The Global Chip Shortage: Explained

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Microchip shortage means fewer cars and longer waits, but it could improve your refinancing odds.

As the world becomes increasingly dependent on technology, so do our favorite products and necessities. There are microchips in almost every electronic device you own, including your smartphones, appliances, laptops, and even your car.

The microchip shortage isn’t a uniquely American or single industry issue, it’s global. However, it has made it especially challenging for the automotive industry, and therefore harder for consumers to buy new and used vehicles.

Every stage of car ownership, including buying, selling, and refinancing, has been impacted by the global chip shortage.

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Understanding the Global Chip Shortage

With the onset of the coronavirus pandemic nearing its two-year anniversary, it would be an understatement to say that many of us are still dealing with the effects in various ways. When many industries shut down last year during the height of COVID-19, so did a lot of the factories that created the microchips that power a lot of the latest vehicles.

The demand for vehicles did seemingly decrease in 2020 seeing as this was a very uncertain time for most people. Factories stopped producing the chips and ordering materials for them during the shutdowns. Then, when the lockdowns ended, suddenly demand drastically increased and factories weren’t ready for the surge. We’ve seen this in many other industries too, as talk of supply chain shortages have been trending all over the news in recent months.

Vehicle manufacturers have to predict how many chips they’ll need in advance, which is why some manufacturers shut down due to lack of microchips to produce ready-to-sell vehicles. According to Consumer Reports, it might take a year and a half, or up to two years, for the microchip inventory to return to pre-pandemic levels.

A contributing factor to the chip shortage is the limited number of chipmakers in the first place. Early in 2021, freezing temperatures in Texas caused a local chip manufacturing company delays, while a few months later COVID-19 infections among workers led to the temporary shut down of a major factory in Taiwan. Notable disruptions like this haven’t made things any easier.

A smaller, but still notable, factor that could be contributing to the chip shortage is the increased production of electric vehicles like Tesla and other models. Electric cars require a greater chip supply than cars fueled by gasoline alone. While this may not be the sole factor, it still plays a role in the bigger picture.

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What Exactly Are These Microchips?

When you get into your car and turn the key, you probably don’t think much of it. The vehicle is simply supposed to turn on and drive once you switch it into gear. However, modern cars require a lot to manufacture and keep running. One of the most important items the car needs simply to even turn on is a microchip.

These computer chips are also referred to as semiconductors and they are very tiny 一 usually about the size of a coin 一 but they provide a lot of power. Microchips help power many of your consumer electronics from your iPhone, Samsung phone, or an electronic toothbrush to your television and gaming consoles. According to experts, the modern vehicle can easily contain more than 3,000 microchips.

The semiconductor industry is mainly headquartered in Asia, in China and Taiwan, as well as parts of the U.S. Microchips are relied on for modern vehicles to function and control everything from the navigation system and power windows to driver assistance features and more.

Current Effects of the Chip Shortage

The semiconductor chips shortage has changed quite a few things for both customers who buy cars and the companies that make them. In October 2021, Toyota announced it would build 60,000 to 80,000 fewer cars that month due to chips being in short supply. Major automakers like Ford, Nissan, and General Motors are following this line of thinking and either reducing the number of cars they make or rationing the few chips they do have and reserving them for certain models.

High-end auto companies like Mercedes announced they will be reserving their chips for pricier models, such as their new electric car. Overall, fewer sales mean less money for the auto industry as a whole. Forecasts say the global chip shortage could result in a $210 billion loss for the auto industry.

This could likely go on to affect the economy in terms of decreasing employment opportunities, costly delays, as well as a personal financial strain on those looking for a new car.

On the consumer side, it means that you could be facing a longer waiting period and higher prices if increased demand drives vehicle prices up. We’re seeing this already with the value of used cars increasing. Usually, cars will depreciate over time. Instead, used car values are at a record high.

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Impacts on Auto Loan Refinancing

While you may have to spend some extra time considering whether you should buy or lease a car right now, it could be one of the best times to refinance your existing auto loan. Refinancing your auto loan involves getting a new loan with a different lender, usually at a lower interest rate. Refinancing can save you money in the long run, and help you potentially pay off your car loan faster.

If you’re considering refinancing, one of the most important factors you’ll need to focus on is your credit. However, your loan-to-value or LTV ratio is an often overlooked but still equally important factor. Your LTV is calculated by dividing what you currently owe on your loan by the current value of the vehicle. Generally, you want a lower LTV because it means you have more equity or ownership in your car instead of owing as much as, or more than, the car is worth.

Since used vehicle values are increasing, LTVs have gone down. This means borrowers have better chances of getting approved for auto loan refinancing. In June 2021, RateGenius released a report confirming these findings. Based on the report, LTV ratios were the lowest on record (dropping by 26% or more) and one-third of all applicants were approved for auto loan refinancing (at the time of publication). This is great news if you’re applied for refinancing in the past and weren’t approved.

What Is Being Done?

Optimistically speaking, we won’t be enduring a global microchip shortage forever. Awareness is the first and most critical step to fix any problem. Now, we are all well aware of the situation. President Joe Biden has asked for $50 billion to invest in the chip industry. This will go toward research and potentially building more factories and necessary materials to build more microchips.

The Senate has also passed a bill that offers tax credit and incentives for chip manufacturers. Other semiconductor manufacturers are already investing in more infrastructure and materials to produce more chips for products and cars. Some experts say the shortage may drag on until early 2023 since it will take some time to implement these changes.

This also doesn’t mean that there are absolutely no cars around. You can likely still go online or to a dealership and find a nice vehicle you like. However, your options may be limited and you’ll want to carefully pay attention to pricing and compare your options as an effort to get the best deal.

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Positive and Negative Effects on the Automotive Industry

A limited supply of microchips is not something that will leave its sole impact on the auto industry and carmakers. If you rely on technology goods, chip production impacts so many other industries and areas of our lives. While this situation and existing supply chain issues are an inconvenience to most people, it could still prove to be one of the best times to sell your used car or refinance your loan. Odds are your LTV ratio has gone down without you having to do much at all.

If you have an auto loan that is costing you a few hundreds dollars per month, explore refinancing and calculate how much you could save. Then, it may just be an ideal time to research and see which vehicle options are available if you’re in the market for a new car. You may have to search a little harder, but all hope is not lost.

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