Shortage of new cars is crippling the Irish market

Crisis in microchip supply is causing production problems for carmakers

Industry analysts AlixPartners estimates that some 7.7 million car sales would be lost this year thanks to the chip shortage. Photograph: Adrian Dennis/AFP via Getty Images

Industry analysts AlixPartners estimates that some 7.7 million car sales would be lost this year thanks to the chip shortage. Photograph: Adrian Dennis/AFP via Getty Images

 

Volvo, along with Ford, has decided in some markets to start offering customers the option of buying cars with a little less standard equipment if they want to get their car a little more quickly.

It’s offering, in the UK market, the XC60 crossover with some high-end safety items – such as blind-spot warning, cross-traffic alert, and rear collision detection – deleted. These items are chip-heavy, so to speak, so leaving them out saves on silicon, and allows Volvo to get the cars out of the factory. Crucially, the Swedes say that those items don’t impact the car’s safety rating.

Ford’s Puma crossover, meanwhile, is currently available without such options as high-beam assistance, lane-keeping steering, rear parking sensors and, more worryingly, automatic emergency braking. The reason is the same, but in this case the car is most definitely less safe overall, and Ford has been castigated by safety experts for marketing such cars.

Meanwhile, there are rumours over at Peugeot that the new 308 hatchback might be offered in a ‘downgraded’ version that does without high-end digital instruments in an effort to get metal rolling out of the factory. Even Mercedes is suffering – “Demand is huge at Mercedes-Benz and at the same time there are, unfortunately, severe limitations,” Mercedes chief executive Olla Kallenius told the Frankfurter Allgemeine Zeitung newspaper. “For some models the waiting times are longer than we would like, in some cases over a year.”

Used cars

“Customers are now facing delivery lead times on new vehicles of up to 20 weeks, and as a result a large portion of them are ultimately buying a used vehicle instead,” Conor O’Boyle, from used-car specialists Sweep, told The Irish Times. “As a result, the average price of a used car has risen by 15 per cent in Ireland since September 2020. The national inventory of used cars has fallen by 18 per cent in the same period.” The problem is accelerating, too – according to O’Boyle’s figures, over the past four months, the national used car inventory fell by another 4 per cent, and prices went up by the same 4 per cent.

For the past few days, the Irish car industry has been up in arms over proposals put forward by the Department of Finance’s tax strategy group to raise rates of vehicle registration tax in the forthcoming budget. Those proposals have variously been described as “regressive” and, indeed, “unconscionable”, especially in regard to the possible rise in prices of new electric vehicles.

However, there is suspicion in the air that the car trade in Ireland is laying the groundwork for blaming the Government if sales of new cars tank in the new year, when in fact the real reason could be the knock-on effect of the chip crisis. While sales of new cars have staged a dramatic post-lockdown recovery this year, the fact is that according to Kelley Blue Book (an influential US car-market analyst) as many as half of all new car buyers are considering postponing a new car purchase in light of the current shortages. It’s hardly surprising – according to Car Dealer magazine in the UK, customers are being told that cars they’ve ordered are now subject to as much as an 18-month delay, while one BMW customer was informed that the 1 Series he had ordered was now so delayed that “there’s no estimation at all as to when it will be built”.

“Semiconductors are a vital element of scores of components on cars, ranging from convenience items like electric window switches and multimedia screens to essential features like airbag controllers and emissions control systems” Jeremy Warnock, Renault Ireland’s product, supply and distribution manager told The Irish Times.

“The current shortages are affecting different suppliers at different times. And globally, our approach must adapt depending on which components are in short supply. For example, if there’s a shutdown in the factory supplying wireless phone-charging pads, we can remove those temporarily from the specification. On the other hand, interruptions to the supply of ABS controllers or engine-management systems will result in vehicle production stopping outright until these components become available again.”

Warnock says Renault Ireland has made some “minor changes to vehicle specifications in 2021” and that its electric models – notably the big-selling Zoe – are actually the least affected as “their importance in our line-up means we prioritise their supply.”

Nonetheless, Warnock expects the shortages to continue into 2022. “Vehicle supply for Ireland will be reduced compared to previous years. This may reduce the choice we can offer on some models. And realistically we have to expect that many customers will have to wait a bit longer for their new car. To make that as easy as possible, we’re working with Renault Bank to ensure that customers approaching the end of their current finance agreement can extend their finance until their new car is available,” he said.

Opel Ireland is being a little more bullish on the matter. Opel’s Irish managing director, James Brooks, said: “Fortunately we have managed to fulfil customer orders in a relatively timely fashion this year, with the net outcome we substantially grew our national market share. The forward stock situation for the first quarter of 2022 is certainly a challenge. As a consequence of chip shortages, our factory production capacity is ever-evolving and we have been actively engaging with Opel on a daily basis for many weeks, to ensure we have adequate stock on the ground in Ireland before year end.

“Historically, Ireland has one of the biggest markets in Europe in January of any given year, due to our skewed seasonality, and Opel is very much aware of this, placing much importance on the Irish market as a performance indicator. To date, the commitment from the factory is robust and we anticipate sufficient stock for early 2022. Our advice to all customers to avoid disappointment, however, is to order early, stay in touch with their preferred dealer and to remain agile in their expectations.”

Losses

Agile is one way of putting it, but the motor industry here and abroad will be hoping that consumers will be at least as understanding and patient as they are agile because there’s big money riding on this. According to industry analysts AlixPartners, the global car industry looks set to book a $210 billion (€181 billion) loss thanks to lost sales. Alix’s predictions have skewed steadily worse for carmakers through the year – back in May it predicted that some 3.9 million car sales would be lost this year thanks to the chip shortage. In September, it upgraded that estimate to a whopping 7.7 million.

“Of course, everyone had hoped that the chip crisis would have abated more by now, but unfortunate events such as the Covid-19 lockdowns in Malaysia and continued problems elsewhere have exacerbated things,” said Mark Wakefield, global co-leader of the automotive and industrial practice at AlixPartners.

So, it looks as if we’re going to spend a winter shivering in our homes because we can’t afford heating, and now we can’t even cheer ourselves up by shopping for a shiny new car. Is there any silver lining in this? Well, possibly – the rise in used-car prices might open up the UK market to buyers once again.

“The net effect we have witnessed through the year was an almost immediate hardening of prices throughout the lockdowns of 2020 and a steady rise in used-car prices throughout 2021 as supply issues became more pronounced,” said Michael Rochford from Irish car industry watchers Motorcheck.

“The irony is that the prices of used cars are rising to such an extent that soon it may not seem as expensive to import a car from the UK and supply from the UK might normalise again.”

Those used-car imports from the UK were down by 35 per cent in the year to date in 2021 thanks to the fallout and tax changes linked to Brexit, and that has been another factor that has pushed up used-car prices and strangled supply this year.

“Ultimately the consumers most affected at the minute are those that are not trading in a vehicle and buying straight,” said Sweep’s O’Boyle. “Those with a trade-in? Their trade-in would also have appreciated over the last year which will offset, to an extent, the increase in the price of their new vehicle.”

Is there any sign on the horizon of the chip shortage easing? Don’t hold your semiconducting breath. The problem is twofold – last year, at the height of the Covid crisis, carmakers effectively mothballed their factories and, because they were not making many cars, cancelled or scaled back orders for chips. At the same time, there was a boom in demand for laptops, tablets, mobile phones and other chip-intensive devices, so tech companies put in big orders for chips, and were prepared to double-down on pricing for those chips as the chipmakers themselves idled factories and reduced output.

Then, when car sales bounced back strongly in late 2020, early 2021, the carmakers were left out in the cold when they went, somewhat cap in hand, back to the chipmakers. The tightness of supply was further constricted by a fire in a major chip factory earlier this year, and more recently by a spike in Covid cases in Malaysia, a key producer of chips for global industry.

Backlog

“We see the urgent need for electronic components for production extending well into 2022,” said Michael J Long, chief executive of Arrow, a leading supplier of chips and high-tech electronics, speaking on an earnings report conference call. “Second, we believe customers want to keep their places in line with lead times extending. Backlog has grown significantly again in the last quarter. Inventory, while it looks up at a given moment in time, if you would have seen the same inventory on another day, it would have looked significantly different.

“We are still a bit hand-to-mouth. So the demand is not the issue at this point in time, supply is the issue. Hopefully, we’ll be able to keep everybody’s expectations in check. And hopefully, we can get out of this sometime next year. But I don’t see it any time sooner.”

According to motor industry watchers Just-Auto, some 62 weeks of global chip production have been lost in total since the crisis began, and that figure has jumped dramatically in the past month alone, having been seemingly starting to ease in August. This is not a crisis that is going to end any time soon.

That said, some may not especially want it to end. Both Mercedes and BMW have said that while they will throttle back on production numbers in response to the crisis, they’ll shore up their bottom lines by focusing on more expensive models with higher profit margins.

Some investors have hailed the crisis as a saviour, as it has forced carmakers to stop discounting in an effort to drive sales volume, while Arndt Ellinghorst of Bernstein Research concluded in a recent report: “Isn’t autos a funny industry? The fewer cars manufacturers sell, the more money they make. The current pandemic and semiconductor shortage have forced manufacturers to produce fewer cars, which has lifted pricing, mix and residual values.”

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