Remember in Q4 2021, the peak of the supply chain strain? The economists and market analysts told us it would be a slow path to recovery, but we’d get there. Unless we’d experience a new X Factor — an unknown disruption not in their crystal balls.
Flash forward to today: New vehicle supply has reached its highest point in August since April 2021. New vehicle price increases are moderating. Inflation is on an uneven path, but trending downward.
Then the UAW strike hit. Could this be that X Factor? On top of that, a different set of analysts is telling us that a government shutdown is likely by Sept. 30. Should we call that the Y Factor — and ponder how X and Y together will really compound matters?
The topic came up in conversations with fleet managers and industry executives during recent back-to-back business trips (the New York/New Jersey Fleet Forward Tour stop and the American Automotive Leasing Association’s annual meeting in D.C.) and email exchanges. The discussions generated perspective if no real answers yet.
What They’re Saying
Some thought the strike’s “timing is shocking” and it would be “another hit to automakers’ credibility” after those automakers “took incentives off the table” in the post-COVID new normal.
There was a consensus, echoing general industry sentiment, that Elon Musk and the heads of the foreign brands running non-union plants in the South are smiling right now over their popcorn bowls.
If the union demands are met, many are wondering about the effect in the long run on the Detroit 3’s legacy costs which are already higher than the non-union shops, and what that’ll do to vehicle pricing (and automakers’ profits). Another wondered how the Ford Canadian Union Unifor deal would affect the U.S. strike, though the details haven’t yet been disclosed.
But the real issue for fleets, of course, boils down to how the strike could affect fleet vehicle inventories.
The most recent comparison is to the six-week UAW strike against General Motors in Q4 2019. During that strike, GM’s dealers were able to maintain inventory levels above the industry average. That strike “wasn’t so painful, but it took three weeks after that until everything was running again.”
It wasn’t until after the strike that dealer stock dwindled. And then covid hit.
This time, the UAW is striking not one automaker but all Detroit 3 manufacturers in a staggered approach. The shuttered plants (as of now) produce these vehicles:
- Ford Bronco and Ranger
- Chevrolet Colorado and Express
- GMC Canyon and Savana
- Jeep Gladiator and Wrangler
In a protracted strike, the biggest issue would be with Express and Savana cargo vans. That segment recently has low inventories overall, which wouldn’t allow a fleet buyer much choice with competitors.
Back then, the two sides weren’t as far apart in contract negotiations as they are today. The union rejected a 21% wage increase offer by Stellantis — again, 21%. This portends a much longer strike.
Effect of Protracted Strike on Fleets
If and when the real pain finally comes, with new plants shuttering for much longer than six weeks, the new post-COVID operating environment could affect fleets in multiple ways:
Supply chains are still tied together so tightly that there will be a spill-off effect on suppliers, which has already started with temporary layoffs. This could expand beyond paint shops to suppliers that fleets rely on for parts, upfits, and transport.
This take is from a major fleet dealer: “In my opinion, any disruption will cause a ripple effect that will last much longer than anyone can anticipate. It reminds me a lot of the ‘COVID excuse’ we are still hearing today. The strike will become a scapegoat for the ‘Why Not’s’ that everyone has been doling out for the past few years.”
And this is email exchange is from a systems supplier to fleet dealers: “In MY opinion and conversations, no major concerns on the commercial side YET. Of course, depending on how long this drags out, that could change quickly. Dealers that are sitting on inventory seem to encourage these circumstances to move inventory at a profiting margin — easing the conversations around compressed margins.”
“Fleet vehicles’ length in service has already been stretched, so there’s not much room to extend that service life while waiting for vehicles,” said one FMC executive.
However, “COVID forced us to learn to be creative and flexible,” said another executive, referencing fleets’ ability to engage with new suppliers. “That discipline is still in place.”
Y Factor: Government Shutdown
Now to that potential “Y Factor.”
In the AALA meeting, Ken Kies, managing director of the Federal Policy Group, said he believes there’s an 80% chance there will be at least a partial government shutdown by Sept. 30, and that shutdown will take two months to resolve. He’s hardly alone in that prognostication.
A government shutdown does not have a direct correlation to vehicle inventory levels like a strike. But there are broader implications.
Some metrics pulled from the Internet: Modern government shutdowns have lasted from three to 34 days (2018-2019). The ones from 1982 to 1995 were three to five days. You can see how legislators have been okay with fiscal brinksmanship lately.
With a protracted shutdown, these factors could have a spill-off effect on fleets in some form:
- During the 2018-2019 shutdown, about 800,000 federal employees stopped working. Essential services such as TSA screenings and air traffic control continued but absentee rates spiked, which affected wait times and flight schedules. Any effect on air travel would affect business in the fleet industry as well.
- In another vein, how many of those employees drive fleet vehicles? Parked government fleet vehicles aren’t necessarily a problem, but a sharp increase in use after the shutdown ends could present logistical challenges.
- For the international flow of goods, border crossings should be minimally affected — again, barring a spill-off from other departments or voluntary sickouts.
- Government services related to transportation are also deemed essential, but customer service at the federal government will likely be slowed.
- The bigger picture involves the economy in general and a shutdown’s effect on unemployment rate, GDP, government loan programs, and the cost of borrowing. While we wouldn’t see the effects on fleets per se until, after the fact, this general lack of confidence has a tendency to generate “scapegoat actions” as mentioned above.
- Nonetheless, in this new normal with so many other macro factors causing anxiety, a double whammy of the UAW strike and government shutdown could erode confidence and affect fleets and transportation in untold ways. Y Factor indeed.
Should we now be looking for a Z Factor?