The supply chain issues – most notably, a global shortage of semiconductor chips – led to historically low vehicle inventories but also record pricing and profits amid resilient consumer demand and the lack of available cars and trucks.
It’s a situation that some auto executives such as Ford Motor CEO Jim Farley have pledged to continue when the industry is not in a time of crisis because of the higher margins for the automaker as well as its dealers.
“This is a better way to run our business,” Farley told investors earlier this year. “We have the most complicated go-to-market system I think on planet Earth. We could simplify all of that with tighter inventories.”
Instead of a 75-day or more supply of vehicles, Ford is targeting a 50 days’ supply. To help manage this, Farley wants to move the company more to an order-based system instead of customers buying vehicles off a dealer lot. It will help lower discounts from the automaker and allow Ford to better manage its production, he said.
The lower vehicle inventory levels and higher prices this year are among a handful of changes that automotive executives and analysts believe may never go back to pre-2021 levels. Other changes involved electric vehicles, supply chains and new competitors. Here’s additional information on those changes and more.
From General Motors CEO Mary Barra describing this year as an “inflection point” to nearly all major automakers announcing a pivot to electric vehicles, this year marked a significant shift in tone for the automotive industry and EVs.
A Rivian R1T electric pickup truck during the company’s IPO outside the Nasdaq MarketSite in New York, on Wednesday, Nov. 10, 2021.
Bing Guan | Bloomberg | Getty Images
While EVs, including plug-in hybrids, remain a niche market at about 4% of the U.S. industry, executives and experts expect an aggressive ramp-up over the next decade.
Most notably, the electrification of pickups began with deliveries of the Rivian Automotive’s R1T in September and the GMC Hummer EV earlier this month. They are expected to be followed by an electric version of the Ford F-150 – America’s best-selling vehicle for decades – in the spring and Tesla’s Cybertruck late next year.
Electric vehicle companies going public through special purpose acquisition companies, or SPACs, was a trend that started in late-2020 but accelerated in 2021.
From battery and charging suppliers such as Solid Power or ChargePoint to EV companies such as Lucid Group, such companies have changed the automotive landscape. While some don’t expect all of the companies to succeed, even one or two new companies can put pressure on the legacy automakers to change their direction, as Tesla has proved.
Factory shutdowns starting last spring due to the coronavirus pandemic and occurring now due to a global shortage of semiconductor chips have caused the number of new vehicles available in the U.S. to reach record lows.
Keeping a lower inventory of vehicles is something the automotive industry has played around with in the past but never really been able to keep going; specifically, the Detroit automakers that typically have among the highest inventory levels.
Tyson Jominy, vice president of data and analytics at J.D. Power, believes the longer the lower inventory levels go on, “the more likely it is that these changes can be made permanent.”
Dealer inventory levels across the country remain extremely low due to a semiconductor chip shortage that has led to sporadic plant shutdowns and depleted vehicle inventories in 2021.
Michael Wayland / CNBC
“The challenge is it’s a fixed asset industry and we have a core history of backsliding and producing more because the temptation is always there to cheat, produce one more unit because of the cost efficiencies,” he said.
The auto industry had about 1 million new vehicles on dealer lots in December, which was 1.8 million fewer new vehicles available for consumers to buy this year and 2.5 million less than 2019, according to Cox Automotive. J.D. Power reports national vehicle inventories are at 850,000 vehicles this month, when retail sales are typically 1.4 million.
The low supplies have led to record dealer profits as consumers are willing to pay more for a new vehicle. Some dealers also are adding markups, or “market adjustments,” on high-demand products. While that’s not unprecedented, the amount and scope is more than ever before, analysts say.
“Everybody’s going to make a lot more money because of it from here on out. I just don’t see it going back to pre-Covid levels,” Sonic Automotive President Jeff Dyke told CNBC earlier this year, saying “the whole ballgame” has changed in the past year.
J.D. Power reports about 89% of new vehicles bought by consumers sold near or above the manufacturer’s suggested retail price, also known as MSRP or sticker price. That compares with 12% in December 2019.
Cox Automotive reports the average list price of a new vehicle last month was about $45,000, up from less than $40,000 a year earlier.
“I would probably argue that some of that could be permanent,” said Jeff Schuster, LMC’s president of the Americas. “I don’t think pricing is going to come back down to pre-shortage levels or incentives are going to increase.”
The chip shortage and electric vehicles are causing automakers to rethink their logistics and supply chains, as companies attempt to safeguard themselves from such a situation ever occurring again.
The changes range from more vertically integrating parts production to forming joint ventures or partnerships with EV battery and chip suppliers.
Toyota Motor earlier this month announced a new $1.29 billion battery plant for electrified vehicles in North Carolina. It followed similar announcements by GM, Ford and others to move production of EV battery components closer to home to reduce costs and lower risks of supply chain disruptions.
“As you would expect, we’re committed to learn from this crisis to be a much stronger company,” Farley said earlier this year. “We’re taking this opportunity to revamp our supply chain to eliminate vulnerabilities down the road.”
Read More: Five ways 2021 may have forever changed the auto industry