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Car buyers should not expect a quick return to normal pricing and inventory availability even as auto production begins to return to prepandemic levels later this year, analysts say.

Forecasts point to a gradual recovery in inventories, but not until the end of 2022. Low supply and high demand will combine to keep dealers’ lots empty and prices high for both new and used vehicles.

The global semiconductor chip shortage has become a familiar culprit for people seeking a new or used car or truck in the past year. New vehicles require thousands of the computer components to regulate everything from fuel consumption to safety systems and autonomous driving features.

In 2020, as the COVID-19 pandemic swept around the world, automakers everywhere reduced or cancelled orders for semiconductor chips, expecting demand for vehicles to fall as economic activity declined. As they pulled back, makers of computers, video games and smartphones ramped up production in response to work-from-home demand. They quickly stepped in to buy the 10 to 15 per cent of global chip supply that would otherwise have gone into vehicles.

The automakers were then taken by surprise when demand for private vehicles suddenly recovered. “Demand did not drop. Demand actually got really high, as people started to shift away from shared mobility and [were] really focusing on private mobility, mainly private cars,” said Kevin Roberts, director of industry insights and analytics at CarGurus.

But because automakers had cancelled contracts for semiconductors, they went to the back of the line. “This is impacting the automotive sector to the point where they’re really limited in their ability to manufacture volumes that can meet their demand forecast,” said Rob Handfield, professor in supply chain management at North Carolina State University.

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In Canada, this meant a reduction in vehicle output from two million units to just 1.1 million last year, according to the Canadian Vehicle Manufacturers’ Association (CVMA).

The chip shortage continues to cripple the car industry. In January, Toyota announced it was cutting production in Japan by 47,000 vehicles as a direct result. Volkswagen and Honda also curtailed production, citing short supply of chips.

According to a report released in January by the U.S. Department of Commerce, chip inventories were down to critical levels, with only five days’ supply on hand, and demand in 2021 was up 17 per cent compared to 2019. While COVID-19 continues to disrupt operations, capacity was also lost when a chip factory burned in Japan, while one in Texas was disrupted by a major winter storm.

Matteo Fini, vice-president, automotive supply chain and technology at analyst firm IHS Markit, said “2022 is already something of a write-off.” He said semiconductor lead times have more than doubled, and they will continue to climb.

Automakers are responding to these challenges by modifying supply-chain practices, Fini said. They are building up inventories where previously they would have relied on just-in-time deliveries to keep production flowing. “In relative terms, it costs peanuts to have that inventory compared with having a line stoppage, which can cost upwards of US$50-million per week to an original equipment manufacturer.”

Another strategy is to develop new relationships with suppliers. “Automotive companies are notorious for bullying their suppliers and throwing their weight around,” Handfield said. But some companies like Toyota, which had long cultivated its suppliers, were – until recently – insulated from the chip shortage.

“The GMs and Fords of the world are finally figuring out that maybe they have to stand in line like everybody else now. And they’re not used to doing that,” he said. Ford and GM are now working with chipmakers to develop new manufacturing capacity and ensure they will be at the front of the line.

Some of that new capacity will be located closer to home, which helps North American carmakers shorten the supply chain and buffers against risks such as the skyrocketing transportation costs seen during the pandemic. The Biden administration is trying to pass legislation that would see US$52-billion go toward domestic semiconductor production.

“Given how integrated the Canadian industry is with North America, anything that can be done to increase production in the U.S. will ultimately benefit Canadian manufacturing,” said Brian Kingston, CVMA’s president and CEO.

But building semiconductor fabrication plants takes years, and until that capacity comes online, manufacturers have been curbing production and focusing on the models that will net the best profits. They are “trying to balance off their production with vehicles that are in the highest demand to make sure that they can service the market as best as possible,” Kingston said.

For car shoppers this means no breaks on pricing, no manufacturers’ incentives, less choice, long lead times for new cars, and soaring prices for used vehicles. According to CarGurus Canada’s December 2021 data, new car prices climbed 28 per cent from the previous year, while used car prices jumped 41 per cent.

Inventory of vehicles on the market is beginning to return, with a 10-per-cent uptick in December 2021, said Roberts. However, new car availability is still down almost 47 per cent from 2020, and there are 20-per-cent fewer used cars on the market.

Roberts said that in 2022, demand for both new and used vehicles is expected to remain high and sales volume will recover faster than inventory levels. However, as more semiconductor chips become available, the automakers will begin to make a broader range of vehicles again.

He projects that by the third quarter of 2022, production will be returning to normal. “With more trims coming off production lines, the overall average prices of a new vehicle should come down,” he said.

However, according to Kingston, there is still a great deal of pent-up demand for new vehicles, which he believes will continue through 2022. That means prospective buyers should be prepared to wait for their new vehicle, he said.

If you really want to buy a car in 2022, Roberts advises learning to take advantage of the market. “Think about needs versus wants, particularly when it comes to details like colour and options. You might have more flexibility there,” he said.

He also advises looking farther afield in places you might not otherwise consider, and don’t forget there’s still room for negotiation, even with reduced inventories.

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