Ask the Expert: What is the Trajectory of the Global Semiconductor Chip Shortage?

by Jeff Barron

Jeff Barron is Managing Director, Head of Leasing National Sales for The Bancorp Commercial Fleet Leasing with 30 years of commercial fleet leasing experience.

The global shortage of semiconductor chips has had far-reaching consequences spanning multiple industries. The supply chain is fragile, priority is given to those who need the chips most and incentives are projected to be low throughout 2022. This lesson in supply and demand is not all bad news, however, as Jeff Barron of Bancorp Bank details.

Modern-day automotive vehicles rely on advanced technology more than ever to deliver an exceptional driving experience coupled with innovative safety and mobility features. But there’s currently an unprecedented global shortage of an integral part to these vehicles—semiconductor chips—that’s affecting nearly every industry, from automotive to consumer tech, and many more in between.

While this shortage has aff­ected consumers, it’s also affecting businesses as they are unable to access new fleet vehicles until supply bounces back. Given the continuous setbacks companies have faced because of the shortage, business owners and fleet managers alike may be feeling overwhelmed as they try to proactively plan for the future.

We’ve answered three of the top questions business owners and fleet managers may have regarding the current shortage to help them chart a path forward:

  1. When will this shortage end?

Unfortunately, this shortage won’t be resolved anytime soon, as even the slightest ripple in the supply chain can have serious ramifications across multiple industries. Despite initial projections that the shortage would only continue through Q3 or Q4 of 2021 for the auto industry, it’s become evident that the impact will be felt into 2022 and possibly beyond.

In many cases, orders are simply being canceled due to the shortage. But in an effort to maintain workflow, some auto manufacturers are currently building vehicles with everything but certain chips and keeping them in storage yards. Once the delayed chips arrive, they are installed and the vehicles are placed into the distribution system. Or, they are simply deleting certain non-safety-related features and shipping the vehicles to the market. During these uncertain times, companies will need to take a closer look at their particular situation to identify next steps. As of now, there are two options for managers to consider:

Option 1: Wait until the 2022 model year
If the specific make and model that is slated to be replaced is out of stock, and the uniformity of the fleet is important to the company’s image (e.g., if the entire fleet is comprised of branded, white Ford F-150s), fleet managers may want to consider waiting until the 2022 model year. The 2022 order banks are open, but until the chip shortage situation improves, production constraints will continue and order-to-delivery times may extend well beyond industry norms.  Many companies may have to decide what is more important, a unified fleet or adding new brands to expedite replacement or additional vehicle deliveries.

If managers decide to wait, they’ll need to extend the service life of their existing vehicle(s) until the shortage has been resolved, and they should do any necessary maintenance now to ensure the vehicle will be able to continue running safely, enabling drivers to meet increasing consumer demand.

Option 2: Consider leasing a different make or model for immediate needs
For companies who are considering hiring, or have recently hired, new staff to accommodate an influx in business, it may not be feasible to wait for the 2022 model year to obtain the necesary vehicles to support these employees. Since managers will undoubtedly face limited product choices and higher prices when looking for new vehicles for immediate delivery, they may want to consider a different make and model, or possibly even a different type of vehicle. For example, can a properly equipped cargo van serve as an alternative to a pickup truck with a utility body?

  1. In the past, fleet orders and local stock purchases allowed for consistent pricing and deliveries, what can I expect now?

For immediate needs, business owners and fleet managers should keep in mind that due to pent-up demand and short supplies, auto dealerships are likely to prioritize more profitable retail customers, which means business fleets may not have the same access to stock units, or will have to pay more than they have in the past. For factory-orders, the original equipment manufacturers (OEMs) will continue to give auto dealers priority on production, and fleet-customer orders will be reviewed for legitimacy, prior years’ business, and available product allocation.

  1. Are there any budget implications of this shortage going forward?

Unfortunately, yes. As a result of the shortage, 2022 incentives will be lower across the board, which means vehicle costs will rise. In fact, average new-vehicle incentives have dropped almost 30% in the last year, reaching their lowest level in five years.[1]

Companies may see incentive amounts cut by more than half of what they were in the past as manufacturers navigate the shortage and tweak their offerings accordingly. Savings from these incentives can add up significantly when a company is replacing multiple vehicles, so fleet managers will need to reevaluate 2022 fleet budgets based on these lower incentive amounts and increased vehicle costs in order to better prepare for the road ahead.

This shortage has been a lesson in supply and demand as it relates to pricing, inventory, and the supply chain at large for many industries across the globe. It has proven that businesses, despite the industry they are in, can be extremely dependent on each other. Business owners should consult a fleet management partner if they haven’t already, as having a dependable partner like The Bancorp to help navigate the situation and share updates on the latest developments can alleviate some of the pressure business owners may be feeling.

To learn more about this discussion with Jeff Barron, listen to Episode 32 of the Monitor Podcast Series: The Impact of the Global Semiconductor Shortage on Vehicle Fleet Leasing.

[1] Forbes, May 2021.

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