Production Cuts Hit Automakers, Auto Buyers Alike

According to Morningstar analyst David Whiston, every 100,000 units in sales lost “costs Ford about $4.7 billion of revenue.” This July 2021 image of a Richmond, California, Ford dealership illustrates the lack of inventory. Justin Sullivan/Getty Images

The sprawling Nissan assembly plant in Smyrna, Tennessee, is up and running today after a three-week shutdown. Still, the Labor Day holiday will stretch for two additional weeks at General Motors’ North American assembly plants, idled by the semiconductor shortage.

With chip supplies still scarce, the industry will likely continue to face production problems through the rest of the year. And that, in turn, is compounding problems faced not only by automakers but auto dealers and auto buyers alike.

Industry earnings are forecast to tumble sharply during the third quarter even with motorists paying record prices for new vehicles—if they can find them. According to J.D. Power, U.S. dealer inventories are rapidly depleting. Pre-pandemic, they typically had a 60- to 70-day supply of vehicles on their lots. It’s now down to around 20 days and, for some hot-selling models like the Toyota Tacoma, inventories are in single digits.

The situation didn’t look good going into the long Labor Day weekend, “as the increasingly constrained inventory environment continues to crimp sales,” Bank of America Securities warned clients in an advisory last week.

Auto sales fell 14% in August compared to year-earlier numbers already constrained by pandemic lockdowns. But that understates the situation. In April, U.S. new vehicles sales reached an annualized rate of 18.5 million, well above the pre-pandemic peak. However, that fell to 14.8 million in July and just 13.5 million in August.

When North American automotive production was put on hold for two months in 2020, manufacturers sharply pared chip orders, leading semiconductor manufacturers to find new customers in the form of consumer electronics companies snapping up chips for smartphones, webcams and game consoles. Costfoto/Barcroft Media via Getty Images

Inventory shortages have driven down sales and have led to record average transaction prices (ATP)—what customers actually pay as they drive off the lot. ATPs reached an all-time record of $42,736 in July, Kelley Blue Book reported, up $402 from June and $3,223 from July 2020.

“While transaction prices marked new highs in July, new-vehicle incentives continue to fall,” noted Cox Automotive Analyst Kayla Reynolds. Rebates and givebacks were down to 5.9%, she said, adding that “Excellent new-vehicle deals are certainly hard to find.”

Initially, “I couldn’t find a car,” said Craig Daitch, the owner of a strategic communications firm in suburban Detroit. When he finally found the Jeep he wanted, the dealer wanted an “adjustment fee” of $3,000. “I turned him down, said Daitch.

The chip shortage is an outgrowth of the pandemic. When lockdowns began in March 2020, North American automotive production was put on hold for two months, and manufacturers sharply pared backorders. Semiconductor manufacturers quickly found new customers, consumer electronics companies snapping up chips for smartphones, webcams and game consoles enjoying a surge in demand. While auto sales bounced back quicker than expected, carmakers have now found themselves at the back of the line.

The Biden administration is putting pressure on trade partners, such as Taiwan, to boost chip production. But that has clearly not solved the problem, and further production cuts are in store. For example, Toyota will assemble 40% fewer vehicles than initially planned in September.

The financial hit to the industry could be severe. Ford has repeatedly cut back production of its most profitable model line, the F-Series pickup. As a result, every 100,000 sales lost “costs Ford about $4.7 billion of revenue,” Morningstar analyst David Whiston wrote.

In May, AlixPartners estimated the auto industry would lose about $110 billion in revenues due to the chip shortage, up from a January forecast of $61 billion. The longer the shortages continue, the more that figure will climb.