Small cars are an endangered species — blame the supply chain

There’s a decent supply of expensive, giant cars but relatively few affordable, tiny ones. Experts say you can blame the supply chain, as you’re already likely used to doing. And unfortunately, such reduced supply of vehicles more generally is likely to outlast the current supply chain crunches. 

Automakers are ditching sedans for SUVs because, well, they can make more money

Vehicles require a slew of components. Many of them come from suppliers and manufacturers all over the world. Famously, one particularly crucial component has been in a shortage since the beginning of the pandemic: the precious semiconductor. 

Supply chain professor Susan Golicic of Colorado State University worked at Chrysler as a logistics consultant before she entered academia. She said a single vehicle nowadays might require more than 1,000 microchips. 

Many of the components used in each vehicle require microchips. If, say, your door lock module is missing its chips, that means your overall production will be delayed. 

“When you need that many [chips] for a single vehicle, it all compounds as you move further upstream,” Golicic said. 

Companies can’t make the same volume of vehicles they would like to in order to meet demand. So they’re prioritizing high-margin vehicles that they know will sell well. For many automakers, that means more pickup trucks and fewer compact cars.

“They’re having to allocate which vehicles they actually want to produce,” Golicic said. “Typically, they’re going to choose the most profitable. When Ford has to make a decision on what vehicles to produce, knowing they don’t have parts to build all of them, they’re going to build an F150.

“When a business has to make decisions about ‘I can’t build everything, what am I going to build,’ they’re going to build what they make the most money on,” Golicic said. “Generally speaking, that’s going to be their most expensive product.” 

A new Honda Passport SUV starts at $41,100. A Honda Civic starts at less than $24,000. 

You might expect that Curtice, the Omaha-area Honda salesman, would be seeing far more demand for smaller, inexpensive vehicles — but that hasn’t been the case. About half of his buyers are seeking SUVs or pickup trucks. 

“People have adapted to inflation,” Curtice said. “You had that sticker shock initially and now they’re evolving to what’s out there, what’s available.” 

That matches national trends. Just two of the top 10 best-selling vehicles of 2022 were sedans, according to Car and Driver — even despite soaring fuel prices and concerns about climate change. 

Manufacturers have been moving away from the small car market for years. The Big Three from my stomping grounds of Detroit have been the most eager to dump compact cars and push pickup trucks and SUVs.

As American options for small cars diminish, customers have typically turned to Asian or European brands. Asian manufacturers, however, have struggled with their supply chain this year amid lockdowns in China, Michelle Krebs, a Cox Automotive executive analyst, said. A looming energy crisis in Europe threatens manufacturing across the Atlantic too. 

I reached out to the biggest automotive manufacturers to learn more about this. Representatives from Ford, Stellantis, Toyota, GM and Hyundai did not respond to my inquiry. (Awkward …) A Honda representative told me they didn’t have enough time to respond based on my deadline.  

A Volkswagen representative sent along a statement noting that the company has adapted to the ongoing supply chain crisis and that localizing production to North America has been key to resiliency. The VW representative highlighted its Chattanooga, Tennessee, plant. (I’ve heard of that place!)

Vehicle prices may have been the ‘leading edge’ of our current inflation crisis

In the halcyon days of early 2021, when historic inflation hadn’t yet wracked the U.S. economy, one area had emerged as troublesome: used car prices. Omair Sharif, founder and president of Inflation Insights, said used car prices “kicked off” our ongoing inflation spiral in the second quarter of 2021. 

Stimulus checks and folks moving to areas of the country requiring cars were all part of the increased demand for vehicles. Sharif highlighted a more insidious, less spoken of driver for vehicle demand, though. There was a key structural change in the used car market in early 2021.

Rental car companies faced doom in the early part of the pandemic, so they sold off massive parts of their fleets. But by 2021, they realized they needed to buy many more cars. It was an unprecedented move that destabilized the used car market. 

“You had somebody who was a natural seller into the market become a buyer,” Sharif said. “That’s just not something that anyone had ever seen.”

Semiconductor shortages drove up the cost of new vehicles even more.

“Used vehicles in some sense were the leading edge of the inflation increase that’s been with us for the last 18 months,” Sharif said. “It materialized there first before it really did anywhere else.”

Automakers want to keep inventories low so they can make more money

Retail inventories have generally recovered from pandemic shortages. Manufacturing these consumer goods quickly rebounded. In fact, at many retailers, these stockrooms are bloated with too many air fryers, pieces of patio furniture and televisions. 

Meanwhile, the automotive industry can’t seem to catch up to its pre-pandemic inventory norms. According to Cox, the active inventory of vehicles the first week of October totaled under 1.4 million with 45 days of supply. That same week in 2019, we had nearly 3.4 million vehicles and 80 days of supply. 

At Curtice’s Honda dealership, there were 200 to 300 vehicles on the new car lot before the pandemic. Now it’s around 70, he said.

We will likely never return to those days of plentiful automotive supply, said Krebs of Cox. That means more expensive cars for the rest of us. 

The economists at the Federal Reserve Bank of St. Louis say this trend too predates the pandemic. Automotive production has declined since the 1990s. Easing off on supply is one wise way to increase the price of something. A recent New York Times article also revealed that automakers and dealerships aren’t eager to give up “swollen profits” from low car supply.

“[The automakers] have always overproduced,” Krebs said. “When you overproduce you still have to sell some way, so you do that by discounting. The automakers have realized if they keep supply more in line with demand, they can get the best price.”

Email me at rpremack@freightwaves.com. Subscribe to MODES for more supply chain insight. 

By the way, I will be on vacation next week — mostly mourning the fact that automotive companies do not want to email me despite my deep Detroit roots. Look out for a guest column on trans-Pacific trade by my colleague JP Hampstead. 

We will also have no MODES on Nov. 3 as that week is FreightWaves’ Future of Freight Festival and I will be quite busy! Sorry!