Dollar Signs: Computer Chip Shortage Drives Record Auto Dealer Profits - Forbes

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Dealers, automakers and auto lenders are cashing in, due to the shortage of both new- and used-car inventory, driven by a computer chip shortage and high consumer demand for cars and trucks.

Asbury Automotive Group reported an all-time record average per vehicle of $5,004 in “front-end yield” in the second quarter, in a July 27 conference call. Front-end yield includes gross profit per vehicle, plus net profit from Finance & Insurance.

The $5,000-plus figure was 41% higher than the same quarter last year, the company said.

The average number includes both new and used vehicles. To provide some context, in the second quarter, Asbury’s average new-vehicle selling price was $40,526, a 7% increase from a year ago. Asbury said. The average used vehicle price was $26,449, up 18%, the company said.

“Major challenges” from low inventory are driving low discounting and high profits, says Dan Clara, senior vice president, operations for Asbury.

Dealers, automakers and auto lenders don’t have much motivation to offer discounts under the circumstances.

As of June 30, Asbury, based in Duluth, Ga., had an all-time-low, new-vehicle inventory, of just 17 days, Clara said. Days-supply is an estimate of how long the existing inventory would last, at the current selling rate. Before the pandemic, a 60-day supply was considered the normal benchmark for a healthy balance between supply and demand.

“Some of our stores were at a five-day supply during the quarter,” Clara said. That is, without replenishment they would be out of cars in less than a week.

“The margins that we’re seeing, a lot of it is related to the lack of inventory. It’s a supply and demand equation. And the level of discounting that you’re seeing right now is very, very, very minor, if any at all, just because again, it’s just a simple supply and demand equation,” he said.

Auto industry analysts expect supplies of new and used vehicles to begin to “normalize” beginning this fall as chip supplies improve, but vehicle inventory is expected to stay well below average for at least the rest of 2021 and into 2022.

New vehicles are in short supply due to high customer demand, and because automakers are short of the computer chips used in cars and trucks to run state-of-the-art electronics, such as multi-screen infotainment systems, and “driver assistance” features like front-collision avoidance.

Used vehicles are also in relatively short supply because of high consumer demand, in part because some new-vehicle shoppers are switching to used vehicles, when they can’t find the new vehicles they want, and partly because new-vehicle production fell last year.

Not counting Finance & Insurance, for Asbury the average, new-vehicle gross profit per vehicle in the second quarter was $3,496, up 84% vs. a year ago. For luxury brands, it was $5,550, up 44%; for non-luxury imports, $2,552, up 139%; for domestic brands, $4,152, up 86%.

For used vehicles, it was $2,635, up 52% vs. a year ago.

Finance & Insurance profit per vehicle was $1,898, an increase of 9% vs. a year ago. Most of that amount, about 70%, or $1,329 on average, is for insurance-type products customers buy, like extended-service contracts, and Guaranteed Asset Protection.

If your vehicle is stolen and not recovered, or totaled in an accident, GAP pays the shortfall, if the customer owes more on the remainder of their loan than the vehicle was worth, at the time of the loss.

The rest of the F&I profit, about $569 on average, is compensation dealers make for acting as the go-between, between the customer and auto lenders. That’s usually in the form of dealer reserve, also called dealer markup. Auto lenders typically limit that amount to no more than a couple of percentage points. In practice, dealers say it’s usually much less. Many lenders pay dealers a flat fee per loan contract, instead.

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