May 18, 2022

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Automakers New Sales Strategy a Worrisome Industry Trend


The auto industry’s computer chip shortage isn’t getting any better. After initially trying to stall for time by building vehicles without the necessary computer chips, but keeping them in the lot to install them later, car manufacturers are now selling those chip-less vehicles to customers.

Citing a report in Automotive News, The Verge reports Ford (NYSE: F) will begin shipping Explorers to dealers and to tell customers they’ll get those non-safety-related chips to them within the coming year. That means the new vehicles won’t have some of the creature comforts consumers consider to be basic amenities, such as rear heating or air conditioning.

Because demand for new vehicles continues to outrun supply, the development suggests dramatically falling sales is no longer a tenable position for automakers, which now need to convince car buyers to accept vehicles that aren’t fully functional. It may not be so easy to keep those promises.

Two people considering offer.

Image source: Getty Images.

A new round of logjams on the way

The supply chain crisis continues to ripple across all industries that are unable to get goods, merchandise, parts, and supplies to meet consumer and commercial needs. And it could get a lot worse very quickly.

China just imposed a lockdown in the Shenzhen region to combat a new outbreak of COVID-19 cases. Not only is this a major technology hub for electronics, including semiconductor manufacturers, but it’s also home to one of the world’s largest shipping ports.

While the lockdown is scheduled to only last a week, it will further exacerbate an already escalating situation in existing shipment backlogs. Despite much of the world having reopened to normal operations for a year or more, it still hasn’t been able to catch up, and shortages of all manner of products are extant. Now, new delays will be added.

Manufacturers are having to resort to creative measures to overcome the shortages. Last year, in a bid to remain on its targeted production schedule, Tesla (NASDAQ: TSLA) notably repurposed computer chips and had its engineers rewrite the code so they could be installed in the company’s electric vehicles.

Yet it also was shipping some new Teslas without any USB ports because there were no chips available, and some wireless chargers were reportedly also not functional.

So Ford’s plan to sell Explorers without certain chips might not be a completely new. A colleague says he recently purchased a Chevy Equinox with nonworking heated seats. The SUV came with an IOU from the dealer to install the required chip at a later date to make them operational.

Because demand for new vehicles remains white-hot, it might be all automakers can do to salvage sales.

Computer chip with a car image on it.

Image source: Getty Images.

Paying more for less

Automotive News says U.S. vehicle sales fell to a seasonally adjusted rate of 14.5 million, down from 15.2 million in January and below the full-year rate of 14.9 million recorded for all of 2021. Ford was among the worst performers, with sales crashing 21%. Honda Motors was down by a like percentage, while Toyota was off 11%.

That could help explain why Ford made the decision to move the incomplete vehicles from the factory lot to the dealer lot. It remains to be seen whether consumers at large will accept the terms, though consumers are finding themselves pinched.

The average price of a new vehicle surged, soaring to $45,872, or more than the MSRP of $45,209, according to CNBC.

Used cars aren’t any better, with prices rocketing up 45% in January to an average of almost $26,000. And with the price of oil still around $100 a barrel, the cost of gasoline still is in record territory at $4.30 a gallon, making the cost of vehicle ownership a more expensive proposition.

But what’s the alternative?

It’s become a do-or-die situation for carmakers. Either they have their vehicles sit on factory lots gathering dust until the chips arrive, or they move them to their dealer lots and promise customers they’ll install the chips later for free.

It suggests auto sales might start falling more sharply than planned because of a lack of fully functional vehicles to sell. A car or truck without a USB port or heated seats might be a minor inconvenience consumers will overlook in slaking their demand for a new vehicle, but the lack of air conditioning or other major amenities could be a nonstarter for many buyers that will lead to worsening sales reports, particularly if “within a year” stretches to beyond a year.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns and recommends Tesla. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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