Are you currently being impacted by the Global Chip Shortage?
We have an exciting show for you today. We have two guests and we are going to talk about what’s going on in the industry, starting with the computer chip shortage, including electronics.
It’s affecting everything from manufacturers closing down plants to us at the local level when fixing vehicles and trucks. The manufacturers shut down production, which then the secondary market shut down production.
The production of microchips was picked up by other industries and it’s really hard for us to recover right now. There’s a huge silver lining in all this, which is about the manufacturers competing in the future, the future of electronics, and consumer perception of our industry unions.
We got into an incredible conversation about the computer chip shortage and it’s been really fun, you’re going to enjoy it.
We have two guests from Reuters, a Detroit Bureau Chief, Ben Klayman, and a reporter, Stephen Nellis.
The first question I asked to Stephen is,
“What is the cause of the computer chip shortage in the automotive industry?”
Stephen Nellis replied to us about the chip shortage and gave a witty response,
“The cause of the computer chip shortage is pretty simple. It’s for everything from laptops, like the equipment that we’re using to do this, this podcast.
What happened last year during the pandemic was that lots of people bought electronic stuff. Many people got a new phone, new camera, and thousands had to get a laptop if they were going to work from home.
Which basically took all the inventory that had been sitting around in the chip world and basically sucked it dry, making the situation very tight. Ben Klayman can actually speak more of this from the automakers perspective. The same time that was happening the automotive world was sort of having a collapse.
Automakers didn’t know if they were ever going to make cars again…”
Stephen Nellis also adds on and says that things were down pretty tightly. People inside the automotive industry quit putting orders in, which helped aid during the recovery process.
The key thing to remember here about the computer chip shortage is that it actually takes a long time to make one.
It would take approximately 12 weeks to create a computer chip according to Stephen Nellis.
I directed a question to Ben Klayman and asked if the situation derived from automakers panicking. Then the automakers also have a secondary market where you have Bosch and Siemens and Johnson controls and all these other companies that make parts for them.
So they panic on them, then they stop ordering and then the other industries pick up those orders.
Ben Klayman responds to my comment and enlightened me by saying,
“Going back to May and June of last year, the auto industry in the U S shuts down. Immediately, the automakers turned to their big suppliers and the big companies started deciding that they don’t need those parts.
Stephen pointed out the consumer electronics industry was more than happy to step in and pick up slack. The auto makers thought that they were not going to have demand coming in.
Well, they were wrong. Demand came back with a vengeance. So they’re selling cars like crazy, and they need to get all the chips they can. Obviously they’re coming up far short.
The other irony of this all is that automakers are used to being the 800 pound gorilla with its suppliers. However, in the computer chip industry, the automakers are around in error.
They don’t have the power there. So it’s not like they can muscle their way through this computer chip shortage.”
Moving forward, I believe the list of manufacturers not shutting down factories is longer than the one of factories being shut down. Just about every manufacturer is being affected by this, right. It’s from BMW to GM to Ford. Everybody is being affected.
I asked my two guests from Reuters,
“What is the recovery time and how bad is it? How long does it take to dig out of this computer chip shortage?”
Ben responded to my question first regarding the computer chip shortage, he says,
“Over the last week, we’ve had all the automakers basically agree that the second quarter is going to be worse than the first quarter. That’s going to be what they think is the bottom. They previ
ously said that the first quarter would be the worst, we would be the bottom, and we would start to recover.
So they’ve been wrong before, but the current thinking is second quarters at the bottom. From there, we start to slowly recover after that, although it lingers through the rest of this year. We start to get back to some normalcy next year. Now, whether that happens or not,we will never know, only time’s gonna tell, but they’ve been wrong before.”
Ben agreed with me that they’re trying to manage propaganda while they figure it out. But we don’t really know the extent of it until the truth comes out from this computer chip shortage.
To give us more insight Ben Klayman builds off of my point and says,
“I mean like yesterday last week Ford said it was going to be all told when the year’s out, they’re going to lose 1,000,000 vehicles to the chip shortage. That’s a huge hit. They said the hit financially, it was going to be 2.5 billion. GM didn’t give a number on the number of units lost today, but they agreed that the second quarter is going to be bad and they’re going to lose about 2 billion due to the chip shortage.”
Furthermore, I was interested in how this will affect the local dealerships and parts suppliers for repairing vehicles and used cars. Due to the fact that the used car market’s going crazy, chips are involved in a lot of those repairs.
“Is it going to take a little while for that to be affected in that inventory? Or is it coming very soon?”
Ben Klayman responded to my question and said,
“I mean, I’m not as familiar with the used market as I am with parts repair. But I mean, certainly it is affecting the used car prices because we’re seeing demand for new cars hit and that’s causing people to turn to used cars.
The used car demand is exploding and the prices are going up there. It’s certainly going to continue to play out. Dealers are making huge profits right now on getting full sticker price as opposed to the industry historically not caring.
What are the incentives? What are the rebates? Nowadays you’re paying full sticker price for pretty much any vehicle you want. GM today talked about the average new vehicle transaction prices on its full sized trucks in the quarter were up 10%. For the big SUVs like the Yukon those were up over 20%.”
In response to Ben, that’s really the sunshine of all of this, where we had an issue pre-pandemic with too much inventory. Now we have a situation where if Tesla had an advantage, it was that they didn’t have flooring expenses.
They didn’t have an inventory. People would order them and then get them and it cuts out a big chunk. I know from owning a dealership myself and running a very large dealership, my flooring expense could be a hundred thousand dollars in a month. Having $20 million worth of cars on the ground.
This is an opportunity for the manufacturers to flip to an order system where customers can’t go in and pick up the car today. But can they order it and eliminate that disadvantage in the marketplace financially and catch up to Tesla a little bit by changing that model?
Ben Klayman quickly talked about the chip shortage and told me,
“I definitely think we’re moving more toward that. Time will tell whether some automakers are gonna move fully to a build to order system. We’ve had the CEOs of Ford, in the past, say that they’re not going back to pre pandemic levels of inventories.
They’ve seen the profits that they’re making now and an analyst on the GM call today even said they wanted to rebuild their inventories a little bit. The analysts were a bit confused because they had the three best quarters in history that they ever had.
Why would you want to go back? Mary Barra has a stance: listen, we’re never going to go back to pre pandemic levels. We have to go a little bit higher. Her thinking is she does want to have enough inventory. So if someone walks into a dealership saying that they want a particular car, they’re going to be able to walk out with that car truck right there.”
Moving on, I think back to years ago where I’ve experienced this in two ways.
One is like Illinois and they made it illegal for you to sell cars on Sunday. Everybody thought that that was a terrible idea. The truth of the matter is the same amount of cars sold. They just couldn’t buy them on Sunday.
Now another scenario is, I’m running a dealership and my sales manager comes to me and he says that he has a handful of salespeople that want to work on Thanksgiving.
“Would you be okay if we opened up?”
If we find somebody to answer the phones it’ll be easy to plan around working on Thanksgiving.
The funny part is that you can see on the security cameras, people would come to the dealership and look at cars you’re just closed. We’d sell 20 cars that our competition wouldn’t sell because we were open, people would call and they had that day off.
If it’s fair for everybody and everybody’s doing it, then there really isn’t an advantage. It’ll be interesting to see how the different manufacturers approach that. Recently, my fiance wanted to buy a Tesla and she called up Tesla here locally in Los Angeles. They don’t have anything for her to drive and she can’t drive the new one. However, you order it or you don’t.
If you want it, you’ll go online and order it. But they don’t have an option for us to drive, which blew me away.
Ben Klayman said that the competition will determine this as well.
Once we understand that the experience for the consumers is what has to change, Tesla’s leverage in the marketplace revolves around the customer experience. If you want to know more about the Global Chip Shortage, I recommend watching the full video! You will be able to grasp all the information right from the dialogues we bring up.
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