My middle son is about to start driving. For a parent, this is never a fun time. But there is even more anxiety than usual right now – and it has nothing to do with moving violations or safety concerns…

According to JD Power, the average price of a new vehicle has escalated to $45,000. That’s a lot of cash to spend on a teenager whose only driving experience up until now has been drag racing on video games like Grand Theft Auto.

Of course, that’s assuming your preferred make and model is even available. If you haven’t noticed, many new car dealerships are half-empty right now, with the thinnest inventory levels since the 2009 financial crisis. Frustrated buyers are finding that it can take months for their chosen car or truck to get delivered.

New vehicles just aren’t coming off the factory assembly lines at anywhere near their usual pace. In fact, Ford and General Motors (among others) have been forced to temporarily halt production and idle plants all across North America in recent months.

The chronic shortage of new cars has caused collateral damage in the used vehicle world. Fewer new sales mean fewer trade-ins making their way to pre-owned lots, widening the supply/demand imbalance. You may have heard that consumer prices spiked 6.8% last month on a year-over-year basis, the sharpest uptick since 1982. Well, nowhere has inflation been more acute than here.

_{Source: Federal Reserve}

The average price of used cars and trucks has shot up 31.4% — to go with a 58% surge in gasoline prices. That means a 2008 Nissan Murano with a sticker price of $7,000 this time last year might sell for $9,000 or more today.

What’s Going On?

The biggest culprit: a severe global shortage of semiconductor chips. Ask any mechanic, and they’ll tell you that these indispensable components govern just about everything in today’s new vehicles, from tire pressure monitors to fuel injection systems to rear backup cameras. Heck, you can’t even roll down your windows without them.

The average new car contains around 150 different chips (up to 3,000 for an electric vehicle). They are generally inexpensive – maybe a few bucks each. But newer models are useless without them. And like many other industries, supply chain constraints have been crippling.

Blame it on Covid.

When vehicle sales plunged during the 2020 lockdowns, automakers cut back on their part orders (including chips) in response to weaker demand. But the automotive sector only accounts for about 10% of the massive global semiconductor industry. So manufacturers naturally started shifting production to other types of products used elsewhere, namely consumer electronics.

When the crisis ended and customers like General Motors attempted to re-stock, the supplies just weren’t there. Some vendors had already entered into more lucrative contracts with other customers that had to be honored. Even for those with flexibility, it can take months to retool equipment and change gears. Making matters worse, fire damage at a major production facility in Japan further disrupted supplies.

The end result was millions of half-finished vehicles awaiting these tiny parts. Ford CEO Jim Farley refers to the current situation as “the greatest supply shock I’ve ever seen.”

Let’s put a few numbers on this.

MotorTrend reports that the chip shortage cost the global auto industry 11.3 million vehicle sales worth $210 billion in 2021. That’s a gaping hole. And while the shortage is expected to ease in 2022, experts agree that available supplies may not meet demand until new plants with mass capacity begin production in 2024 and 2025.

While this situation has been a nightmare from the automaker’s perspective, it underscores the importance of the supply chain. As an investor, you gotta love it when a business simply can’t sell its wares fast enough and customers are clamoring for more.

Looking ahead, global auto sales are expected to rebound sharply from 82 million units this year to 90 million in 2023. That’s a lot of chips. And most models will be outfitted with high-tech features that would have once sounded like science fiction… automatic emergency braking (AEB), lane departure warning, forward collision avoidance systems, parallel parking assistance, even fully autonomous self-driving capabilities.

The Big Picture

None of these advancements would be possible without semiconductors. And this is hardly the only catalyst in play. Suppliers are seeing demand from all directions as the Internet of Things (IoT) revolution is seeing chips implanted in literally billions of everyday appliances.

Worldwide chip sales grew 26% in 2021 to reach $526 billion, the sharpest growth in over a decade. And forecasters are expecting that total to climb past $600 billion this year. While some “fabless” chip designers outsource fabrication, high barriers to entry (semiconductor foundries can cost $10+ billion) have helped limit competition, concentrating this wealth among a relatively small group of major players.

Industry consolidation has shrunk the field even more as competitors join forces to scale their operations, trim costs, and profit from other synergies.

Not long ago we saw Analog Devices (NYSE: ADI) close its $20 billion takeover of Maxim Integrated Products, creating a global analog giant with 125,000 customers. Just a few weeks earlier, Marvell (Nasdaq: MRVL) was putting the finishing touches on its $10 billion takeover of Inphi, gaining clout in the booming chip market for cloud data centers. Meanwhile, AMD (NYSE: AMD) is set to gobble up Xilinx for $35 billion.

We haven’t seen the last of these deals. And my latest recommendation over at Takeover Trader could well be the next in line.

Either way, if you add it all up it becomes pretty clear that semiconductors should be a winning idea in the years to come. My advice: if you’re looking to start the New Year off right with some winning picks, then make this a key area of focus.

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