition, luxury cars require even more components.
Table of Contents
- What Is Causing a Shortage of Cars?
What Is Causing a Shortage of Cars?
COVID caused the initial disruption in the chain supply. In addition, natural disasters affected factory production.
The war between Russia and Canada caused even more problems. The common denominator with all these issues is the production of chips (semiconductors).
Many electric components depend on them. How long will it take before things return to normal, and what alternatives and solutions can we seek to prevent this from happening again? We will also take a look at the major players in the semiconductor and car industries.
Why Is There a Car Shortage Right Now?
Who would have thought that car sales would drop after 2019? However, this isn’t due to a lack of demand. On the contrary, demand for faster, better, and newer cars has never been higher.
Unfortunately for car manufacturers, a series of unfortunate events led to a decline in production. So is there a shortage of cars?
A Series of Unfortunate Events
Is there a shortage of cars? First, the pandemic led to a disruption in the semiconductor supply chain. Globally, Taiwan and China are the leaders in chip production.
Due to ongoing COVID cases, certain parts of China are still under lockdown. Taiwan Semiconductor Mfg (NYSE: TSM) controls 51% of the global chip market.
When COVID began, China and Taiwan were isolated from the rest of the world. As a result, transporting the necessary chips abroad took much longer and became more expensive.
It also became more difficult to produce the necessary quantity due to labor shortages. Car makers were expecting a decline in car sales due to the pandemic. The complete opposite happened.
Second, in February 2021, a major blizzard occurred in Texas. It took many weeks to fix power grids. Authorities were prioritizing families and essential businesses. Samsung and NXP Semiconductors NV (NASDAQ: NXPI) were heavily affected.
Billions were lost, and it disrupted the supply even more. In addition, a huge fire hit a Japanese chip-making factory, Renesas Electronics Corporation (OTCMKTS: RNECF), the following month. They represent 30% of the global production of microcontroller units for cars. This added more fuel to the fire.
Lastly, in February 2022, Russia declared war on Ukraine. What does this have to do with anything? Presently, not much. In the long term, it can have serious effects due to a shortage of neon gas.
Ukraine is the leading neon supplier in the world. They supply about 60% of the world’s neon and own between 45 and 54%. Chip-makers currently hold enough neon gas, but a lengthening war could cause problems.
Effects on Car Supplies
Is there a shortage of cars? Since 2019, car sales have been dropping. But, according to analysts, they are expected to recover in 2022 or sometime in 2023.
Nowadays, most cars require between 20 and 40 chips for all their features. Luxury cars can require more than 100 due to their high-tech equipment (advanced safety, driver assistance, heating, etc.).
Many makers are focusing on more expensive models that will guarantee more income. Most popular models are receiving less attention from major companies. Multiply these numbers by all the millions of cars produced worldwide.
Furthermore, car chips are different from other electronics. Suppliers have to satisfy every business while aiming for maximum profitability. Is there a shortage of cars?
How are buyers reacting? Many are turning to used cars. However, their value has skyrocketed since the beginning of the pandemic. Since 2019, used car prices have increased by at least 29 to 40%.
In some countries, they may even exceed the price of a brand-new car. As long as they are in good condition, they’re worthwhile. Pre-ordering has become the norm for those determined to purchase a brand-new car.
The wait time can fluctuate depending on the model desired. Dealerships and buyers are used to striking a deal in hours. Now, it can take weeks. In addition, some models or colors are not available. Therefore, looking for a different model or waiting may be wiser.
Effects on Car-Makers and Chip-Makers
How are car-makers and chip-makers responding to the growing demand for their products but the lack of supply? Is there a shortage of cars? Let’s find out.
Is There a Shortage of Cars and Car Makers?
Companies adapt differently while trying to keep their sales as high as possible. For example, General Motors (NYSE: GM) is building models without essential components such as seat and heat ventilation.
They are willing to install them later once the chip shortage is handled. GM also got rid of its fuel-saving cylinder deactivation feature for full-size trucks.
Japanese carmaker Toyota (OTCMKTS: TOYOF) is pausing production in five Japanese factories for three months while they receive more valuable chips. This is estimated to cripple their production by 47,000 vehicles.
Toyota maintained excellent relationships with its suppliers until the shortage began. But, unfortunately, the same story is happening in North America for them. As a result, GM and Toyota fell short of millions of vehicles in the last years.
One of the biggest winners in the automobile industry is Tesla (NASDAQ: TSLA). The company posted surprising financial statements for Q1 of 2022, beating expected revenue and EPS. In addition, car sales and production grew and also exceeded expectations.
Despite being far behind Ford, Toyota, VW, Mercedes, and other giants in terms of car sales, Tesla is worth more than all of them combined. Next year’s projections are also optimistic despite global chip shortages. They benefited from being the first movers in the electric vehicle sector. Many investors invest in Elon Musk, not only in Tesla.
Ford (NYSE: F) and Volkswagen (OTCMKTS: VWAGY) were also the victims of chip shortages. Multinational carmakers used to be the first in line when receiving their chips. They must wait, like everyone else, until they can find a viable solution.
Is there a shortage of cars? Despite being one of the predominant, profitable, and most successful industries of the decade, the semiconductor industry faces a few challenges.
There is an obvious shortage; chip-makers must split their supply between automobiles, phones, and other electronic devices. In the early days of the pandemic, car sales were decreasing. As a result, chip-makers focused their attention on other sectors. However, car sales recovered quicker than expected and exceeded expectations. As a result, there was no longer enough supply for their needs as the attention was focused elsewhere.
The semiconductor industry is as complex as any. It takes months for certain product lines to fill. Switching suppliers can only lengthen the process.
Production affects the long-term economic output of many industries. So it wouldn’t come as a surprise if new domestic companies emerged to focus on producing industry-specific chips. So who are the current leaders in the semiconductor industry?
In terms of ETFs, two investment companies are leading the race. VanEck Semiconductor ETF (NASDAQ: SMH) and iShares Semiconductor ETF (NASDAQ: SOXX) have over $8B in assets under management.
Their returns have been almost identical over the last years because they own similar stocks. However, the distribution between both is different.
Their top holdings include Taiwan Semiconductor Mfg (NYSE: TSM), NVIDIA Corp (NASDAQ: NVDA), Broadcom (NASDAQ: AVGO), Texas Instruments Inc (NASDAQ: TXN), and Intel Corp (NASDAQ: INTC), and many more.
It can quickly become a race between who can secure strategic partners and guarantee the best quality and the most chips consistently. A mix of ETFs and individual stocks is the way to go in this industry. Any company can become a major player overnight.
Despite the recent slump in stock prices, it is a very hot industry worth keeping an eye on. They are due for a bounce back.
Alternatives and Solutions to a Global Chip Shortage
In this final section, we will explore how companies reliant on chips can have better control over the supply of semiconductors. Of course, the easiest way to fix this issue is to build more chips domestically.
However, this can’t be done overnight or in less than a year. It takes a long time to build and begin making the chips. So in the first quarter, companies most likely operate at a loss.
This is where government intervention can be justified. But, first, they can incentivize more companies to enter the market with economic benefits.
Of course, this will create more competition for existing chip-makers. This would force them to expand their operations even further and faster. This can greatly benefit the industry and all its participants.
Throughout history, building strong partnerships with renowned firms often led to success. For example, Qualcomm (NASDAQ: QCOM) partnered with Microsoft (NASDAQ: MSFT) earlier this year.
Qualcomm will be exclusively providing Microsoft with chips for their metaverse expansion. Microsoft has been busy lately with AR, VR, and gaming acquisitions.
Qualcomm can satisfy their needs for chips. In return, Microsoft can meet its financing needs and guarantee a steady demand stream.
Partnerships shouldn’t only be limited to domestic companies. International partnerships will benefit not only companies but consumers as well. For example, I bet many new agreements and partnerships will be formed between semiconductor companies and their automobile and tech partners in the next months and years.
Is there a shortage of cars? To conclude a long story, yes, there is a shortage of cars. It might last well into 2023. So for anyone looking to sell their car, now might be as good a time as ever.
They’re selling for record prices. But, on the other hand, buyers are in for a ride. New cars aren’t produced satisfactorily; old cars sell at record-setting prices. To make things even worse, chip-makers aren’t certain when they can properly address the demand for their products.
There’s a competition between automobile makers and electronics producers for the right to have the chips first. Both industries need them, and neither will give up their ground. This affects businesses and consumers, who must wait longer and pay higher prices.
From a market perspective, now might be the time to buy. Shortages are realistically expected to last until sometime in 2023. Sales and revenues can only increase from now on. Picking strategic stocks isn’t as easy as it sounds. Do your research before jumping into the stocks mentioned throughout the article.
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