Talk Money Weekly #006: The Global Car Shortage

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TM_INTRO MUSIC

[00:00:00] Hey everyone, Mesh here. And welcome back to our Wednesday short, The Talk Money Weekly, where we talk about current business events that pair with our newsletter, which is also released on Wednesdays. Today's episode: the Global Car Shortage.

MUSIC END

[00:00:16]So I recently learned that the US has got a car shortage issue. Meaning that people want cars. They can't get them, though. There aren't enough cars. Everybody wants a car. They're paying significantly over asking price for the car.

[00:00:28] I've never heard that before. [00:00:30] Normally you can walk into a car dealership. See a car salesman, know the guy's sneaky. And you say, Hey, today I'm going to make sure that I get a discount on this car. I'm not going to let this guy get away with it this time.

[00:00:43] Unfortunately, that's not the situation we are in today. Basically cars are making a lot of money. Why?  There's not enough cars in this country right now. So I sit down with my good friend Kartik Misra who educates me on the subject. 

(Coin Drop)


Mesh: [00:00:56] Hey Kartik.

Kartik: [00:00:57] Hey Mesh.

Mesh: [00:00:58] So Kartik, you're going [00:01:00] to tell us a little bit about what's going on with cars right now in the US and why it's such a pain in the ass to buy a car. And from what I understand, it is nothing to do with the fact that COVID eliminated this demand for cars. Given everyone wants to technically get a car now and escape the city. And [00:01:19] from what I know, everyone was looking for a car at some point. So could you just give us a little bit of a background of what the hell is going on [00:01:27] with cars in the US and the ability not to get [00:01:30] one? 

Kartik: [00:01:30] Yeah. So I think one of the interesting things that has happened, and again, I think all of this is actually COVID related one way or the other. It’s just a very interesting way that it has played out. [00:01:41] So currently we are seeing a resurgence in car demand. The most accepted explanation out there for this phenomenon is that people do not want to actually go in public transportation of any sort because of COVID and therefore they're going to own more cars. This has happened not only in cities [00:02:00] like New York,  but also in the suburbs. [00:02:02] So there's just a lot more cars and there's a demand for a lot more cars out there. And the issue is that those cars from the supply side are just not being manufactured, right? One of the major reasons why this is happening is because during COVID there was a steep drop off in demand for cars, at least for the initial couple of months, let's call it a quarter. [00:02:25] And so a lot of big car makers decided that they were not going to put [00:02:30] in orders for future parts for cars that they might have to build out, you know, the next quarter or six months. And that was because they thought that the demand would not come back as quickly as it did. So what happened at the end of the day was[00:02:46] they decided to not order these particular parts. It's very small. It's basically a microchip. And that has led to today, in which companies like Ford, General Motors, Volkswagen, [00:03:00] some of the biggest manufacturers of cars in the world have had to shut down, you know, in some cases, almost 50% of their production because they just do not have the microchips that it requires to run some of these cars.

Mesh: [00:03:13] Kartik. Let me. Hold on. I was thinking that it had to do more with there's a big factory line. These cars are being built. They can't be built because there's a whole, you know, backlog or the production is shut down and it just takes a long time to get started. Again, we're [00:03:30] talking like a microchip, like the equivalent of what goes into our iPhone.

Kartik: [00:03:34] Correct. It is related to the iPhone, which is, which is kind of fascinating when you think of supply chains around the world, right? So on your first question, there's actually a significant amount of idle capacity sitting around in terms of car assembly lines. So people could have ramped that up in a couple of months if they needed to. [00:03:53] Which they probably do right now because the demand is so high. The issue is that during the middle of COVID, when we [00:04:00] were all sitting at home, we were all ordering electronics, right? Whether it was Macbooks or iPhones or Xboxes or Nintendo or whatever else that we were using to entertain ourselves. [00:04:12] So orders of all of those things, right, went up pretty significantly. You can probably see that in the earnings calls of Apple, that just happened recently, right? And so a lot of the microchips that were used for both cars and electronics were taken up by the electronics industry and they use them to [00:04:30] manufacture and sell all of these different, electronic items that were being bought in vast quantities during COVID. Turns out that the car manufacturers weren't fast enough to the draw. [00:04:41] They did not actually, you know, speak for their own microchips. And so now we're in this problem where. There are just no microchips lying around that the car manufacturers can use. So you just can't build enough cars to sell.

Mesh: [00:04:57] And so what, what happens [00:05:00] here? Is it the stock price of these companies get affected like Toyota and some of these other ones like Volkswagen? Are they given that they probably were getting hammered  during COVID for a period of time and then had the opportunity to rally significantly. [00:05:16] But if they can't meet the supply, given there's no cars to be sold, what happens to the stock prices?

Kartik: [00:05:23] Right. So I think, I think there's a lot of things that affect stock prices for OEMs, which is a word for auto manufacturers.[00:05:30] But basically there's a lot of things that actually affect cars or a car manufacturer price’s out there. [00:05:36] So one of the reasons why they're probably not as affected. So Ford basically came out in the recent earnings and said, hey look guys, we've made most of our earnings in the first quarter of this year. The other earnings that we were supposed to make for the rest of the quarters this year are probably not going to happen because we're not going to sell enough cars [00:05:54] cause we're not making them, right? But the cars that they are making, they're actually being able to sell [00:06:00] for a significant markup. So they are actually making higher margins on the cars that they are actually selling, right? Cause there's a dearth of cars out there. So I don't think it's necessarily negatively affecting all car manufacturers, but some manufacturers where there is a pretty significant amount of drop-off in the cars sold. [00:06:20] It's definitely been a headwind.

Mesh: [00:06:24] So this is kind of similar to what's happening in the real estate market. You go upstate New York [00:06:30] and every fucking person wants to buy a house and everyone's bidding on the same house because there's only a limited supply in the house. And the price of the house is significantly over asking price. [00:06:39] So you could kind of compare the two, right? Like cars are being sold in the same way that real estate is being sold?

Kartik: [00:06:45] That is exactly correct. I think, I think the, the, the important sort of repercussions of this are when will this problem be solved and what happens when we get to a point where we are buying more electric vehicles [00:07:00] would just happen to actually have, you know, requirements of, four or five times more microchips than the cars that we drive today.

Mesh: [00:07:08] So that would mean that like the electric vehicles, like the Teslas of the world and all the new vehicles that are coming up, require more supply of chips to be made? So does that mean that the chip suppliers need to increase the production of what they're doing right now?

Kartik: [00:07:25] They absolutely need to do that. But I think, you know, in talking to some of them, one of the things [00:07:30] that is interesting to note is they're not sure whether all of this demands sticks. So before they spend billions of dollars of capital to make new production lines for microchips, they want to know[00:07:43] that iPhone, Mac, uh, you know, laptop, X-Box sales are going to keep up with their COVID sales numbers, or if they just drop off and they've built all of this capacity that never gets used, right? So is it a one-time bump in demand or is it going [00:08:00] to be sort of a continuing bump in demand?

Mesh: [00:08:02] If you're a person right now looking for a car, what do you do? Do you wait it out or are you just kinda, hey, let me go buy a beater on, on Craigslist, or ask my mom that she's not using her car and, and see if I can use that for a little while. I mean, what options do you have?

Kartik: [00:08:18] Well, I, I think the last option is probably the best if you have it. The thing is that the, one of the interesting facts that remains right now is the second hand market [00:08:30] is even hotter than the first-hand market right now, in the sense that the, the relative prices of secondhand car  sales have actually gone up more on a percentage basis than firsthand car sales or first-time car sales

Mesh: [00:08:44] So, if anyone out there has a car that they're sitting on, uh, that's a piece of shit. Uh, you might've just hit the jackpot.

Kartik: [00:08:51] Oh, a hundred percent. I'll give you an anecdotal story. A really good friend of mine actually bought a nice SUV. Um, maybe [00:09:00] six months ago at this point. And he got a really good price because that was in the sort of, you know, midst of COVID and he got it probably, I don't know, 10% off of MSRP. [00:09:09] And he literally got a call from his dealer a week ago, said I will buy the car back from you at MSRP. I don't mind that you've driven it a few thousand miles.

Mesh: [00:09:22] Okay, this is amazing. I mean, this is where I wish I had a car only to sell a car. So, uh, Kartik. I want, I want to thank you for the [00:09:30] insights as always. 

Kartik: [00:09:36] Yes, that's perfect. And thanks for having me Mesh.

MUSIC_TM OUTRO

[00:09:43] So if you're like everyone else looking for a car, you might have to be waiting a little bit longer. I hope you actually find the car so you can take those escapes out of the city. Go visit family. Go visit your friends. Hopefully you're actually sitting on a beater car and you just realize you hit the goldmine, [00:09:58] and sell it for a few bucks [00:10:00] or now you're living this amazing luxury. You have a car and everybody else wants one.

[00:10:04] So that's it for this week. I want to thank my buddy Kartik Misra. And make sure you're subscribed to the Talk Money newsletter to get more business news released every Wednesday, along with this podcast. Until next time.


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