By Peter M. DeLorenzo
Detroit. Back about a year ago, I stated that the ongoing silicon chip shortage will plague the auto industry through all of 2022 and into 2023. A few out there in the biz flat-out scoffed at the idea, and a few more were hoping against hope that I was wrong. Well, I wish my prediction wasn’t accurate in this case because this chip “thing” is here to stay, and it will continue to wreak havoc across the entire industry for the foreseeable future.
At this point, the negatives associated with the chip mess have been well-documented. Production disruptions, parts shortages, empty dealer lots, vehicles assembled with missing features – the list goes on and on. But in the midst of all of the hand-wringing at the car companies, private smiles are quietly being hidden from view. Why? Because the chip crisis has fundamentally altered this business in favor of the manufacturers and dealers, and it’s proving to be a boon to their collective fortunes.
Let’s start with profitability. Despite all of the negative headlines, the automakers are, for the most part, making money hand over fist. The cost of doing business – meaning the incentives that were required to move the metal in the old days – have been substantially reduced, and in most cases eliminated altogether. The notably higher transaction prices have boosted the profit per vehicle to unforeseen heights. Translation? The automakers are generating huge amounts of ca$h-ola, which they’re using to underwrite their EV development efforts.
And the dealers are benefiting too. Yes, dealer lots are empty, which has hurt in the short term. But – and there’s always a but in this business – the chip shortage has fundamentally altered the way the dealers interact with the manufacturers and their customers. The days of ordering cars and trucks for dealer stock are gone. The chip crisis put paid to that old way of doing business. Now? Customers are waiting for vehicles to be unloaded from the delivery trucks – vehicles that they have been forced to order to their specification. Because of this sea change, dealers have been able to all but eliminate – or at least reduce to the bare minimum – the carrying charges for sitting on a dealer lot full of vehicles.
What does it all mean for the consumer? The days of wandering down to the local dealership and picking up something off of the lot are over. That means the days of instant gratification – when you got an itch for a new vehicle and got it scratched at the dealer in a matter of days, or hours – have become obsolete. Is this a negative for the consumer? In some respects, it is. Once consumers get used to the idea of planning ahead and getting exactly what they want, however, I think the old way will rapidly fade into the rearview mirror.
And oh, by the way, the other unforeseen benefit to the dealers (and the manufacturers)? The “no dicker sticker” is well and truly here to stay. Consumers will order their vehicles knowing the price going into the transaction, and that will be the way of the world when acquiring a vehicle.
I should point out that some things never do change, when it comes to a decided minority of dealers, however. The incidents of dealers gouging customers for hot vehicles – like the Ford Bronco, Chevrolet Corvette Z06, etc. – with exorbitant “added dealer markups” have been on the rise. Some consumers suffer severe bouts of “first-on-the-block” syndrome and willingly pay through the nose to be the Biggest Tool in the Shed (at least in their neighborhoods), and there’s not much the manufacturers can do about that. But the extreme examples of dealer gouging, like an additional $25,000 over sticker, are being dealt with severely, and there will be serious ramifications for the “bad actors” out there.
There is no getting around the fact that the chip crisis has been an unprecedented event in this business. How significant is it? It has altered everything that defines this industry. The upheaval has been serious and far reaching, with repercussions touching every dimension of this business. And it isn’t going away anytime soon.
That this upheaval is happening on the verge of the biggest transformation in industrial history – to a battery-centric infrastructure – just makes things exponentially more critical.
Manufacturers have geared up and altered the way they conduct themselves on the fly. And in some respects, it has been most impressive to observe. Dealers have demonstrated a resiliency that has been impressive, too, and when this all shakes out, the “new” way of doing business will come to fruition in a positive – and profitable – way.
As for consumers, they have already demonstrated an ability to quickly adapt to this new way of ordering and buying cars. Planning ahead and getting exactly what they want is worth waiting for, apparently. And why not? With the average price of a new vehicle approaching $50,000, you might as well be as specific as possible.
Yes, there is collateral damage with all off this, with the “old” ways of the business being relegated to the scrap heap, but I think it’s a small price to pay at this juncture.
The automotive ship is headed to new horizons, and those mired in the “old” ways will be left behind.
As for the rest? It’s Chips Ahoy! Or, something like that.
And that’s the High-Octane/Electron Truth for this week.