SUPPLY CHAIN ISSUES IN FLEET MANAGEMENT
It has been a challenge finding the right vehicles due to supply chain issues in the automotive industry. There are several issues causing a shortage of vehicles. The biggest contributor to the shortage is the smallest part… a chip. But there is much more to it now. Read on…
Last year, the COVID lockdowns idled factories and demand for vehicles briefly dropped. The automakers didn’t need as many chips. At the same time, consumer electronics sales exploded. The demand for laptops increased for people and students working and studying from home. Video game consoles, exercise equipment, and TV demand increased as more people were looking for entertainment during the lockdown. The demand for vehicles picked up quickly and the overall demand for chips exceeded supply. This led to a global chip shortage.
This semiconductor chip shortage is delaying automotive production by millions of units worldwide. Experts predict that global automotive industry will produce 4 million fewer vehicles in 2021 because of the chip shortage. Ford estimated it will produce 1.1 million fewer vehicles than planned for the year.
New vehicles can use dozens of chips for the mechanical systems, safety systems, infotainment and climate controls. The estimated worldwide production of vehicles in 2020 was 78 million. Now consider that the automotive industry only accounts for 5% of the global chip market.
Semiconductor Manufacturing International held a conference call on May 13 and said the supply constraints will last “until the end of the year.” Other reports say the chip shortage could last until 2022.
Doering Fleet Management believes all recent data suggests this problem will last through model year 2022.
Two of the three largest chip manufacturers, Taiwan Semi Conductor and Samsung, have said they are sold out of chips for 2021 and expect the same for 2022. There aren’t enough chip making machines in the world to keep up with the increased supply.
Manufacturers are finding ways to get around the shortage. For example, some high-tech features are being replaced by analog devices that don’t use chips. In some cases, only one key is provided with the vehicle. (Volkswagen, Audi)
There typically is a 60-to-100-day supply of inventory on hand at dealerships. It is less than 10 days today. When dealers get new units, the good ones go very fast, typically sold before arrival or the day they arrive. Cargo vans in particular are very difficult to find.
When it comes to fleet vehicles such as pickup trucks and cargo vans, GM, Ford, and RAM are go-to brands, typically.
GM was the hardest hit. Order banks were cut short by months with no warning. The computer chip shortage along with wheels and accessory supplies caused shortages.
Ford seems to have managed the best. We can still place orders and the lead times are 12 weeks to 26 weeks. There are vehicles in stock, but they are expensive and difficult to find.
Ram seems to have fared moderately. They have cut off their order banks and at the time of this writing there is limited availability, but it changes weekly.
Nissan is stopping cargo van production permanently and phasing out commercial vehicles.
Toyota, Honda, Nissan, Hyundai, Lexus, Infiniti, and others have negligible inventory. It is best to factory order versus paying huge markups and transportation charges.
Luxury vehicle demand is high and dealers are selling out. Therefore, to get the vehicle you want, you need to order a vehicle. New vehicles lead time is typically four months.
Most order banks for 2021 model year vehicles are closed and manufacturers did not produce enough vehicles to fill fleet orders due to supply chain issues. For 2022 model year, some manufacturers are requiring dealers to show confirmed fleet orders to determine allocations. In past years, they allocated vehicles based on historic retail and fleet orders. Because of this, companies need to act now if they plan on replacing vehicles in 2022.
As one would expect, this combination of limited supply and high demand is causing prices to increase. Retail rebates are gone as are incentives. Dealers who used to offer fleet pricing are now selling vehicles at or above MSRP. According to data from J.D. Power, LMC Automotive and Edmunds, the average new vehicle price in July 2021 is 17% higher than the prior year and used car prices are up 21% since June 2020.
For 2022, expect price increases and dramatic decreases in incentives. Toyota no longer allows companies to register for a fleet number. Nissan/Infiniti closed their Infiniti rebates to fleets. FCA/Stellantis terminated fleet programs in May and launched a new, scaled back empowerment program. Manufacturers who keep incentives will likely reduce the allocation. If you need 50 units you may only get 15. Pricing for model year 2022 has not been released. This is the latest pricing has ever been released which speaks to the level of uncertainty in the market.
Used vehicle prices are at record high levels due in part to the chip shortage. Used car prices were already rising due a supply shortage of used vehicles. Rental companies typically sell their vehicles in the used car market. However, they unloaded much of their inventory last year as the travel industry came to a standstill during COVID. Off lease vehicles are another source of used vehicles. Because of the new vehicle shortage, companies are extending their leases until they can get replacement vehicles.
The prices at auctions are at record highs. There have been instances where used vehicles were sold for more than they cost brand new a year or two earlier… So much for depreciating assets!
OPTIONS FOR FLEETS
Vehicles are a critical component to businesses today and revenue depends on a fleet.
1. Start early.
Don’t delay putting your plan together. The situation is going to get worse before it gets better.
If you haven’t worked with a Fleet Management Company (FMC), now is the perfect time to enlist help. FMCs work closely to understand your business, how vehicles are used, and put together a strategy given the current vehicle shortage to help you plan vehicle acquisitions six to twelve months ahead.
Starting earlier allows companies to factory order. Factory ordering allows companies to order what they want, not what is available on the dealer’s lot. This can reduce costs as you aren’t paying for features you don’t need or want. Factory ordering can take anywhere from six weeks to six months depending on the vehicle and production schedules. As mentioned above, allocations will be limited to actual orders in 2022. If you need vehicles in 2022, you need to act now.
If factory ordering isn’t an option due to more immediate needs, FMCs have access to a broad network of dealers and auctions across the country. Individual fleet managers or company owners don't have access to the broad range of dealers that a fleet management company has access to. Because of limited inventory, dealers aren’t as attentive to individual companies. Because of volume, FMCs have more leverage and relationships with these dealers.
Doering Fleet Management searches across the US to find the right vehicle. We found vehicles significantly cheaper on the east coast for a west coast customer. We transported them across country and still saved the customer four thousand dollars per vehicle net of transportation costs.
2. Be flexible and patient… and opportunistic!
Be prepared to be flexible if you unable to wait for a factory ordered vehicle. Vehicle availability is limited. If you have an immediate need, you likely won’t get exactly what you want. Be prepared to make compromises on options, colors, and features or even brand. We have many clients whose fleets were primarily Ford trucks. Because of the lack of inventory, many have moved on to RAMs.
Now is also a unique time to be opportunistic by short cycling your vehicles. Short cycling means replacing vehicles faster than planned or faster than the average lease term or historical holding period. Used vehicle values are at all time high levels and the math makes sense to replace vehicles early and replace them with a new vehicle. There are many advantages to short cycling including lower maintenance and repair costs on new vehicles. Additionally, employee morale improves when drivers have new, reliable vehicles. Doering can evaluate your fleet against the current market for your used vehicles, the cost for replacement vehicles, and maintenance savings to determine if short cycling is the right move for your company. To learn more about Total Cost Management click here.
3. Be prepared to make quick decisions.
The search process may take extra time as your FMC searches the country for the right vehicle. However, once that vehicle is identified, you need to decide quickly or risk losing that vehicle. When you work with an experienced FMC, you have the confidence you need to be decisive and not miss out on securing the best options for your needs.
HOW LONG WILL THIS LAST?
This is that magic question. We are in unchartered territory. Experts say it will last into 2022 and others say even into 2023. We agree. The reset in pricing will take years to come back down to pre-covid levels. We expect 3-5% year over year price increases and one half the rebates in 2021 and 2022.
At Doering, we continue to keep our pulse on the industry and continue to bring creative new ideas to our customers.