How the pandemic could have a long-term effect on the way you buy a car

·4 min read

Ford and General Motors soundly beat Wall Street’s expectations with their first quarter earnings, but the worldwide shortage of semiconductors has left car dealers struggling to come up with the vehicles they need as consumer demand rebounds to pre-pandemic levels.

That is forcing automakers to rethink key business strategies, and could see them backing away from established practices — including never fully rebuilding dealer inventories. Such changes likely will impact consumers in a number of ways. Among other things, that may mean a longer wait for the vehicle a customer buys, as well as fewer incentives and other discounts.

“The pandemic has just changed the game,” said David Cole, chairman-emeritus of the Center for Automotive Research. Almost every automaker will be changing business practices “to hedge against unexpected situations, whether an earthquake or a pandemic,” Cole said.

The impact will be felt at every level of the automotive business, from manufacturing to marketing, as well as retailing, Cole said.

Take dealer inventory. It has been accepted wisdom that retailers need an average of 60 to 70 days’ worth of vehicles in stock. Unlike shoppers in Europe and most other global markets, American motorists have typically preferred to pick up a vehicle the same day they go shopping, with a lot full of vehicles needed to give them their choice.

But, in the wake of the North American production shutdown last spring — and similar closures abroad — inventories plunged. Toyota, for example, reported some of its most popular products were down to lower than a 10-day supply early this year. Overall, dealers had about 1 million fewer vehicles than normal in stock, reported research firm J.D. Power.

Yet, something unexpected happened. With fewer vehicles available, “buyers were willing to wait,” in some cases up to six weeks, said Mike Jackson, CEO of AutoNation, the largest U.S. auto retail chain.

Overproduction to keep showrooms overstocked “has been ruinous for the industry,” Jackson told NBC News. It resulted in high costs for dealers to maintain large stocks and routinely drove up factory incentives — money-losing givebacks that helped drive GM and Chrysler into bankruptcy in 2009.

Working with dealers to provide better ordering tools, the industry found buyers not only willing to wait, but also amenable to less discounting. Power and other analysts have found that incentives have dropped, in many cases, by thousands of dollars per vehicle.

Another plus is that the industry can alter production schedules more rapidly to reflect sudden, and often unexpected, shifts in market demand.

“We’ll never go back to levels of inventory we had pre-pandemic because we’ve learned we can be much more efficient,” GM Chairman and CEO Mary Barra said during a Wednesday earnings call.

While dealer inventories may decrease, factory inventories are being forced to rise.

When Japanese automakers like Toyota first broke into the U.S. market four decades ago they sharply undercut domestic product pricing. One reason was the use of Just-in-Time manufacturing. That meant minimizing the amount of inventory stored at plants which, in some cases, received parts just minutes before they were needed on the assembly line.

The JIT process is extremely effective — when it works. But it’s another matter entirely when there’s a disruption, whether from a natural disaster like an earthquake or blizzard, or a disruption in the supply of parts like the semiconductors needed today by the dozens in a typical automobile.

Ford last week warned it could lose more than 1 million vehicles originally scheduled for production this year.

At a recent event hosted by Automotive News, Ford CEO Jim Farley admitted he has just begun to recognize the challenges of maintaining thin factory inventories, adding that “most other industries use safety stock for critical components like chips.”

While the Just-in-Time system won’t vanish entirely, automakers are looking at ways to ensure they have a backup of their more critical parts and components to avoid seeing the sort of slowdowns and shutdowns that are now expected to last until late 2021, at the earliest.

For manufacturers, these changes should translate into a more robust manufacturing system, more efficient marketing — and higher profits.

For consumers, however, it could mean higher prices — as well as longer waits to drive home in a new vehicle.