Chip shortage explained: Low inventory, skyrocketing used car prices and no end in sight

As you well know, microchips are found in virtually everything, from the obvious (cellphones, smart devices) to the not-so-obvious (your power tool's lithium-ion battery, for example). In your car, there are computer modules controlling virtually everything, from engine and transmission operation to in-car tech and virtually everything in between. Long gone are the days of cars having "a" computer. Today, they're everywhere, and interconnected in ways that make them all vital to a car's fundamental operation.

The microchip is as ubiquitous in modern consumer products as wood is in home construction. But unlike lumber, microchips aren't merely refined raw material. While many chips (such as those used for computer memory) have numerous applications, that doesn't mean that all computer chips are created equal. The specialized computers that manage your car's powertrain components, infotainment and onboard safety systems can't simply be swapped out for whatever's available.

Semiconductor fabrication is a complex and expensive process, which limits the size of the field, and not every manufacturer is capable of supplying the chips needed by car manufacturers. By and large, silicon producers are several steps removed from the assembly of the products their chips power, but some, such as Intel, Samsung and even Foxconn, are borderline household names.

Others, such as Renesas and Taiwan Semiconductor Manufacturing Company (TSMC), are silent behemoths, known mostly to industry insiders and tech enthusiasts. While companies like Intel manufacture a lot of their own chips, they and others, including computing giants AMD and Nvidia often rely on contract manufacturers like TSMC for chip production.

Production of (and demand for) chips is greater than it has ever been, so why are we suddenly out of them? The short answer, predictably, is "COVID" or, more broadly, "market forces." Want the long answer? Well, strap in. It's a bumpy road.

The onset of COVID

For starters, silicon wafer and microchip production was hit early on by COVID just like any other industry. The impact of this was negligible, as it happened while demand for cars was similarly suppressed. Dealerships shut their doors to walk-in customers and lines went idle to minimize the first wave of coronavirus infections. As manufacturing re-opened, automakers remained cautious in their supply orders as demand recovered slowly in the face of uncertain economic conditions, widespread unemployment and ongoing health concerns.

The lack of dealership traffic had a secondary consequence as well: Since customers weren't buying new cars, they weren't trading in old ones either, which put a squeeze on businesses that relied on used inventory, including the new generation of Internet-based car dealers like Carvana and Vroom. This was the beginning of the upswing in used car values, but we'll come back to that later.

Meanwhile, at home ...

As COVID-related social and workplace restrictions began to take hold, demand for cars may have dipped, but demand for consumer electronics skyrocketed. Computers, video game consoles and other personal productivity and entertainment devices got hot quickly as consumers learned that their existing hardware wasn't going to cut it for the new normal. Enterprise demand jumped too as businesses around the world scrambled to equip their workforces for remote operations.

Like anything else in the modern industrial supply chain, microchips are produced to demand, and with automotive demand flagging and consumer electronics demand going through the roof, chip producers adjusted their production schedules to accommodate. Further compounding the situation, the second half of 2020 also saw the launch of the latest generation of video game consoles from both Microsoft and Sony along with a new generation of desktop and mobile GPUs and CPUs from Nvidia, AMD and Intel. All of these launches were competing for the same slice of the consumer silicon pie.