Automotive Chip Shortage: Why It’s Happening & When It’ll End

Why Is There a Chip Shortage

Demand for new vehicles plummeted across the globe in March of 2020 when the COVID-19 pandemic hit. Because of this, much of the automotive industry slowed or stopped the production of new vehicles. As a result, they canceled many of their orders for parts with computer chips attached.

At the same time, global lockdowns caused demand to spike for computers, cell phones, game consoles, and other consumer electronics. So right when car companies stepped out of the supply chain line for semiconductors, electronics companies started placing unusually large orders for the chips.

The semiconductor companies signed chip manufacturing contracts committing their chip production to electronics companies for 6, 12, even 18 months. Then 0% interest rates, uncertainty about air travel, and loosened lockdown restrictions brought the auto industry back to life.

With demand suddenly back to pre-pandemic levels, car companies tried to rev up production, placing new orders with the semiconductor industry. But by then, chip factories were busy manufacturing semiconductors for other clients.

To make matters worse, in March of 2021 a fire at a major chip factory in Japan caused the facility to halt operations for nearly a month. And once they reopened in April, the Renesas Electronics factory was operating at a reduced capacity for months.

The increased demand from both electronics companies and car manufacturers, the worldwide pandemic that disrupted all manner of supply chains, and the fire in a major semiconductor manufacturing plant all contributed to the global semiconductor shortage we’re currently facing.

Effects of the Chip Shortage on the Auto Market

The global chip shortage has had a dramatic effect on vehicle manufacturing and, consequently, car sales. The consulting firm AlixPartners estimates that the shortage could cost car companies more than $110 billion in 2021.

If this projection is accurate, it would mean that the automotive chip shortage will prevent manufacturers from producing 3.9 million vehicles this year. When you realize how many chips it takes to build a single vehicle, the significance of this shortage comes into focus.

Since the 1980s, chips have found their way into virtually every component of cars. From door locks and windows to fuel gauges and push to start ignitions, everything requires a chip. One single vehicle can use as many as 1,400 chips.

Manufacturers are joining the consultants at AlixPartners by releasing similarly dreary predictions. Ford stated that they expect scare chip sales to reduce their projected 2021 earnings by $2.5 billion. GM echoes their sentiment, suggesting they’ll fail to earn $1.5 to $2 billion dollars they otherwise would have this year.

The inevitable consequence of slowed vehicle production is fewer new cars. While this has caused the price of new cars to rise, it’s having an even more dramatic impact on used cars.

Fewer new cars mean fewer people trading their cars in for the latest model. So, your neighbor who swaps his car every few years might be delaying his next purchase. But such enthusiasts only make up a small portion of the auto market.

Car rental companies like Enterprise, Dollar Thrifty, Hertz, and Avis, on the other hand, play a massive role in both the new and used car markets. These companies typically replace their cars every year or two, normally purchasing a total of about 2 million cars a year.

For every vehicle they purchase, they also sell one. But because of the manufacturing bottleneck, vehicle rental companies aren’t turning over their fleets at anywhere near their typical pace.

In fact, the increasing demand for rentals this year, coupled with the scarcity of new cars, led rental car companies to start buying used vehicles. Rather than flooding the market with almost-new used cars, rental companies are soaking up what little inventory already exists.

When Will the Chip Shortage End?

Chip manufacturers like Intel expect our ever-growing demand for semiconductors to extend the shortage into 2022, potentially further. Thankfully, analysts in the automotive industry predict that the worst of the shortages will loosen their grip on the market by the end of this year.

To satisfy the increasing demand, chip manufacturers are ramping up production. By the end of 2022, output is expected to increase by more than 750,000 wafers per month thanks to the efforts of more than 40 manufacturers.

In the US, President Joe Biden hopes to boost American semiconductor manufacturing by funneling $50 billion into the industry as part of his $2.3 trillion American Jobs Plan. The bill has yet to pass and will likely undergo some changes before it does.

But the proposed semiconductor spending has not been the focus of opposition. At the very least, American semiconductor companies will likely receive at least a portion of the proposed funding. And for the sake of the automotive industry, we hope they receive the funds sooner than later.

What the Automotive Chip Shortage Means for Lemons

With fewer new and used cars on the market, consumers who are driving lemons have fewer opportunities to find reliable alternate transportation. Further, less supply of new cars has coaxed more used cars onto the market from individuals who couldn’t pass up inflated offers.

But the high demand for used cars might also cause dealers to relax their standards for sourcing vehicles. Keep this in mind if you’re in the market for a used car. Check the paperwork thoroughly for repairs done to the vehicle. And check your state’s Lemon Laws in regard to preowned vehicles.

The Indiana Lemon Law, for example, applies to both new and used cars so long as a problem arises within the vehicle’s first 18 months ago or 18,000 miles. So if the vehicle meets those qualifications, you can buy with a bit more confidence.

Plus, Indiana requires manufacturers to brand the title of any vehicles that were returned as lemons. So keep an eye out for any titles branded or stamped with “Manufacturer Buyback-Disclosure on File.”

While not every state offers lemon protections for new cars, many do, especially if the car is still under the manufacturer’s warranty. The Texas Lemon Law for used cars, for instance, is a prime example of these kinds of regulations.

The federal Magnuson-Moss Warranty Act also provides additional protection for vehicles still under warranty. Plus, its fee-shifting provisions make manufacturers responsible for consumers’ attorneys’ fees in Lemon Law cases.

As a result, even our most experienced attorneys can offer their services as free Lemon Law lawyers. Because at Krohn & Moss, Ltd. Consumer Law Center®, we never charge a fee unless we win the case. And when we win, under most state lemon laws, we just send a bill to the car company.

So regardless of which state you’re in, know that you have rights and recourse if you wind up purchasing a lemon. And if your find yourself in a lemon, give us a call so we can get you the compensation you deserve.

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