Chip shortages and supply chain issues caused massive headaches for auto lenders in 2021 and cost the industry an estimated $210 billion in lost revenue. Though recovering, vehicle production continues to suffer in 2022 and experts predict effects to ripple into 2023 and beyond.
According to MotorTrend, “The world will have lost 11.3 million units of production in 2021 because of the chip shortage. The impact could be another 7 million units in 2022 and 1.6 million in 2023 … Economists at Cox Automotive do not expect the wholesale car market to reach pre-pandemic and pre-chip crisis levels until at least 2025.”
In this article, we’ll discuss how the chip shortage is impacting auto lenders and their borrowers.
Tracking The Chip Shortage
Following the onset of the pandemic in March 2020, the majority of automakers, including GM, Tesla, and Fiat Chrysler dramatically decreased output of new vehicles. This was during the first months of the pandemic when most of the country was under lockdown and experts were anticipating lower consumer demand for vehicles for the foreseeable future (which, to be fair, wasn’t far at a time of unprecedented global upheaval).
Soon after, this action was paired with manufacturers closing facilities to prevent the further spread of the virus among their staff.
After abating somewhat in 2020, consumer demand for automobiles redoubled in 2021. Unfortunately, new car manufacturers could not initiate production quickly enough to meet the renewed demand because the computer chips needed to build critical components in their vehicles were in very short supply around the globe.
So, where did all the computer chips go? Many semiconductor manufacturers also had to halt their production lines when the virus first began. The unexpected shift for millions of Americans to working remotely caused a huge surge in demand for PCs and other consumer electronics.
Electronics like smartphones, personal computers, and other smart devices also rely on semiconductor chips and they tend to be more profitable clients for chip manufacturers, so auto manufacturers faced steep competition for the available supply of semiconductors.
Impact Of Semiconductor Shortage On New And Used Vehicle Inventory
In response to the unavailability of semiconductors needed to manufacture new vehicles, many major automakers have ceased the production of new cars. In fact, at the peak of the shortage, Ford had to stop production on the F-Series trucks and GM stopped making large trucks and SUVs.
As a result, dealers today have less inventory and consumers are seeing far fewer sales incentives and offers.
The chip shortage for new cars has had a big impact on the used car industry, too. Tired and frustrated over waiting months for their desired new car to be available for purchase, many consumers are turning to the used car market.
This increased demand for used cars is having a predictable effect on the price of used vehicles. According to November 2021 data from the New York Times, “Used car prices are up about 45% over the past year … New car and truck prices are up about five percent over the past year.”
At used dealerships across America, used cars are becoming increasingly hard to find with everything from electric vehicles and sports cars to used ’05 Volvos flying off the lot.
Chip Shortage And Other Auto Lending Challenges In 2022
Synthetically high vehicle prices resulting from heightened consumer demand and semiconductor supply chain issues will eventually come back to earth. Analysts are concerned this decline in valuations of used vehicles, paired with extended loan terms (some for 72-84 months) at low-interest rates (3-4% or lower) will become a considerable risk to lenders with large used car portfolios in the coming years.
In addition, wages increased by 4-5% in 2021; however, headline inflation increased by 7.5%, which means consumer purchasing power (real wages) has decreased. This will invariably lead to a strain on consumer balance sheets and an increase in borrower delinquencies.
With car prices for both new and used vehicles increasing dramatically and loan terms extending longer, car buyers will likely have negative equity in their vehicles for a longer period of time.
To meet the challenges auto lenders and credit unions are currently facing, SWBC is pleased to introduce healthCAR — a new way for members to protect their vehicle after their manufacturer’s warranty expires.
It’s a simple, affordable, month-to-month, vehicle extended warranty that can help generate income on direct and indirect borrowers, members with auto loans at other institutions, recently paid-off loans, and members with vehicles past the manufacturer’s warranty.
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Michael Dippo is Senior Vice President of Automotive Products at SWBC. He works closely with SWBC’s Collateral Protection Insurance (CPI) carriers to manage existing CPI programs and develop new coverages for clients. He is responsible for underwriting, corrective action, quality assurance, skip tracing, and asset recovery as they pertain to SWBC’s CPI and blanket VSI products.