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For local auto dealers, optimism is in just as short supply as semiconductor chips 18 months into the pandemic.

Finance magazine “Kiplinger” reported that relief in the semiconductor industry might not come until well into 2022, perhaps even 2023. The Delta surge has forced chip testers and packaging facilities in Malaysia and Vietnam to shut down. Demand never relented as storms in Texas and a fire at a major producer in Japan earlier this year caused a significant ripple in the supply chain.

Consulting firm AlixPartners forecast ongoing shortages on semiconductors, plastic resin, steel and labor are going to cost manufacturers 7.7 million units they would have built this year. That’s an increase from what was expected to be a 3.9 million-unit annual shortfall in May.

 

Doing what they can

The shortage comes at a time when spending is spurred by pent-up demand, says Mike Gibson, president of the Central California New Car Dealer Association. Gibson is also general manager of Fresno Lexus.

Dealers are trying to meet clients’ demands and are doing the best they can with limited resources, he says.

“Every dealer is trying to accommodate their clients,” Gibson said. “They’re grateful to be open and serving their clients.”

Sales teams are focusing on what customers are looking for in a car, said Brett Hedrick, owner and general manager of Hedrick’s Chevrolet in Clovis. Then, cars will have to be put on order. Because of this, nearly all of the models coming in are pre-sold, Hedrick said.

“You get the expectation that you’re going to go in and buy a car and you have to wait four months,” Hedrick said.

Manufacturers are making what’s popular. Tahoes and Silverados are selling, so that’s what’s being prioritized.

But Hedrick said over the past few months, production appears to be on a downward trend. Normally, they’d get 75-100 cars delivered a month, but this past month, they only got 26.

They only get notification 30 days in advance on what is being delivered.

“You can’t predict anything until you find out what you’re going to get,” Hedrick said. In March, they sold 165 vehicles. In April, they sold 152. By August, they sold 110 and in September, they’re going to be below 90.

 

Prince to a pauper

While sales teams are making more money because of increased prices, they have to be prepared for the swings, Hedrick said.

“You may be a prince one month and a pauper the next month,” said Hedrick.

Brad Maples, general manager of BMW Visalia, said he’s considering compensating sales associates differently come the fourth quarter of 2021 and perhaps the first quarter of 2022. He’s considering using a base salary for his staff.

“They need to pay their bills. I don’t want them struggling,” Maples said.

If they get eight cars in, six will already be sold.

Maples said it’s hard to replace good people. His No. 1 salesman has been there for 15 years, with his second following close behind.

“It’s hard to replace good people,” he said.

Maples thinks changes in the auto industry are just beginning.

People overpaying for cars now is adding to debt levels that increase as people continue to trade up, he said.

“Three months from now, I think we’re going to be seeing a tremendous amount of negative equity on auto loans,” Maples said.

 

Bubble brewing?

Auto debt climbed to a record high of $1.37 trillion in the fourth quarter of 2020 a 6% year-over-year increase, according to credit company Experian. Even as the pandemic enabled many to work from home, that debt kept pace with the rest of the decade. Average individual auto loan debt in 2020 was $19,865 compared to $19,231 in 2019. While the number of delinquencies actually dropped at the beginning of the pandemic, the number of past due accounts rose by 12% from Q3 to Q4 in 2020.

Borrowing by people with prime and super-prime credit ratings made up 43% and 20% of all loan originations, according to Experian. And it was in those accounts where loan balance increased. Deep-subprime and subprime borrowing decreased.

Maples anticipates banks will have to expand lending policies to keep up with rising debt levels or the lending arms of the manufacturers will be on the hook to get inventory moving.

Right now, cars are being marked up sometimes as much as $8,000 to $9,000. And while used car trade-in values are rising just as quickly, the ballooning negative equity will have to go somewhere — usually ending up on the next car.

“It’s like a golf ball waiting to become a basketball,” he said.

Dealers who aren’t getting new vehicles are paying whatever they can for used vehicles. This means if values drop too much and they can’t move their cars, they could be stuck selling a car for less than they paid for it.

“It will put most dealers in a bad position because of their inventory,” Maples said. “What you pay today, you may not pay tomorrow.”

 

Trouble all around

For recreational vehicles, they are facing challenges of their own.

Dealers of RVs have experienced record-selling years, said Curt Curtis, president of RV Country in Fresno.

It only took 60 days after lockdowns for people to find that going outdoors was one of the only things they could do.

At that time, they had plenty to sell, said Curtis, but by August, the writing was on the wall concerning factory shutdowns and unbridled demand.

They’ve been hit by shortages of awnings, air conditioners, furniture and generators. Retailers have been having an easier time buying generators — Curtis assumes this is because retailers pay more for them as they don’t buy them in bulk — so manufacturers have been sending them to be installed at the showrooms.

“The burden is on us to put it in, which obviously costs us more than if we got it directly from the factory,” Curtis said.

Gibson said following the pandemic, auto dealers are grateful to be open and serving their clients.

Auto dealers had the opposite problem in the last recession.

“The question is what this will look like when it rebounds,” Gibson said. “I don’t think any dealer knows that or when that is.”