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AUTO INDUSTRY UPDATE 2021
by Larry Carley copyright December 2021 AA1Car.com
With the end of 2021 in sight, I thought my readers might appreciate a review of what this past year as meant for the auto industry, car dealers, consumers and anyone involved with auto service and repair.
Manufacturing and supply chain disruptions caused by global Covid-19 have created a backlog of unfulfilled parts orders, everything from mechanical parts to electronics. The semiconductor chip shortage has had the greatest impact on auto manufacturers because they can't get the chips they need to produce all the cars, SUVs and light trucks they could potentially sell. Apparently, nobody expected the economy to rebound as quickly as it did from 2020 so orders for many key components were postponed or cancelled. Chips and other auto parts require considerable lead time to produce, so if orders are not placed well ahead of time a sudden increase in demand can create a prolonged shortage of supply.
The semiconductor chip shortage has forced auto makers around the world to limit production, idle assembly lines and temporarily suspend the production of many entry level vehicles in favor of more profitable models. They have also deleted certain options or electronic driver assist features that otherwise would have been available on various models.
Experts say the chip shortage in 2021 has probably reduced global auto production by nearly 8 million vehicles and cost the industry an estimated $210 billion in lost sales .
Here in the U.S., auto makers have had to scale back production to around 16 million vehicles, which is about 1.5 million less than what they had expected to build and sell. Last year was a disaster for the U.S. auto makers, with only 8.8 million vehicles built.
Wall Street analysts estimate global vehicle production for 2021 should total around 76 million vehicles, with volume increasing in 2022 to around 85 million IF the supply chain issues for chips and other parts clears up and the Covid pandemic doesn't hit us with any new surprises.
In 2019 before the Covid tanked the world economy, global auto makers built 92 million vehicles (67 million cars and light trucks, plus 25 million commercial vehicles). Then out of nowhere the world was hit with the pandemic. The result was lockdowns, massive layoffs and much economic uncertainty. The demand for new vehicles plummeted, and global auto manufacturing fell 15 percent to 78 million vehicles.
China, where the pandemic originated, seemed to weather the crisis better than the rest of the world. Their auto production was only down about two percent with a total of 25 million vehicles produced. In 2021, China also struggled with the chip shortage but was still able to build more than 22 million vehicles, which is more than the U.S., Japan, South Korea and Germany combined! China is and will continue to be the world's biggest car market.
New vehicle production cutbacks have created a market in 2021 where demand has far outpaced the supply of new cars (and used cars!). Consumers can't get the models they want because new car inventories are limited, and they may not have as much choice when it comes to color or option packages. Dealers are milking this for all its worth by not wheeling and dealing, and not discounting. They are forcing consumers to pay full list and then some for the vehicles people want.
This fall, the average price of a new car in the U.S. hit a record $46,036, which is up $5,000 over what consumers were paying in 2020.
Used car prices are also through the roof. The reduced availability of new cars combined with fewer trade-ins and soaring demand for late model cars coming off their leases has driven the price of used cars up 25 percent to as much as 40 percent for high demand models. It's a great time to sell a used car but an expensive time to buy a new or used car.
Although new car dealers are selling fewer vehicles than they could if their lots were full of inventory, they are getting much better margins and making record profits.
According to the National Automobile Dealers Association (NADA), the average per-vehicle gross profit for new cars in 2021 was up 65 percent. Net profit before tax at the average new car dealership was up a whopping 128.2 percent over last year, with domestic brand dealers up 112.6 percent versus 140.6 percent for import brand dealerships.
Unfortunately, 2021 has also seen the worst inflation since the 1970s, with prices on everything from vehicles to groceries increasing 6.2 to over 8 percent or more. There are several reasons for this including the Federal Reserve dumping money into the stock market to prop up bond prices, the cost of 20 years of war in Iraq and Afghanistan, mandated increases in minimum wages, and a sudden explosion in consumer demand for everything.
To date, the Federal Reserve has done NOTHING to curtail inflation as both wholesale and consumer prices soar and unemployment reaches historic lows. The Fed needs to raise interest rates now and to raise the rates signficantly otherwise inflation will only get worse in 2022.
Another problem that has developed in 2021 is a shortage of warm bodies to fill jobs. Every business from fast food restaurants to big box stores to auto dealerships can't find enough people to fill all their job openings. For the first time in a long time, we have a real job-seeker's market rather than an employer's market. That probably won't last, so if you are looking for a better paying job, now is the time to make your move.
New car dealers as well as other auto repair facilities tell us they can't find enough qualified people to handle all the service and repair work that needs to be done. That's nothing new in the auto repair business. It's been a problem for years and is only getting worse. During the pandemic, many older, experienced techs have decided to retire or they have left the field of auto repair to seek better pay and benefits doing something else.
Very few high schools still offer an auto shop class. Students are told the only path to success is with a college degree. So fewer and fewer young people are choosing auto repair or other skilled trades as a future career. The wages and benefits for entry level positions in auto repair are NOT competitive with many other trades or even entry-level jobs at some big box stores or fast food restaurants. Industry experts say there is a shortage of at least 20,000 auto repair technicians that needs to be filled somehow. And with automotive technology rapidly evolving to electric vehicles, the shortage will get even worse. Many old timers who are still working don't want to learn how to diagnose and repair hybrid and electric vehicles. And most of the kids who are graduating from high school these days have ZERO interest in twisting wrenches to earn a living.
So as we wind up 2021, we are facing many challenges and opportunities. My hope is that the new year will see the Covid pandemic winding down, the global supply chain sorting itself out and getting back to some degree of "normal", new and used car prices leveling off and coming back into balance, and the Fed taking action by finally raising interest rates to reign in inflation. If these things happen, 2022 should be a better year than the past. If they don't happen, we're in for another year of angst and uncertainty.
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