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Chip Crunch Derails U.S. August Auto Sales: Rough Road Ahead

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U.S. vehicle sales cratered in August owing to persistent microchip shortage, which has been crippling the auto industry lately. August has historically been one of the better months for automakers in terms of sales. But this time around, it has been a rough month, with the chip crunch causing inventory levels to plummet to record lows and dealerships not being able to keep up with strong vehicle demand.

While many auto biggies no longer release monthly sales data, most of which that report have witnessed a year-over-year decline in sales volumes. Per Morgan Stanley, U.S. light vehicle sales declined 17% year over year last month. Based on the estimates of J.D. Power and LMC Automotive, Cox Automotive and TrueCar, sales were anticipated to decline 4-18%, as shortage of semiconductor supply along with a rebound in global coronavirus cases had further disrupted the supply chain. In August, seasonally adjusted annual rate (SAAR) declined to 13.09 million light vehicle units, marking the lowest SAAR reading in 2021 so far, after a high of 18.5 million in April, and the weakest since June 2020.

A Look at Sales Numbers

U.S. auto giant Ford (F - Free Report) suffered the worst blow, with sales plummeting 33.1% year over year to 124,176 units. While sales of the namesake brand declined 32.5%, that of Lincoln fell 44.3%. Most of Ford’s hostellers saw double-digit declines, with sales of F-Series, Ranger, Transit, Escape, and Explorer tanking 22.5%, 67.7%, 36.1%, 32.6%, and 56.9%, respectively, on a year-over-year basis. Ford currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

South Korea-based automakers Hyundai and Kia posted U.S. sales of 56,200 units and 54,009 units, down 3.7% and 5.3%, respectively. Sales volume declined for Hyundai’s popular trucks including Palisade, Tuscan and Santa Fe last month. Sales of Kia’s Telluride, Seltos and Sorento models also fell.

Japan-based auto biggie Toyota’s (TM - Free Report) U.S. sales dropped 2% in August to 188,067 units. Per U.S. Automotive News, sales of Toyota’s popular models like Highlander and RAV4 slipped 11% and 24%, respectively. Toyota’s close peer Honda (HMC - Free Report) witnessed a 15.6% sales slump year over year to 114,656 units. With that, the company snapped its five-month sales growth streak since March. Sales were down 18% for the namesake brand but up 4.7% for the Acura division. Most of the popular Honda models witnessed double-digit growth. For instance, sales of Accord, CR-V and Civic declined 24%, 18.8%, and 23%, respectively. Another Japanese automaker Subaru recorded a sales decline of 14.7% in August to 49,373 vehicles, blaming inventory constraints for the falloff. Meanwhile, Mazda — another Japan-based carmaker — was an outlier, with its sales rising 4.6% year over year. Its CX-5 model made up more than 50% of the company’s sales last month. August was also good for Volvo, which witnessed a 3% sales increase year over year, marking the 15th consecutive month of rise.

Low Inventory Levels and Fleet Deliveries Raise Concerns

Owing to the chip deficit and associated production challenges, vehicle demand-supply balance has been severely disrupted. The industry is struggling with low inventory, with less than a million vehicles in inventory for retail sale versus around 3 million two years ago. Quoting Thomas King, the president of the data and analytics division at J.D. Power, “Although inventory is arriving at dealers daily, it is simply replacing the vehicles being sold, preventing dealers from increasing inventories to a level necessary to support a higher sales pace.”

Fleet sales for August are likely to total 107,387 units, indicating a decline of 7.4% and 48% from the corresponding months of 2020 and 2019, respectively. As it is, fleet sales to rental car companies, corporations and government agencies have been rather slow to recover than retail sales. Aggravating supply chain disruptions will only worsen the volumes, going forward.

Brace for More Tough Times

Shortage of semiconductors in the auto sector has proven to be a speed-bump for automotive production and sales. Reportedly, the ongoing semiconductor chip shortage is expected to hit revenues from the global automotive industry to the tune of $110 billion in 2021. Additionally, renewed strains with the resurgence of COVID-19 cases — especially in Asia — will further hit chip production. Most of the auto bigwigs believe that the chip deficit will linger well into 2022.

With the situation getting worse, automakers are forced to slash production and temporarily shutter factories. For instance, General Motors (GM - Free Report) will be suspending operations or extending downtime at eight plants in North America during the next two weeks, including two factories that manufacture the firm’s hot-selling Chevrolet Silverado truck. Last month, the company said that it expects production to decline by 100,000 vehicles in North America during second-half 2021 from the first half. Ford has also cut production of trucks at the Kansas City Assembly Plant for two weeks. The company will also reduce shifts at two more truck plants in Michigan and Kentucky. Stellantis (STLA - Free Report) has extended output suspension at several plants in Europe. Last month, Toyota announced that it would slash global output for September by 40% from its prior plan. German auto giant Volkswagen (VWAGY - Free Report) expects chip supply to be extremely tight and volatile in the third quarter of 2021, which is set to limit production as well as sales.

In light of the current situation, carmakers and dealers will have a very tough time to rapidly restore inventories and meet the mounting demand of vehicles. In the absence of a quick solution to this chip problem, consumers are likely to have a hard time in finding new vehicles and specific models at dealerships. In other cases, with prices going through the roof owing to supply-demand mismatch, customers might just not be willing to pay a heavy premium to get their hands on vehicles of their choice.