A shortage on auto chips or silicone microchips necessary for the production of new automobiles has left many dealer lots empty nationwide.
Conversely, that auto chip shortage has led to a boom for used car businesses.
Small Business Trends contacted one local used car business to find out how they’re dealing with the current situation.
“We’re finding that people are looking for later model used cars with low mileage,” says Jerry Enders, a used vehicle business owner in Pennsylvania for more than 40 years.
“Prices have been running 20 to 30 percent higher,” he says. “The prices are out of line because of the chip shortage.”
Auto Chip Shortage Leads to Empty New Car Lots, High Demand for Used Vehicles
Auto manufacturers held a small piece of the chip market. Pre-pandemic, the new vehicle business was thriving.
In 2019, in the US, 17 million new vehicles sold. And in 2020, 14 million new vehicles sold. During the pandemic, automakers were shut down and cancelled orders for chips and semiconductors.
At the same time, millions of people began working from home, contributing to an increased demand for computers and other electronics – and the chips those items contained. So, essentially, automakers lost their seat at the chip table.
The most basic of new vehicles, not equipped with a lot of extras, have at least three dozen chips. Luxury SUVs have hundreds.
The worldwide chip shortage is expected to last until late in 2022, with the pinch of new vehicle production stretching well into 2023, according to numerous reports.
Chip Shortage Impact on Business Vehicles
If your business has some low-mileage leased vehicles, or you’re driving a low-mileage late model vehicle, you’re in the driver’s seat.
New vehicle dealers are struggling to meet demand, while it’s a sellers’ market for used vehicle dealers. Comparable to the real estate boom, prices are higher than “book” value. In fact, the current price of a used vehicle is at least 10-30% higher than its actual value.
Is it the perfect time to trade in your fleet? Or your personal car?
Before you do that, you’ll have to ask yourself an important question, considering the current state of the vehicle market: How are you going to replace those vehicles?
Market Availability for Used Vehicles Amid Chip Shortage
A big source of the used car market stock historically stemmed from rental vehicle companies and off-lease vehicles. Vehicles from those sources went to the used market when they neared a certain mileage, typically below 50,000 miles.
During the pandemic, the travel industry was crippled and employees worked from home. Although rental and lease vehicles aged a year or two, they didn’t rack up miles.
Enders points out that supply for the used car market was also generated from trade-ins when people purchased a new vehicle.
Should you consider trading in a leased or personal vehicle? Before you do, line up your replacement vehicle. Although prices are high, you’ve got to weigh the cost of repairing an older vehicle against the cost of financing a “newer” used vehicle.
You should still trade up when you can, Enders advises. He named some key factors in making that decision:
“Used car dealers can’t stop buying inventory, and buy late model vehicles with low mileage,” Enders says. “A reason for that is that banks won’t finance vehicles with higher mileage, or older vehicles that are 10 years old.”
He advised trading in a vehicle before it reaches 70,000 miles on the odometer. When mileage is higher, used car dealers may not accept it on a trade.
Low New and Used Vehicle Inventories – What Are Your Options?
Currently in the new vehicle market, the highest demand is for SUVs and trucks. Enders said that in both the new and used vehicle markets, that demand is rapidly shifting from the large gas-guzzlers to the smaller versions.
Enders sys that in the past 3 months, potential buyers are asking a new question: “What’s the gas mileage on this vehicle?”
“We are seeing a high demand for Subaru and also SUVs with four cylinders,” he said. “People are very mileage conscious, and nobody was asking me about that a year ago.”
Forget about negotiating down from the sticker price. With low inventory, you have little bargaining power. The MSRP (Manufacturer’s Suggested Retail Price) is the price.
Enders said that industry standby guidelines such as Kelly Blue Book and NADA should be treated as just that – guidelines.
“They are a guide,” he said. “Prices are higher than published.”