WEST BURLINGTON — Dan Wenig finds himself spending more time on the road these days in search of used vehicles to buy for his lot in West Burlington.
“I’ll try to hit two today,” Wenig, who co-owns Family Motors Inc. with his wife, Becky, said Wednesday during his three-hour journey from Morton, Illinois, where he had gone for a dealer sale he doesn’t normally attend, to another in Mount Vernon, Illinois. “I typically go to buy cars three days a week, and it’s getting harder and harder.”
Up until the past year, Family Motors’ inventory typically consisted of 40 to 50 vehicles. Now, Wenig considers himself lucky to have 15 displayed on his West Agency Road property.
On the north end of Gear Avenue, Deery Brothers Inc., whose lot has more vehicles than those of other area dealerships, is down 40% on new car inventory.
“The average consumer is used to pulling into a lot and seeing them parked six feet apart,” said Brad Deery, who owns four Deery Brothers dealerships and co-owns an additional eight with his cousins. “Today they’re parked 36 feet apart because we have so much space.”
It’s a problem experienced nationwide by new and used dealers alike as the auto industry struggles to restore production to pre-pandemic levels. That effort is being hindered by materials and parts shortages brought on by COVID-19 and other events.
“It’s been interesting to see something like this, because I’ve never seen this in 40 years of being a car dealer, this shortage of cars used and new,” Deery said.
How did we get here? The trouble began before COVID-19
Deery said, while new car production has been greatly impacted by a shortage of semiconductors, or chips, the trouble began before COVID-19.
In September 2019, General Motors workers went on strike in demand of increased job security, a gateway for temporary workers to become permanent, better pay and retaining health-care benefits. The strike would be the longest among auto workers in 50 years, running from Sept. 15 to Oct. 25.
“They had a (month-and-a-half) window when they didn’t build cars, so that kind of created a little hiccup,” Deery said.
The industry was on its way to recovering from that until March 18, 2020, when General Motors, Ford and Fiat Chrysler temporarily closed their U.S. factories amid COVID-19 concerns. Other automakers followed suit, with initial plans to reopen at the end of the same month. Ongoing fears about the virus prompted the shutdowns to continue into May 2020.
“We lost a lot of allocation and production,” Deery said. “Then, when they opened back up, the manufacturers — and this was all of them: GM, Nissan, Mazda, Toyota and Honda — a lot of folks didn’t go back to work because they were affected by the coronavirus (either they had it or were scared of getting it), so the level of absenteeism was anywhere from 20% to sometimes 50% in some of the factories. That resulted in less cars being built.”
The production of parts needed to build and repair cars has suffered as well because of worker shortages.
Then there was the polar vortex in February that brought unseasonably freezing temperatures to Texas, overwhelming the state’s power grid and resulting in the closure of factories responsible for producing materials needed for new vehicles, such as adhesives, glues, foam and rubber products.
“When that plant shuts down, it takes weeks to get it hot again, so that complicated our inventory issues,” Deery said.
The next month would see a fire ravage a Renesas Electronics Corp. subsidiary-owned factory in Hitachinaka, Japan, abruptly halting production of the microprocessing chips needed for more elaborate auto features such as entertainment and GPS systems, as well as those as simple as key fobs.
The fire further strained chip manufacturers already struggling to keep up with demand driven by increased computer and smart phone sales during the pandemic. According to market tracker International Data Corp., laptop and desktop computer sales saw a 13% increase in 2020 from the year before, exceeding 302 million.
“In 2020, there were 3 million less cars produced because of the pandemic,” Deery said. “Now you roll into 2021, you have a shortage because of the chip, because of foam, because of adhesive.”
The series of events has left dealers navigating unfamiliar territory.
“The last year-and-a-half has been like the biggest learning curve in the car industry that I’ve had in 20 years,” Wenig said.
‘We’re looking further than we ever have’: Dealers cast a wider net for used cars
With production of new cars drastically slowed, used cars are becoming more difficult to come by as people are hanging onto their vehicles.
The dealer sales Wenig has attended for years are now offering half or less the number of vehicles, and the ones that are available are fetching higher bids as more dealers turn up in hopes of sustaining their inventory.
“For instance, one auction I go to, a new car dealer that had five new car stores would typically bring 25 to 40 used cars a week to about one auction,” Wenig said. “Now he brings zero cars to that auction and he’s been bidding against me on the nicer stuff.”
Wenig has seen a number of used vehicles go for well above National Automobile Dealers Association guidelines, one of the many references he utilizes when deciding whether a vehicle is worth the investment. (There’s also Blue Book, Black Book and the Manheim Market Report.)
At a recent dealer sale, he saw a 2008 Silverado 2500 bring in more than $18,000. NADA listed its value at $15,600.
A few years ago, a 2013 Dodge Ram 1500 with 121,000 miles sold for between $14,000 and $15,000. On Wednesday, that same vehicle was sold again in Morton for $18,500.
“I was just sitting there with my mouth open,” Wenig said. “You can go to one every day of the week and not travel more than three hours, but what has happened is the new car dealers have become part of the used car market, because they’re not letting things go into the used car market like they did when they had a full new car inventory. They’re having to make their money off of used cars also, so the new car guys have become our competition.”
While he has seen vehicles sell for $2,000 more than what they’re value is listed at in bigger cities, he does not believe the same to be likely in southeast Iowa, especially because banks refer to NADA guidelines when considering car loans.
“It’s almost like a different learning curve on how you price things,” Wenig said.
“You put the lack of cars with at least just the same amount of people trying to get them, and it drives the price of the good ones up, and I think the market, the Blue Book, the Black Book, the NADA, the Manheim numbers that we use in the industry has had a hard time keeping up.”
Because of this, Wenig won’t go more than $1,000 above NADA values. He also has expanded what he deems acceptable. Previously, he preferred vehicles with less than 125,000 miles. Now, he considers vehicles in the 150,000-mile range.
Deery Brothers has also expanded its search radius, buying cars online rather than at in-person auto sales and relying on thorough digital reports to find good inventory.
In a normal year, that search would not extend beyond a 1,200-mile radius. Now, “we’re going coast to coast to look for cars,” Deery said. “We’re looking further than we ever have.”
Then there’s transportation costs, which can exceed $2,000 depending on the distance the vehicle needs to travel.
“Sometimes it’s just not worth it,” Deery said.
Deery considers himself lucky, especially at Brad Deery Honda, 501 W. Agency Road, which took on extra inventory in January.
“The microprocessing shortage hit Honda, and now we’re running with a leaner inventory. We’re fortunate we have a lot more than most folks,” Deery said.
New cars feed used car trade-ins, Deery explained, and with limited availability of new cars, trade-ins have slowed. Still, Deery Brothers has managed to keep a decent supply.
“We had a brisk sales environment last fall, so we went out and purchased a lot of used vehicles anticipating the demand,” he said. “Dumb luck is what it was.”
How the ‘COVID hangover’ is impacting consumer spending
Both Deery and Wineg have noted quick turnaround time on used cars of late.
“That is the advantage of this market I guess is that when you get a really nice piece, it doesn’t sit there two weeks (before it’s sold),” Wenig said.
Despite the used car shortage, Wenig said his business hasn’t been hit too hard.
“I don’t think our bottom line has much. I think we’ve stayed pretty consistent just because we’ve worked harder on it. We’ve worked more hours,” he said. “Because we’re family-based, we have three of us from the same family involved. Instead of 60 hours a week, we’re at 80 hours.”
While Wenig is on the road and working on vehicles to bring them up to customer standards, Becky Wenig oversees operations at the dealership.
Deery noted more people have been bringing their vehicles to his service department, which has had difficulties getting parts, in an effort to keep them safe and operational as they ride out the car shortage.
“It’s helping our service business, because there are a lot of folks that are reconditioning, spending money on their car, waiting to get through this until they can find the car they want, so subsequently our parts department is having the same issues,” he said. “We’re having a hard time getting parts because of the COVID hangover.
“The manufacturers are building parts for the cars they want to build off the new car assembly line. However, the parts they normally would be able to provide my repair facility are going toward new cars, so we have a backlog.”
Some customers looking for a new vehicle have been willing to settle for a make and model slightly different than what they initially wanted.
“If a person comes in here and they want a Nissan, we might have something like it in the Toyota family,” Deery said.
Others are seizing the opportunity to sell, figuring their cars are never going to fetch a higher price than right now, Deery said.
According to Labor Department data published last week, used car prices are up about 45% over the past year. New car and truck prices, meanwhile, are up about 5%.
The future of new cars
Deery predicts it will take a year for the auto industry to reach its normal inventory levels.
As production is ramping back up, some manufacturers are going to start shipping cars to dealer lots without semiconductors. As the chips become available, they will be shipped to dealers whose technicians are trained to install them.
“So we’ll have a car here that’s not operational. It’s built, but it needs some microprocessing chips, so they’ll send those and we can finish it here, so we won’t have to wait for the factory to do it,” Deery said. “(Manufacturers) are running out of room. They’ve got all these cars built but they’re running out of storage facilities. These dealers lots are very thin, so we have a lot of capacity where we can store cars while we’re waiting for these final parts to get shipped.”
Manufacturers also have been sending only one key since this means the use of one less chip, with plans to send the second key as availability grows.
Another change consumers may notice is altered packages on less sought-after models of new cars.
“You might get a Toyota Highlander and you might want the convenience package, but within the convenience package, you can’t get a rear entertainment system, so they’ve altered the package, dropped the rear entertainment system, called it a different package,” Deery said. “They’re getting innovative on how to work with the limited supply they have and still produce cars.”
Deery anticipates 2022 will be a good year for car sales, with a predicted Seasonally Adjusted Annual Rate of 17 million.
“There’s a lot of pent-up demand,” Deery said. “People want a new car, they need a new car, but they’re going to wait to get what they want. The average price of a new car today just tipped over $40,000, so most folks, if they’re going to spend over $40,000 for the second-largest purchase that they’re going to make in their lifetime, a lot of them will wait for what they want.”