Fleet Pent-Up Demand in North America to Add Pressure on 2023-MY Ordering

Earlier than anticipated final order deadline dates caused many fleets to be unable to order all of the vehicles they needed in the 2022 model-year. One fleet manager told me that her company was only able to order 60% of the vehicles that it needed. This was not an isolated incident as many orders for 2022 models weren’t submitted because of the earlier final order deadlines. In fact, MY-2022 has the distinction of being one of the shortest model-years in history. In addition to scheduled vehicle replacements that will occur in MY-2023, there will be additional orders for vehicles companies were unable to build in MY-2022.

So what volume of fleet orders can we anticipate in the 2023 model-year? Well, that’s any one’s guess, but I do know that there continues to be a lot of pent-up demand in the fleet market and, if you don’t order early your 2023 models, it will be difficult, once again, to source the fleet vehicles that you need, especially trucks and vans, which promise to continue to be in high demand in both the fleet and retail markets. In fact, J.D. Power reported that SUVs and pickup trucks accounted for a record 80.2% of new vehicle sales in December 2021 as OEMs prioritized production of these higher-margin vehicles to compensate for lost revenue due to lower overall production volume due to supply chain constraints.

Inventory to be Tight for MY-2023

 Demand for new- and used-vehicles will not abate any time soon due to the tremendous pent-up demand that will carry through calendar-year 2022. Industry-wide (both retail and fleet), it is estimated that there were 4 million vehicles worth of pent-up demand at the start of calendar-year 2022.

Even as production schedules continue to improve, inventory is expected to remain tight for much of CY-2022. While microchip supplies are improving, its not certain when they’ll return to pre-pandemic levels. In fact, the automotive industry’s demand for microchips promises to further increase in the coming years. For instance, the average gasoline-powered vehicle has about 1,000 microchips, but, as the industry transitions to electrification, a typical EVs can have more than double the number.

This pent-up demand, along with an easing of supply chain constraints, a build-up of available vehicle inventory, and a sustained macroeconomic recovery should drive volume growth in both the retail and fleet markets. While new-vehicle sales rebounded slightly in 2021 from the dismal numbers of CY-2020, it was still about 2 million units below pre-pandemic volumes. This decline in total sales is not due to demand, which continues to be strong, it is due to lower production volumes that limits the inventory available for sale. One consequence to these inventory constraints has been upward pressure on new-vehicles transaction prices. With demand continuing to exceed supply, OEMs have reduced both retail and fleet incentives since there is no need to stimulate demand. As a result, the reduced incentives has put upward pressure on transaction costs. One positive consequence of today’s market disruptions has been higher resale values for used vehicles. Retail demand for used vehicles is not only strong, but consumers have more cash to put down on their next purchase. Retail buyers are getting more for their trade-ins, which means, according to financial reporting services, their borrowing hasn’t increased even though transaction prices are up. Likewise, fleets, which use a total-cost-of-ownership acquisition model, are experiencing upward pressure on initial costs, but are seeing this offset by higher resale prices for their out-of-service fleet vehicles.

Fleets Competing with Retail Demand

With limited vehicle inventory in the overall market, fleets are competing with retail buyers for high-demand vehicles. Right now, dealerships are in a situation where they are able to sell everything the manufacturer will give them, especially trucks. Today, dealers are very profitable, to the point where one dealer described it as making obscene profits. With the high demand and low inventory, dealers can pre-sell vehicles before they arrive on their lots. However, limited dealer inventory impacts fleets when out-of-stock emergency purchases are required. While the anticipation is there will be greater inventory in 2022 than 2021 due to more vehicles being produced as the supply chain constraints start to ameliorate, it seems dealers would much rather have a lower day supply in order to keep end-user demand high and rebates low.

Fleet Acquisition Strategies for MY-2023

A fleet acquisition strategy is critical to help you mitigate some of the constraints anticipated for the 2023 model-year. First, it is important to be proactive in your vehicle acquisition planning and budget allocation. It is imperative to order early and to be flexible with your vehicle choices. You need to plan in advance to allow you to order early. You need to be flexible as to what you want to order. In the past, when vehicle supply was plentiful, many fleets demanded specific colors, options, or trims that in today’s environment may cause delays or add time to the order-to-delivery process. Likewise, you need to simplify your vehicle specifications. If it is practical to do so, and if it doesn’t impact the fleet application, look to simplify your vehicle specs to increase the number of sourcing options available to you that will allow you to order vehicles from a wider range of OEMs. Look to streamline vehicle specifications – where appropriate – especially when ordering vans and trucks because this will increase your sourcing options and help to move vehicles quicker through the upfit process and reduce OTD times.

Let me know what you think.

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Originally posted on Global Fleet Management