Chip Shortage: How Dealers Can Cope with It

circuit board

The recent years have been challenging for the automobile industry. Not only does it have to deal with the COVID-19 pandemic, but it also needs to manage chip shortages.

Forecasts suggest that the supply for this critical component in most electronic-based products like modern vehicles won’t be stable until 2022. That means production will continue to stall, and the available cars for sale will remain low.

Although that sounds like a great opportunity to make prices more competitive because of the high demand, it can create a problem in the long run. For one, dealerships will have fewer units to sell – a case of opportunity cost.

What Is Causing the Chip Shortage?

Many factors seem to be contributing to the problem. These include:

1. Capacity

There is a real issue of capacity in the industry. Many major suppliers cannot scale production to meet current demand, let alone any increase in demand. The problem is exacerbated by chip manufacturers upgrading their plants and equipment to produce more. Still, there’s a time lag before these upgrades result in a greater capacity.

2. Investment

As evidenced by the capacity shortage (above), the semiconductor industry requires large capital investment to build new fabrication plants. Major existing semiconductor manufacturers have been rolling out new, often more efficient facilities. However, many still struggle with raising financial resources. Some companies have already announced their plans to build facilities, but it can take years before these plants exist.

3. Increasing Demand for Consumer Electronics

If one were to look at the semiconductor industry as a whole and determine its health, the answer would be “strong,” and many experts certainly don’t see it weakening. They believe that the market will experience significant growth for years to come with continued increases in revenue from all product segments.

However, this is not true of every individual company. They are beginning to see signs of increasing demand for consumer electronics, particularly smartphones, which require high-value chips with high margins. Smartphones have been driving growth in the mobile wireless market.

On the downside, manufacturers now have fewer chips to allocate to automobile makers. Vehicles are transitioning to more electronic control of various systems, starting with power windows and locks. This trend is expected to continue with the addition of more systems that require computers to control, such as lane departure warning, adaptive cruise control, active suspension, collision avoidance, and night vision. All these need chips to work.

car dealership

How Car Dealers Can Overcome Chip Shortage

Although this is an issue that needs to be addressed by the chip manufacturers, there may still be some things that dealerships can do:

1. Sell Used Cars

Since the chip shortage is likely to continue for some time, dealerships could get creative and seek opportunities. One way would be to sell used cars. The demand for these vehicles has been high partly due to the lack of newer vehicles on the lot.

Granted, finding used cars to sell isn’t easy. For this reason, car dealers can consider automotive franchise opportunities. It gives them access to an extensive fleet to sell, customer and market support, and add-on services that give more value to customers, boosting revenue and consumer loyalty.

2. Enter the Aftermarket Parts Business

Another option would be to become an aftermarket parts supplier for automobiles. Many replacement parts do not require chips or at least do not have them immediately. For example, engine timing belts are commonly replaced on older cars, with mechanics resetting the valves each time they replace them.

Other kinds of aftermarket parts dealers can sell include:

  • Timing gears
  • Water pumps
  • Wiper blades
  • Radiators and heater cores

This list is not exhaustive, but it’s a good place to start. By offering these parts below retail prices and charging less than the main dealerships, car dealers can increase customer loyalty and revenue from maintenance sales.

3. Offer Value-added Services

There are other areas that dealers can focus on to increase business. These include similar services as mentioned above, but they could offer additional services such as an oil change with replacing the timing belt at a lower price than mechanics would do independently.

Car dealers can also offer roadside assistance with free towing for used cars, as well as extended warranties and low-rate financing. Another potential add-on service is maintenance plans, where buyers receive a set number of oil changes, inspections, and tune-ups within a certain timeframe at reduced rates.

The demand for chips in automobiles is not going away anytime soon. But it doesn’t mean car dealers don’t have options. They can start by looking for ways to increase revenue and customer satisfaction using the ideas above.

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