How global chip shortage is disrupting car prices

Matt DeLorenzo, Kelley Blue Book Senior Managing Editor joins the Yahoo Finance Live panel to discuss how the global chip shortage is disrupting the market for used cars.

Video Transcript

ZACK GUZMAN: Much more in the spillover effects of America's chip shortage here playing out in the auto industry. We've of course been highlighting how it's dialed back production among major auto manufacturers due to that chip shortage. But now pair that with stimmy checks going out as well, and people looking to buy some cars out there. It's pushed used car sales up to record levels here.

And for more on that, I want to bring on a man who knows car prices better than everybody. Matt DeLorenzo is Kelley Blue Book Senior Managing Editor, and he joins us right now. And Matt, I mean, when we look at the numbers, maybe not surprising to think that, you know, if you can't get a new car out there-- or maybe the one that you want, or have to wait longer-- that you'd be turning to used cars. But what are you seeing in terms of the demand out there and the mismatch in the market right now?

MATT DELORENZO: Well, right now there's a big demand for both new and used vehicles. One of the problems is the shortages of new vehicle inventory. So as a result of fewer choices available on dealers' lots, people are turning to used cars.

So that has two effects. The first is that used vehicle prices are up, and new vehicle prices are up. We're seeing average transaction prices topping $40,000 for new vehicles. That also means that there are fewer incentives and deals out there.

And it's also propping up used vehicle prices. So you know, if you do have a late model used car, there are a lot of dealers who are out there who would like to give you good money to get your hands on the car. The flip side of that, though, is that if you get that great return on your car, you're still stuck if you need another vehicle. You're going to be facing higher both new and used vehicle prices.

AKIKO FUJITA: What does that inventory picture look like more specifically? I mean, how quickly is it getting chipped away at, especially with a lot of these production halts?

MATT DELORENZO: There's still about 30 vehicles-- models that are affected as a result of the chip shortage. But also, it's one of those things that it affects so many of the different manufacturers that overall industry inventory is down. They're trying to catch up. But they're still trying to catch up from last year when they had to shut production down as a result of the COVID situation.

So you know, they've been chasing it. They've been trying to catch up, and demand is growing faster than they can actually physically produce cars. That has a big silver lining that a lot of people overlook, is the fact that they don't have to work as hard for new vehicle sales. They're not spending as much money on marketing. Their gross profit for vehicle is actually up.

The thing that's helping them is that all these problems affect all manufacturers. So it isn't like some manufacturer can slide in there, crank up production, and take market share away. So yeah, they may be facing difficult times. But these are the kind of difficult times they like to have.

ZACK GUZMAN: Yeah. And Matt, we talk so much about kind of the return to travel, right? Earlier in the pandemic it was road trips that was getting people through here, since they couldn't fly. So there was a spike in demand for cars back then, and now carrying over. I imagine that you would kind of see that unwinding of it now that people could fly again. But I guess that's not necessarily the case.

So when it comes to maybe focusing in on where we go from here, do you project prices moving even higher? And what is demand looking like when it comes to maybe specific models of cars? Because SUVs and trucks, I thought, had been, you know, the long hottest models to get out there or make. Talk about what you're seeing now.

MATT DELORENZO: Right, right. Well, it's continuing along that lines. You know, crossovers and SUVs are very popular. I think if you're going to find a deal anywhere, it'll be on a traditional four-door sedan. Those aren't as in high demand as they used to be. They tend to sit on the dealer's lots a little bit longer. You still might be able to get a deal on that. Also on that score, though, manufacturers are building fewer of those and more SUVs and trucks, because of the higher profit margins. So again, that's one of those things that's balancing out.

The other interesting thing that you mentioned about people starting to travel again-- we have a rental car shortage. Last year, a lot of the rental car companies didn't have any business. They sold off big portions of their fleets. Hertz went into bankruptcy. And now with travel coming back, you are actually seeing rental car companies going back into the used car market to get vehicles so that they can rent. So you have a lot of different people competing for fewer cars, and that's why prices will continue to rise on both new and used vehicles.

AKIKO FUJITA: Matt, getting back to the carmakers, we heard Volkswagen announced it's going to start building its own chips, following in the footsteps of Tesla. Now, the chips will be specifically used for self-driving cars. But I wonder if you think that's the end result of the global shortage that we're seeing right now, at least for carmakers, as they really try to scale out their EVs, as well as their self-driving capabilities. Are we likely to see more and more companies say, we're going to start designing our own chips?

MATT DELORENZO: That's a terrific point, because I think the last year with COVID, and then now those chip shortage, there's a certain-- the supply chains are very fragile. You know, there was a fire in a plant in Japan. Even the bad weather in Texas affected chip production. And then cars are using more chips than ever, and consumer electronics are exploding.

So I think the manufacturers want to get a little bit more security in their supply chain. So you'll see them becoming more vertically integrated in this area so they don't face production shutdowns at a time when the market's really hot. They can afford a production shutdown if the market's not going so well. But right now it's a real problem for them.

ZACK GUZMAN: Yeah, very expensive if you're looking at rental cars right now. But Matt DeLorenzo, Kelley Blue Book Senior Managing Editor, appreciate you coming on here to chat that spike in prices. Be well.