The transition by most OEMs to an allocation system was designed to manage fleet customers’ acquisition of OEM products. The new system is truly a historic and unprecedented milestone in the history of fleet ordering.
In hindsight, as the fleet industry entered a second year of new-vehicle supply constraints impacting all classes of vehicles, it was apparent that something needed to be done.
Controlling Out-of-Control Process
General Motors took the lead by implementing a controlled allocation system in the 2022 model-year. Such a system was intended to bring order and a sense of fairness to the fleet vehicle ordering process. Fleet ordering had become a free-for-all as companies scrambled to submit orders to secure limited fleet inventory as soon as possible before order banks closed.
The allocation system also eliminated the fear that mega-fleets could buy out a sizable segments of a manufacturer’s inventory, especially in vehicle segments with limited model availability, such as the commercial van segment.
Currently, if a fleet wants to order a new 2023 model, almost all OEMs require customers to go through an allocation system based on a variety of criteria ranging from past historical ordering volume to how long the fleet has been the OEM’s customer, along with other criterion developed in consultation with the OEM fleet account manager.
In one consequence of the allocation system, many OEMs are reluctant to accept new fleet accounts because they need all their production to meet the needs of long-time loyal customers. Non-customer fleets recognize this and are inhibited from going out to bid to source vehicles from these OEMs.
And here’s how one fleet manager framed the current situation:
“With most motor companies not taking on any new customers and/or allocation is based on loyalty and a three-year history, you can’t consider going out to bid or even trying out their EVs for a pilot program.”
Today’s Market Reality
This is today’s market reality. In essence, fleet buyer demand continues to outpace fleet vehicle availability and will continue to do so in 2023.
However, a growing number of fleet managers who fear the large number of cancelled orders carried over into the next model year will cause these sourcing constraints to continue in calendar-year 2024.
Here’s how one fleet manager describes today’s market and his forecast for the next two model-years.
“While today’s sourcing situation is a bit better, even the largest buyers have allocations well below their requests. This is causing more units than ever to carry over into the next model-year, which guarantees these sourcing constraints will persist for several more years before we catch up.”
While ordering allocation systems have brought stability and realistic expectations to fleet order fulfillment, they are an optimal choice since, invariably, fleets will not receive all the vehicles they need.
Here’s how one fleet manager explains how his fleet is being impacted by an allocation system:
“In the past two years, we have received 35-40% of vehicles we desired. But that creates a situation where 60-65% of what I need to replace was not being replaced.”
Some fleets take issue with the allocation system because it guarantees they will not get all the vehicles they need to order. However, fleet managers understand this. They’re not happy about it, but they understand the need for it.
More aggravating to fleet managers is that even after allocated units are ordered, the OEM can cancel them without warning.
Here’s how one fleet management company characterized the situation, examining its client ordering activity across the company’s entire vehicle portfolio.
“Even large fleets who have been ordering from the same OEM for many years are barely getting any allocation. But the real issue is that once orders are placed after receiving allocation, vehicles are cancelled without warning.”
These cancellations occur more often than many think. Even if a fleet has been assured an allocation, it’s still possible some orders can be cancelled. Fleet managers are frustrated – not only that orders can be cancelled, but they can be cancelled without warning.
How Much Longer?
Sourcing constraints are primarily driven by the semiconductor shortage, as well as a variety of other supply shortages, which together have slowed new-vehicle production or created production shortfalls.
The question is: “Will constraints continue in the 2023 calendar year?
For an answer, it is helpful to analyze the question in a historical context because the industry’s track record in forecasting the ultimate resolution of sourcing constraints has not been good.
For instance, the shortage of semiconductors first became evident to fleet end-users in the fourth quarter of 2020. At that time, the conventional wisdom within the industry held the shortage would dissipate by the beginning of the second quarter of 2021.
When that didn’t happen, the goal post was moved to the end of summer 2021, then end of calendar-year 2021, and then the second quarter of 2022. So here we are entering 2023 and the shortage is still with us.
The bottom line: the automotive industry has consistently underestimated the duration of these sourcing constraints.
Fleet managers say they are told to anticipate receiving 50% of ordered vehicles. But that means 50% of the vehicles that need replacement will not be replaced.
Additionally, the 50% of orders actually received are simply available units, not what a fleet needs the most.
Here’s what another fleet manager said:
“We no longer get what we actually need; we get what the OEM is telling us they can give us.”
The question remains: how much longer will sourcing constraints continue? So far estimates from fleet managers and FMCs have been heard.
An estimate from a major OEM:
“We anticipate that it will be at least two more years that there will be an inability to fully secure all vehicle replacements.”
If accurate, this estimation means sourcing constraints theoretically could continue into the 2025 model-year. In addition, even if all sourcing constraints are eliminated, the issue becomes the pent-up demand for vehicles whose orders have been cancelled and simply moved to the next model-year.
The Elephant in the Room
The situation has become the proverbial elephant in the room. The unanswered question is how will this large volume of pent-up demand impact future vehicle availability?
Here’s what one fleet manager said:
“At this time, we are in such a deficit with replacement vehicles, it will be impossible to replace that many vehicles in a single year.”
This fleet manager’s expectation is valid. The whittling down of the industry-wide pent-up demand – on top of the industry’s normal replacement volume – will be a multiyear process.
Even if supply chain shortages are smoothed out in 2023, the fleet industry will continue to face another year or two until pent-up demand is fulfilled.
Forecasts Could Easily Change
The reality is fleet works within in a dynamic economy, and these forecasts could easily change.
For example, what would be the impact if a recession occurs in the next several years as is forecast by a growing number of economists? One consequence of a recession is downward pressure on retail demand that potentially could free up additional vehicle allocation to fleets.
In another possible scenario, future fleet allocation could increase if higher interest rates on auto loans. Higher rates would cause more retail buyers to postpone new-vehicle purchases or shift their purchase to the used-vehicle market – again freeing up potential additional vehicle allocation for fleet customers.
Hopefully, product availability constraints are resolved in 2023, but most fleet managers are bracing for an ongoing multiyear struggle to obtain enough vehicle allocation to keep their businesses running.