In September 2021, car sales fell by over 25 percent while prices skyrocketed. Interestingly, these are happening not because Americans prefer to commute using public transport, work from home, or move near their workplace.
The market is there, but there are not enough vehicles to meet the demand. And the reason? Chip shortage.
Why Is There Chip Shortage?
Chips manage the complex systems in cars, such as connectivity and safety features. Everywhere you look in a modern car, there’s at least one chip. Not only do these chips make your drives safer and more ergonomic, but they also help cut back on fuel costs while prolonging engine life.
As vehicle manufacturing moves toward more sustainable, environment-friendly, and automated designs, chips have never become this vital. However, over the past few years, the industry has been dealing with a massive shortage. According to Goldman Sachs, the shortfall could be as high as 20 percent.
Why is this happening? Here are some possible reasons:
1. Competition Among Other Industries
The automotive industry accounts for around 20 percent of the market share for chips. Consumer electronics, meanwhile, comprises 50 percent. In 2021 alone, manufacturers will sell about 1.4 billion smartphones, and each will require a chip.
In other words, it’s not only car manufacturers that need chips. So do the markers of gaming consoles, laptops, mobile phones, electric toothbrushes, and devices that use the Internet of things.
2. Underdeveloped Manufacturing Processes
Chip manufacturers are finding it challenging to produce chips at low prices due to the inefficient manufacturing process. Most companies rely on outdated tools, machines, and equipment that can’t meet today’s quality standards.
The industry also has a few key manufacturers. Until other companies can fill the gap, the shortage will remain even if demand slows down.
3. COVID-19 Pandemic
The pandemic also played a significant role in the crisis. First, at the height of the global health issue, countries imposed lockdowns and travel restrictions. Facilities stopped the chip production, so both the manufacturers and the buyers had to rely on the inventory, depleting it quickly.
Third, the pandemic forced people to spend more time indoors. It eventually increased the demand for various consumer electronic devices. These include gaming consoles, laptops for those who had to work from home, smartphones, and tablets.
4. Popularity of 5G Technology
The popularity of 5G technology also influenced the chip shortage. In 2021, everything from cars to refrigerators will have 5G connectivity. A study by Transparent Market Research suggests that more than 50 billion devices will have a wireless connection by 2027.
For starters, 5G devices will have more chips than previous versions. In addition to providing Wi-Fi and Bluetooth functionality, they’ll also be a bit more complex, requiring five or six different chips.
Will This Affect Automotive Businesses?
The answer is yes, but the severity depends on the sector. For instance, dealerships will have to face the brunt of the chip shortage problem. One, they will see their supply dwindling at least within the next few months as buyers try to snag one as much as possible or owners hold on to their cars until the industry stabilizes. It could lead to income loss or reduced cash flow.
Second, the increasing demand may result in higher prices. When vehicles become too expensive, consumers may decide to avoid buying a car for now. Third, if a dealer wants to improve its sales and inventory, it must compete with hundreds of dealerships online and offline.
The good news is that automotive businesses can explore ways to make themselves thrive despite the crisis. Here are two:
1. Improve the Quality of Service
The first thing that automotive businesses must do is improve the quality of their services. Remember, they’re competing with hundreds of niche marketplaces on Facebook and Google. Others are local online communities where customers rate dealerships based on their experience.
A recent study shows that 68 percent of consumers have posted about an auto dealership on social media, while another 36 percent have done it offline.
2. Offer Add-On Services
Those who want to get into dealerships, for example, can look for automotive franchise business opportunities that include in-house financing. They’ll be a convenient option for people who need a car but can’t pay cash. It is beneficial at this time when car prices are up.
Other potential add-on services include:
Car detailing and cleaning
Car leasing or rentals
Some experts think that the chip shortage will last for more months or until 2023. It’s a long time to keep bleeding money. Dealers can adopt a customer-centric strategy to gain market share or retain loyal customers until the problem improves.