Why Car Prices Soared Worldwide

When the automobile production and distribution chain operated like a perfectly oiled cog prior to the Covid-19 pandemic, consumers could choose the make and model they wanted.

Now, when there is an unprecedented worldwide vehicle shortage, buyers are putting their names on waiting lists and may have to wait months before they can purchase their cars.

This shortage has led to an increase in the prices of some new car models and a jump in the prices of used ones.

Big manufacturers are producing fewer cars because there aren’t enough semiconductors on the market, an essential part of their production. In addition to this, there is a huge demand for chips from technology companies, which manufacture from household appliances, computers and cell phones to video game consoles.

“The semiconductor industry is trying to keep up with demand, but it just can’t,” says Susan Golicic, a professor at Colorado State University’s College of Business. Faced with the lack of chips, vehicle manufacturers had to select which models are on the production line and which are left out, explains the specialist.

“Many of the companies are only producing the vehicles that make them the most profit,” such as sport utility cars (SUVs), trucks or luxury vehicles. “The situation is quite serious.”

Willy Shih, a professor at Harvard University’s School of Business, told BBC News World that shortages affect the entire manufacturing chain in the auto industry. In other words, it affects all companies that manufacture auto parts.

“This has an effect on the jobs that all the business associated with making an automobile generates. So the consequences quickly spread.”

In Japan, the country of brands like Toyota and Nissan, the shortage of parts caused sector exports to drop 46% in September, compared to the previous year, a clear demonstration of the importance of the auto industry for its economy.

“It is estimated that automobile manufacturing generates around 3% of the global GDP (Gross Domestic Product)”, highlights David Menachof, professor in the Department of Operations Management and Information Technology at the FAU School of Business (Florida Atlantic University) .

In the last year, as he explained in a conversation with BBC News Mundo, around 8 million vehicles stopped being produced. This situation translates into a loss of revenue of around US$ 200 billion for the automotive industry.

Price hike

“In the United States, automobiles are being sold for higher prices than usual because there are people willing to offer more,” said Menachof.

As there are not enough new products available on the market, the demand for used vehicles has increased, bringing the average cost of a second-hand car in the United States to more than $25,000. In fact, says Susan Golicic, the average value of a vehicle has been rising by about $200 each month.

The same is happening in other parts of the world. Mexico, for example, is the world’s fourth largest exporter of automobiles and the seventh largest manufacturer.

The country, which exports around 80% of its production and is the leader in the Latin American automobile industry, is facing the effects of the global shortage in car manufacturing.

Guillermo Prieto, president of AMDA (Mexican Association of Automobile Distributors), says that the price of new cars has risen about 9%, while the used car market (with an age not exceeding five years) has also seen a price increase.

“There is more demand, fewer vehicles, and customers sometimes have to wait five or six months to buy what they are looking for,” he told BBC News Mundo.

“It’s a huge shortage,” he says. This had a strong impact on the labor market, as the sector generates 2 million direct jobs and many others indirectly, considering all companies that supply parts and services.

To the car shortage, another factor was added: the increase in the illegal entry of so-called “junk cars”, coming from the USA. They are vehicles in poor condition that do not find buyers in the world’s largest economy, but manage to attract interested parties across the border.

Labor and economic effects

Although automobiles are produced in different regions of the world, much of the manufacturing is concentrated in a few countries, such as the US and China. But other smaller nations also participate in this chain, such as Slovakia.

The latter, a European country with just over 5.6 million inhabitants, is home to large Volkswagen, Peugeot and Kia factories and produces 1 million cars a year, making Slovakia the nation with the highest car production per capita of the world.

This makes the problems in the automobile industry have a strong effect on the Slovak economy.

In the global context, due to the size of the automotive industry, there is a “multiplier effect”, says David Menachof.

“A company that employs a hundred people generates effects in the hiring of another 500 workers”, in the associated companies that revolve around it.

When everyone involved in the production chain of a car is affected, the local economy feels the impact, especially when some factories are temporarily closed.

Menachof says the problem is likely to continue for many months. “All estimates are that the shortage will extend into 2022, or even 2023, before it really gets back to a normal market situation.”