How dealers are preparing for another semiconductor chip-driven supply crunch

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Welcome to The Breakdown, an analysis of auto retail’s top trends, moves, and insights—in under 5 minutes.

The automotive industry continues to be a political punching bag as a new global trade dispute threatens to unleash supply chain hell.

Earlier this month, the Netherlands seized Nexperia, a Chinese-owned semiconductor chip supplier deep in bed with the Chinese state. In response, China halted all exports from the chip maker, effectively stopping production right before final assembly.

The result is a rapidly dwindling supply of chips for nearly every major automaker. And analysts predict that in just a matter of weeks, new car production could stall and squeeze inventory allocations a la 2021.

Which means that, without a solution, the used car market will catch fire—again. Here’s how dealers are preparing…

Trade-ins are no longer the most reliable source of used car inventory.

For decades, trade-ins have anchored used car inventory. Dealers counted on 60-70% of their supply walking through the front door attached to new car deals.

But that isn’t the case today. MSRPs and transaction prices are rising, which is forcing many consumers to hold on to their vehicles for longer and longer.

Combine that with a lack of newer used cars caused by COVID-era production shortages (to the tune of ~8 million units) and you have a recipe for older, higher-mileage inventory with diminishing margins.

So, JR Toothman from Toothman Ford built an acquisition machine that doesn't wait for trades. He pulls 40-50 cars monthly off the street, including appraisals from service, walk-ins… anything. A full-time buyer also works 10-12 hours daily hunting inventory. And JR himself still acquires 12-15 cars per week.

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"Years ago, I would go around and stop in other dealerships and buy their aged trades," Toothman told the CDG Podcast. "One man's garbage is another man's treasure.”

JR Toothman

Big picture: Dealers need to become surgical acquisition machines focused on forward-looking demand instead of backward-looking sales history. Afterall, profit is made when a car is acquired, not when it's sold.

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Buying “cheap” inventory doesn't mean the car will sell.

The reason: Markets shift faster than legacy valuation tools can track. Black Book and MMR lag real-time demand. So, while cost-to-market might look great at acquisition. By the time it’s reconditioned and listed, the market has already moved.

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"Everybody knows make/model/trim," automotive consultant John Ellis told me. "But what about year range, mileage range, and price range? If any one of those are tilting, it's just harder to sell. I don't care how cheap you bought it for. Because the consumer decides."

John Ellis

The fix requires mining DMS data to identify which combinations produce the most front-end AND back-end gross profit in a dealership’s specific market.

And sometimes, dealers like Eric Miller from Morris Auto Group intentionally buy used car inventory knowing that front-end margins will be slim, but that’s ok because he knows specific vehicle combinations will produce F&I participation rates that make up the difference.

The point is: Dealers who are focused exclusively on "buying cheap" are usually not optimizing for total profit structure.

Siloed departments are creating confusion around recon spend.

Service departments are incentivized to maximize reconditioning (recon) work because every repair order boosts their internal gross and helps service managers hit their P&L (profit and loss statement) targets.

Used car managers, on the other hand, are incentivized to minimize recon spend because every dollar spent on reconditioning potentially shrinks the front-end gross profit they’re able to generate.

The fix: Tiered reconditioning frameworks where both departments agree on recon levels upfront, or at minimum, align on the process so there's no uncertainty.

"Once you show them how working together and making variable considerations based on price point and maybe channel of vehicle, all of a sudden, lane efficiency increases, tech efficiency increases, front-end gross increases," Ellis said.

Bottom line: If production slows, used inventory will again become the great equalizer.

But this time, only the most disciplined operators who treat acquisition, recon, and pricing as one continuous profit system, will win. Because this market rewards precision and control, not luck.