The chip shortage: an inevitable impact on incentives?

Supply chain issues currently experienced across the globe are heavily impacting a number of sectors, not least the automotive industry. Largely stemming from disruption caused by the COVID-19 pandemic and a recent boom in demand for products, the supply problems are creating a rippling effect, from price tensions and surges for materials to—perhaps most significantly—the global chip shortage.

However, after two years of local lockdowns and restrictions, demand for new vehicles is back on the rise. So how might this chip shortage impact the European automotive market and the incentives that play a significant role in driving purchasing decisions?

The current landscape

The demand for manufactured goods was unsurprisingly compressed throughout the first year of the COVID-19 pandemic. However, towards the end of last year there was a significant uplift, and demand for goods has now recovered to pre-pandemic levels, outstripping available output. With this backdrop in mind, many in the industry might anticipate a change in approach to automotive incentives when compared to previous years. For example, one might expect to see a decrease in the number of unique incentives on offer, as OEMs look to balance consumer demand with available supply. However, to date, this is yet to be the case.

Any shift in mentality towards incentives from either a consumer’s or OEM’s point of view will therefore not be something that changes overnight

Last year, JATO Dynamics saw a varied reduction in the number of unique incentives offered, when compared to 2020 across the EU5 countries. From January 2020 to September 2021, unique incentives fell approximately 2% in France; 23% in Germany; 26% in Italy; and 26% in the UK. Interestingly, Spain was the only country to see an uplift with unique incentives rising by approximately 30% over this period.^[1]

Have incentives been impacted by the chip shortage?

As seen across JATO data, initial findings do not currently show a strong, causal link between the chip shortage and automotive incentives. There are a number of potential reasons behind this, with one possibility being that OEMs don’t want to be the first among competitors to amend their own incentives, and often prefer to wait to respond to wider market movements instead.

In addition, as incentives have now become commonplace in the automotive market, consumers expect to receive them as a given when purchasing a new car. Any shift in mentality towards incentives from either a consumer’s or OEM’s point of view will therefore not be something that changes overnight, and may be one of a number of possible contributing factors as to why the impact of the chip shortage is not visible in this area.

In fact, JATO data shows that in some areas, incentives are actually increasing, such as for SUVs. This is likely due to their buying power in comparison to other vehicles. Indeed, from January 2020 to September 2021, incentives for SUVs increased approximately 5%, while with other vehicle types incentives decreased approximately 21% over the same timeframe.

Looking ahead

This year, it is likely that we will see new style campaigns come into fruition, as priorities shift according to the wider landscape. For example, during 2020 and 2021 the popularity of scrappage campaigns and finance campaigns increased in reaction to the economic uncertainty caused by the pandemic. Loyalty campaigns could also increase, as automakers attempt to bring back customers who might have sought their vehicles from other providers able to supply them over the last 18 months.

As the issue continues to develop, the effects of the chip shortage on incentives may become more evident. While we’re not currently seeing the full reality of the chip shortage across EU5 countries, elsewhere it is becoming more clear. In importer countries the trend is more evident. For example in Russia, unique incentives fell by approximately 43% from November 2020 to November 2021, and in Australia they fell by 47% during the same timeframe. However, this may be the result of a number of factors.

Stock incentives—which refer to incentives on ‘stock’ cars that are already built and standing in a compound or at a dealership—are also following this trend in importer countries, dropping considerably in 2021 compared to the year before. Overall, unique stock type incentives were down by 42% in January to September 2021, compared to the same period a year before.

Currently, concrete conclusions on the effect of the chip shortage on incentives are lacking, but there are some clear trends emerging which could develop and take effect in the year ahead. Although customers across Europe will continue to see a range of incentives available to them, the focus of these incentives will likely shift in the coming months but for now, only time will tell.

^[1] These figures are calculated internally by JATO, and may be subject to discrepancies

About the author: Julia Taylor is JATO Dynamics’ Incentive Research Manager