The demand for automobiles continues to rise amid reports of chip shortages that are hurting production. This suggests that there will be strong profit margins in the auto manufacturing sector despite the missed opportunities to meet robust demand.
This will ensure continued solid demand for middle market firms that supply the greater auto industry as the economy recovers and expands this year.
Light vehicle sales that hit a record low of 8.6 million last April during the shutdown have now reached 18.5 million in April, according to annualized data from Wards Automotive Group.
The increase is a solid sign of a recovery. Breaking above the five-year average strongly suggests that changing tastes for travel and living arrangements will stoke sustained demand for light cars and trucks.
Because of long-term undercurrents and recent supply chain disruptions, there is the possibility of manufacturers and dealers being unable to meet the growing demand for vehicles in the short term.
Domestic production in April was 46% lower than in February last year.
Domestic production in April was 46% lower than in February last year—the month before the pandemic hit—and inventories were down by 37%. We anticipate that the chip shortage will be solved later this year, with full production returning next year.
At the same time, the industry faces long-term undercurrents of shifting consumer tastes and technological changes that will eventually reduce the need for cars.
Production of domestic automobiles has been in a long-term decline that continued through the pandemic. And because of the development and efficiencies of the global supply chain, inventories of parts and final products have been reduced as well.
More recently, manufacturing of chips used in automobiles was halted by the severe winter storm in the Southwest and a fire in a plant in Japan. Those disruptions are likely to result in a loss of consumer satisfaction—having to buy a car in an ugly color, for instance—and rising prices. We expect those price increases to be transitory as soon as the supply chains are reestablished.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
