Microchip Supply Chain Disruption and the Insurance Implications for Auto Dealers
Director of Manufacturing and Distribution Practice
COVID-19 caused supply chain issues internationally and across all industries. Supply chain disruption is not a new phenomenon, but auto manufacturers and dealers in particular are feeling the pain of this pandemic-induced conundrum, with a microchip shortage causing pauses in production and empty sales lots across the country.
Here’s the kicker: the microchip shortage may have implications for your business insurance.
What’s going on with the microchip supply chain?
COVID-19 disrupted many aspects of society, one niche area being the production and distribution of microchips. These microchips are typically produced overseas and sold to auto manufacturers to provide smart technology to electronic control units that enable functions across many components of vehicles, including advanced driver-assistance systems such as antilock brakes, stability control, airbags, and automated parking.
When COVID-19 hit, the microchip industry had a higher demand in sectors that were thriving during stay-at-home orders and a new remote work environment. The auto industry is competing with consumer electronic manufactures of computers, smart phones, appliances and other electrical devices for the parts.
At the same time, demand for vehicles is at an all-time high. Growing consumer optimism and pent-up demand resulted in early-year sales with March having the strongest sales month in over 20 years according to Automotive News Research and Data Center. People are out in the world once again, and they are looking to purchase new cars. There is just one problem – a lack of microchips has a resulted in a lack of production, which has created reduced inventory.
According to Automotive News, “Ford finished May 2021 with a 30-day supply of inventory, down from 35 days’ worth in April and 77 a year earlier.”
The supply does not currently meet the demand. And, the situation may not be remedied soon.
The same Automotive News article quotes Sam Fioriani, vice president of global vehicle forecasting at Autocast as saying, “We’re looking into Q3 or Q4 before things turn around.”
How does this affect my insurance?
While it’s frustrating to have low inventory that doesn’t keep up with current market demand, there are business decisions you can make to offset some of your lost costs. Taking a look at your business insurance with your M3 account executive could be one of them.
For example: if you have less inventory on your lot due to the microchip shortage, you may be able to adjust coverages to adequately cover what you do have in stock, ultimately lowering premiums.
It’s a temporary fix (when inventory rises again, you will need to evaluate your coverages once more with your insurance advisor), but it’s one that could help boost your bottom line until microchips are more readily available to auto manufacturers.
Supply chain disruption caused by COVID-19 has put auto dealers and manufacturers in a tough situation wherein supply is not meeting demand for their product. Adjusting your insurance coverages to cover the inventory that you do have on hand is a timely way to shore up your financials until the market balances out.