Commercial Fleet Buying Intentions for MY-2012
Factors influencing 2012 fleet ordering include the improving national economy, initiatives to acquire more fuel-efficient units, and right-sizing trends. However, these forces are tempered by ongoing pressure to reduce capital expenditures.
Acquisitions by commercial fleets, in aggregate, are forecast to exceed 2011 model-year volumes, but not appreciably, according to a survey conducted by Automotive Fleet of 400 major corporate fleets.
The national economy, from a commercial fleet perspective, continues to be a paradox of contradictory market forces. For example, one surveyed fleet, which is increasing its fleet buy for MY-2012, reports it is doing so because “business is booming.” However, another comparable-sized fleet reports its 2012 buy will be lower than the preceding model-year because the company is undergoing layoffs.
Despite these contradictory forces, more corporate fleets plan to increase new-model acquisitions in MY-2012 than those decreasing purchasing volume. However, the overwhelming majority of the nation’s corporate fleets plans no significant change to replacement programs for MY-2012 and will acquire approximately the same volume as the prior model-year.
Among the factors influencing MY-2012 purchases are corporate initiatives to acquire vehicles with increased fuel efficiency, right-sizing trends, and capital pressures to reduce ordering volume or decrease the number of selector choices offered to drivers.
It is important to note that several OEMs are running short 2012 model-years as a result of early build-out dates, which doesn’t produce an exact model-year to prior model-year comparison of fleet buying intentions.
One factor causing an uptick in new-vehicle orders is the strong used-vehicle market. “We will probably be ordering more new vehicles in MY-2012 so we can take full advantage of the current used-vehicle market,” said Jim McCarthy, director, vehicle management services for Siemens CSCM (Corporate Supply Chain Management), a division of Siemens Corp.
This sentiment was shared by multiple fleets responding to the AF survey.
“We short-cycled and refinanced some leases to take advantage of the used-vehicle market in 2010. I plan on doing the same for the 2012-MY, while the market lasts,” said another fleet manager who wished to remain anonymous.
Another fleet contemplating a short-cycling strategy for MY-2012 is ADP.
“With the strong remarketing climate, we are anticipating short-cycling as appropriate and acquiring more than the usual number of vehicles,” said Michael Bieger, senior director, global procurement for ADP.
Similarly, another fleet that short-cycled previously is considering doing so again. “We are in the process of deciding whether we are going to do a short-cycle again,” said a fleet manager who wished to remain anonymous.
Since the AF buying intentions survey was conducted during the preparatory planning phase of the 2012 buy, several fleets were still investigating the viability of short-cycling and had not reached a final decision. One such fleet was 3M Corp. “We are seriously looking at an accelerated replacement schedule to take advantage of the strong used-car market,” said David Haslerud, fleet manager, administrative services for 3M in St. Paul, Minn.
This sentiment was echoed by USG Corp. “With the resale market stronger, we are adjusting our replacement parameters,” said Don Schaefer, director, safety and fleet operations for USG Corp.
Currently, there is a shortage of used-vehicle inventory in the wholesale market, which is driving up resale values. The shortage of used vehicles is projected to persist through the next several years. The ongoing robust strength of the wholesale used-vehicle market was best summarized by Mike Butsch, director of global fleet operations for Joy Global in Milwaukee, who commented: “It’s a great time to sell. Residuals continue to be strong.”
Economy to Drive 2012 Fleet Buy
The primary factor influencing 2012 fleet ordering is the overall strengthening of the national economy.
“I expect to buy more 2012-model vehicles compared to 2011. As the economy continues to improve, we will be more willing to replace older vehicles,” said Lance Keith, fleet manager for The Pape Group, Inc., in Eugene, Ore.
A similar view was expressed by Infinity Insurance Company.
“We are in a good place right now and our company is growing. In the coming year, we are looking to add about 50 to 60 new positions that need fleet vehicles. It is our anticipation to turn over the whole 2010-MY fleet for 2012-MY, which is about 450 units,” said Chuck Kukal, supervisor, fleet, mail and administrative services for Infinity Insurance Company in Birmingham, Ala.
Many fleets are continuing to play “catch-up” with their replacement cycle ordering following several prior years of decreased, or in many cases, no ordering of replacement vehicles.
“We had a freeze on vehicle ordering during MY-2009 and MY-2010. We are now playing catch-up with our MY-2011 ordering. However, we did extend the replacement criteria so that orders will be spaced over 2011 and 2012 model-years,” said one fleet manager.
Some fleets that previously extended replacement cycling are now reversing policy due to increased maintenance costs and reverting to their traditional replacement cycle.
“We will be ordering more cars this year. Earlier, we implemented a longer fleet retention due to the volatility in our business and this is starting to raise our maintenance costs. Although this was the right thing for us to do at the time, we are now more confident in business,” said one fleet manager who wished to remain anonymous.
In addition, the short 2012 model-year with early buildouts by some OEMs is influencing the makes and models selected by corporate fleet managers.
“We are more actively perusing multiple vendors to shield our organization from lack of availability and early cutoffs/buildouts,” said one fleet manager who wished anonymity.
Pressure on Capital Expenditures
The work truck segment (Class 3 and larger) of the corporate fleet market is experiencing growth, while at the same time, feeling strong pressure to control capital expenditures due to high unit costs.
Capital expenditure constraints are also causing shifts in classes of vehicles acquired as illustrated by the following comment from a fleet manager not wishing to be identified: “We will be acquiring fewer trucks as capital pressure continues, but will acquire significantly more company cars as we move people away from an allowance program.”
Another ramification of tight-fisted control of capital expenditures is a reduction in the number of vehicle choices offered to drivers on selectors.
“I suspect this year there may be some added interest from our management team regarding 2012 selectors, but I have not yet been advised as to what it will concern. My assumption, however, is that they will want to reduce the number of selector options, perhaps go with an exclusive OEM, to further cost containment efforts,” said one fleet manager.
One fleet reducing its new-vehicle ordering volume for MY-2012 is Merck & Co.
“For the U.S., Merck will be acquiring significantly fewer vehicles this year due to capital requirements and an acceleration of vehicle replacements last year. OEM sourcing is being carried over from the previous model-year with no significant change in models,” said Joe LaRosa, CPA, MBA, director, global fleet services for Merck & Co. Inc., in Whitehouse Station, N.J.
In some cases, the decrease in order volume from the 2011 model-year is misleading since a higher than normal number of units was acquired last model-year. A case in point is Tennant Company.
“I’ll be buying fewer vehicles in MY-2012. In MY-2011, my purchases were up because I was still catching up from the mandate that I couldn’t order vehicles following the economic downturn. Although ordering fewer vehicles, MY-2012 should be back to normal numbers,” said Stuart Olson, fleet manager Americas for Tennant Company.
Another example is American Family Mutual Insurance Co. “We will be ordering fewer vehicles for MY-2012. We ordered a high volume for MY-2011 due to extended replacement cycles for 2010-MY,” said Brett Switzky, fleet services administrator for American Family Mutual Insurance Co.
Some companies have “reset” their order volume to a lower level and are continuing at that level. In other cases, a few fleets will be acquiring no new vehicles in MY-2012.
“We have no plans to acquire for MY-2012 at this time. That might change, but I doubt it,” said Ruth Alfson, CAFM, fleet manager/DOT Compliance, Fleet Center of Excellence for Serco Group, Inc., in Fairborn, Ohio.
However, most fleet managers responding to AF’s buying inclination survey report that the same amount of dollars are being budgeted as last year, which assures a carryover year for these fleets in terms of ordering volume.
Pressure to Sole Source
With approximately 70 percent of all corporate fleet managers reporting to sourcing groups, there is increased focus on initial acquisition costs and ways to reduce capital expenditures. One approach is leveraging the fleet buy by sole sourcing. “I am being challenged by my purchasing department to consider sole sourcing,” said one fleet manager who wished to be anonymous.
This trend was echoed by another fleet manager who also wished not to be identified. “I want to try to stay diverse with OEMs and convince Purchasing that single source is risky and provides no flexibility. More recently, I am given last-minute information, and I am expected to react in a cost-effective manner. I am constantly trying to educate upper management of the volatility in the auto industry and of model-year buildout cutoffs, long lead times, railcar shortages, etc.”
Cost of Fuel Influencing Selectors
The dramatic increase in fuel prices during the first half of 2011 had a big influence on 2012 selector deliberations.
“Needless to say, fuel efficiency will be a major player once again. Fact is, it is always a consideration, but its impact on our decision-making increases in direct proportion to the increase in fuel costs. For MY-2012, fuel efficiency may not just be a major player — it may be a game changer in some segments,” said McCarthy of Siemens Corp.
A growing number of fleets have established fleet-wide average fuel economy goals, which is driving acquisition decisions.