Demand, supply and ‘chippagedon’

As life starts to return to normal, car companies see a record high in demand for new and used vehicles. A general behavioral shift away from public transport combined with …

As life starts to return to normal, car companies see a record high in demand for new and used vehicles. A general behavioral shift away from public transport combined with the lasting impacts of COVID on the global supply chain means manufacturers will struggle with production. As average new-car prices shoot up due to the shortage and cost of raw materials, among other things.

So, here’s a definite list of price-hiking, shortage-inducing reasons why we recommend you keep your car and SAVE. We sure don’t want you to lose your ride…

1. COVID-19 and the supply chain issue

Last year, Southeast Asia was amongst the many countries to face a high number of COVID-19 cases, forcing automakers to cut down production due to issues within the supply chain. Giants like Toyota cut down worldwide production by 40% in September last year, reducing output by about 140,000 vehicles. Others, including Honda and Volkswagen, too followed suit, leaving vehicle-demanding consumers with limited choices and higher prices.

2. The unforeseen global shortage of semiconductor chips, what?

For the most part, they go unseen, but computer chips are the heart of almost every digital and electronic product we use. When supplies run short, manufacturing halts.

Semiconductor manufacturers produce billions of chips every day but with more and more products requiring computer technology, like the likes of your iPhone and PlayStation, the demand for computer chips has outrun supply. Hence, it’s not just the automotive industry suffering due to the shortage, it’s every other industry as well.

The global auto industry is expected to produce nearly 4 million fewer vehicles than planned this year because of the chip shortages, losing over $100 billion in sales.

Pat Gelsinger, of Intel, has said the worst of the global chip crisis is yet to come. Mr Gelsinger predicts the shortage would get worse in the “second half of this year” and it would be “a year or two” before supplies returned to normal.

The chip shortage effect on other firms:

  • Renault forecasts its car production could be down by about 100,000 this year.
  • SONY highlights the difficulty in production of the PS5 consoles.
  • Apple expects the impact of the shortage to worsen and extend to iPhone production.
  • Tesla says it is using alternative chips and rewriting software.

3. Car manufacturers are facing a raw materials price-hike

Purely a facts and numbers game, sales of passenger vehicles in the local market declined 18% to 2.78 million units in the financial year 2020, and again by 2.24% to 2.71 million units in 2021. Other key commodities needed to manufacture cars are also on the rise, pressuring margins and increasing prices.

Steel prices have shot up by a whopping 70% in last one year; prices of copper and rhodium have gone up by 112% and 255% respectively during the same time. Since the trend shows no decline in the prices of raw materials, manufacturers continue to face the burden of higher costs.

4. The sudden surge in demand caught everyone by surprise

With the EXPO in full swing in the UAE and as life as we knew it (pre-pandemic) returns to normal, car rental companies are facing their highest demand ever for new and used vehicles. The sudden surge in demand was unexpected for both manufacturers and rental car dealers, and the rules of economics clearly state, when demand goes up (& supply remains the same), so does the price.

5. The trial of short-term strategy solutions

To cater to high demand, rationalize costs and make higher profits, manufacturers are now introducing short-term strategy solutions and allocating most of their resources to vehicles that produce the highest profits.

Toyota is taking chips from its Tundra pickup truck – which are getting a whole new look for next year – and allocating them towards the brand-new Highlander SUV, currently in high demand at the minute.

Ford is considering the idea of shipping cars without chips that dealers can later install when and as they become available for quicker turnarounds. However, these unchipped cars may not have the advanced safety features and infotainment systems of higher tech models.

6. Last year, rental companies sold off a large part of their fleets

Rental car companies faced a near halt in demand last year due to COVID-19, forcing them to sell a third of their fleets to raise enough cash to survive the pandemic. With the current rebound in travel, car companies a facing a huge shortage of cars to rent along with an increase in price. Millions have gotten jobs post-pandemic and millions are returning to work, making them more mobile, causing additional strains on used and new car supply.

In case you weren’t already aware, the reasons why car prices have suddenly gone up and there are less cars for companies to rent are plenty and more severe than anyone could have predicted. Even though manufacturers and renters are working tirelessly to cater to demand, it is likely to be a while before supply returns to normal.

At invygo, we understand how important your car is to you at this time and are working tirelessly to ensure you get the ride of your choice, at the price you deserve.

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