Microchip Shortage Update: Car Production Still Slowed

America’s demand for new cars remains high. But manufacturers built almost 2 million fewer cars last year than in 2019 (the last pre-pandemic year). The numbers were low largely because of a global shortage of microchips. It has begun to ease, but slowly.
Automakers remain unable to produce new cars fast enough to meet demand, keeping prices high. For some models, they’re stripping features to keep production going.

Next week, GM will slow production of its two hot-selling large pickups, the Chevy Silverado and GMC Sierra, due to a slim supply of chips.

Many automakers, meanwhile, are simply producing cars without some advertised features. Ford, for example, is producing its Explorer SUV without rear-seat climate controls to stretch its available supply of chips.

Cadillac has limited the availability of some options to conserve chips. The Cadillac CT4, CT5, Escalade, XT4, XT5, and XT6 are all shipping without some combination of heated seats, heated steering wheels, and parking assist features this month.

How We Got Here

The global problem affects many industries, though it has hit carmakers particularly hard.

Today’s cars contain dozens of microchips. Some control critical engine and transmission functions. Others help you change the radio station with voice commands or make sure the steering wheel stays warm in your hands.

But the COVID-19 pandemic left microchips in short supply. Chip factories slowed production due to sick workers. When they re-opened, they faced huge orders for chips used in devices that workers needed to work from home and that students needed to attend school on a screen.

Automakers, meanwhile, reduced their orders, knowing homebound drivers wouldn’t be shopping for new cars.

When vaccines and an economic recovery made car shopping an option again, chipmakers were inundated with orders. They still haven’t caught up. That leaves automakers with a choice – build fewer cars, or build them with fewer options.

Experts say the problem could last into 2023.

Other Limitations a Factor

But microchips aren’t the only thing holding back car production.

Some auto parts come from Ukraine. Russia’s unprovoked invasion of that country left European automakers short of critical parts. Both Porsche and VW have been forced to stop production of some cars, while BMW says the war may limit its factory output soon.

Toyota, meanwhile, has scaled back production for three months thanks to new outbreaks of the COVID-19 virus in parts of Asia. While Toyota’s own workforce hasn’t been affected much, the company says, some suppliers are behind the schedule.

Congress May Act, But That Will Take Time

Most microchip production happens outside the United States. The geopolitical chaos of the last few years has many questioning whether that is sustainable.

Both the US Senate and House of Representatives have passed legislation that would subsidize the growth of the domestic microchip industry. But the two proposals are quite different and haven’t been reconciled into a single law that could be put in front of the president to sign.

The so-called CHIPS for America Act includes $52 billion in federal investments for domestic semiconductor research, design, and manufacturing. A second proposal, the FABS Act, would provide tax credits to companies that build new domestic chip manufacturing.

Negotiations to resolve the differences have just begun. Lawmakers have not provided a timetable for when they hope to have a compromise plan.

Even if they reach a deal, experts say, it could take years for the stimulus to produce more American microchip manufacturing. Building new chip factories and training the workforce to fill them can take several years.

Expect Shortages to Continue

For car shoppers, the news means shortages will continue throughout 2022. They may ease from the extremes of last year.

GM said last week that it has “seen better consistency in semiconductor supply through the first quarter compared to last year as a whole. This has been translated into improvement in our production and deliveries during the first three months” of 2022.

VW CEO Herbert Diess said in February, “The supply situation is getting better, but even in 2022, we will not be able to build all the cars we could sell.”

Prices have begun to come down slowly from the highs of 2021 but remained about $5,000 higher than one year ago in February.

So the rules of buying during the chip shortage may remain in place all year. Our advice: Be patient, look beyond the model you expected to buy, and be prepared to pay high prices if you can’t wait for them out.

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