Ongoing Strong Economy to Bolster 2020-MY Fleet Orders

Editors note: This article is part of a package dealing with 2020-MY Fleet Orders. Read a related article covering Electric Vehicle Acquistion Strategies.

Corporate fleet managers report that the 2020 model-year will be another strong asset acquisition year, comparable to MY-2019, based on an AF survey of the buying inclinations of a broad cross-section of fleets in the commercial segment. The survey was conducted by Automotive Fleet in late May 2019.

The majority of commercial fleet managers responding to AF’s annual buying inclination survey reported that their new-vehicle ordering volume will be either larger or comparable to the prior model-year. A smaller number of companies report they will decrease the volume of their MY-2020 fleet orders, primarily due to a larger than normal fleet buy in MY-2019 and to a lesser degree corporate reorganizations, pending acquisitions/mergers, utilization initiatives, and downsizing pressures.

The AF forecast is that order volume  for model-year 2020 will be similar or slightly greater to what was acquired in the 2019-MY. In many respects, the buying dynamics of MY-2020 are a continuation of those experienced in MY-2019 as macroeconomic market conditions continue to remain robust.

MY-2020 Acquisition Trends

The top factors influencing the types of vehicles to be acquired by commercial fleets in the 2020 model-year are similar to those that drove 2019 vehicle selections. These include upfront acquisition costs, suitability to fleet application, corporate initiatives to acquire the most fuel-efficient models available for a specific fleet application, the incorporation of additional safety features and equipment options into company-provided vehicles, and overall total cost of ownership.

“We first look at the price and safety of vehicles. Second, we look at each business unit to determine their business need and make sure we find vehicles that fit the needs,” said Stephanie Rogers, CAFS, fleet and administrative services for Kawasaki Motors Corp., USA.

A growing number of fleet managers cited order-to-delivery times as becoming a more important factor influencing acquisition decisions in MY-2020.

“First and foremost, acquisition cost is the No. 1 factor in selecting fleet vehicles; however, with increasing order-to-delivery times, availability is also very important. We are a distribution company. If our trucks aren’t moving, we aren’t making money,” said Amy McAdams, CAFM, director of fleet for MORSCO.

This sentiment was echoed by other companies. “One of the biggest challenges we face is the continued inconsistency from manufacturers around their build/lead times, as well as availability of vehicles.  Manufacturers keep moving their build cycles or shortcycling, which makes planning a nightmare. And then you layer in the fact that the trucks we order are not available off the lot. This creates a great challenge to managing a fleet in an economical and efficient manner,” said Kimberly Fisher, global manager, fleet & travel for National Oilwell Varco.

Selecting models with higher mpg than the predecessor model continues to drive many acquisition strategies, along with corporate sustainability initiatives. Some fleets have elected to expand on this fleet initiative by increasing their acquisition of hybrid vehicles.

“With the start of the 2019-MY, AstraZeneca offered gasoline-hybrid vehicles on the selector. This will continue with the 2020-MY units. The goal is to have the entire fleet replaced with hybrid units no later than 2023 or sooner,” said Barbara Zuroick, U.S. fleet & safety manager for AstraZeneca. “Being the first large pharma to offer only hybrid units on its selector was a noteworthy change in AstraZeneca’s fleet. This was broadly accepted and welcomed by the field, as well as leadership.”

Cox Enterprises has adopted a similar new-vehicle acquisition strategy.

“We are looking for ‘greener’ vehicles. All of the business-use sedans that go into service are now hybrids,” said Jim Bigelow, senior director, enterprise fleet for Cox Enterprises. “We have been acquiring 90-plus hybrids per year for the past four years. We are focusing on the safest vehicles in the ‘fleet’ trim level.”

This was echoed by a major insurance company. “We are buying more hybrids because they get better fuel economy and are good for the environment. In addition, all-new vehicles are equipped with complete safety trim packages,” said the company’s fleet manager who wished to be anonymous.

In addition to opting for more fuel-efficient models, most commercial fleets are also spec’ing assets in their 2020-MY fleet buy that have greater safety equipment. The availability of standard and optional safety packages will have a direct bearing on what will be ordered for 2020-MY by many fleets.

“We are adopting more and more technology across all model types purchased than we have in previous years. Our acquisition focus is safety and incident avoidance,” said Jay Massey, corporate fleet vehicle manager for AmeriGas Propane L.P.

A similar response was given by a major food services fleet. “We will acquire vehicles with additional safety features, such as collision avoidance and anti-rollover,” said the fleet manager who wished not to be identified.

Other fleets are making advanced driver-assistance systems (ADAS) mandatory for their 2020 fleet buy due to the documented decrease in preventable accidents. This will be the case for a major pharmaceutical fleet. “Since we began replacing fleet vehicles with enhanced safety equipment, front and rear automatic emergency braking (AEB) in 2017, we are now seeing a significant decrease in collisions. In 2018, our collision rate was 8.7% lower than 2017; and for YTD 2019 we are tracking almost a 20% decrease compared to 2018. By 2020, our entire fleet will be equipped with AEB technology,” said the corporate fleet manager who asked to be unnamed.

Another fleet implementing a safety-focused acquisition strategy is General Mills. “As the industry advances rapidly in the areas of safety and technology, it is critical that the fleet vehicles we offer to employees adjust accordingly. It is important to our company that drivers are provided with safe vehicles, thus we now offer over 11 safety features in our latest vehicle lineup,” said Adam Orth, CAFM, Global Business Solutions – fleet services manager for General Mills Inc.

In recent years, OEMs have responded to fleet manager requests by migrating more safety technology to vehicles typically ordered by fleets. However, getting advanced safety technology in work trucks and vans continues to be difficult, since they are often ordered with the lowest base trim level package.

Some fleets are accelerating replacement strategies to take advantage of increased safety equipment and greater fuel efficiency in new-model vehicles.

“I have already started making changes this year and the trend is to continue into the new model-year especially since the newer vehicles have more safety features and are more fuel-efficient. I am looking into vehicles that at end of life will have more equity in them versus buying the cheapest that’s worth nothing at the end of life,” said John Maggio, fleet operations manager for GFA International, Inc.

Another ongoing trend that will continue into MY-2020 is the decrease in sedan sales to commercial fleets as companies increasingly look to different vehicle segments when developing fleet selectors.

One major fleet transitioning from sedans to SUVs is the Church of Jesus Christ of Latter-Day Saints. “Our acquisition strategy is focusing on more safety features, larger, safer vehicles, and a move from sedans to SUVs,” said Mike Sims, global fleet planning, acquisition and resale manager at Church of Jesus Christ of Latter Day Saints.

However, the discontinuation of some fleet sedans from OEMs is causing fleets to transition to other models as is the case with one landscaping company. “With no Chevrolet Cruze or Ford Focus production, we will move back to Toyota Prius as a manager’s car,” said the fleet manager of the landscaping company who asked to be anonymous.

As the pool of new-model fleet sedans shrinks, it is causing trepidation among some traditional sedan fleets. “Two of our biggest concerns are the availability of midsize sedans and all the gadgets in the vehicles today that add to driver distraction,” said a fleet manager from a major insurance company fleet, who requested anonymity.

Another fleet manager also wishing anonymity asked rhetorically: “Who can sell me mid-size and compact sedans?”

In addition to sedans, some fleets are similarly moving away from minivans and substituting them with SUVs. “As a change in corporate culture, we are continuing to move away from minivans to Nissan Pathfinder, Nissan Rogue, and Toyota RAV4,” said Neil Carter, fleet administrator for Beckman Coulter.

Despite this trend, other companies will continue to offer a mix of sedan and SUV choices for its employees, such as General Mills. “We will continue to offer both SUV and sedan options to our drivers as there is a demand for both,” said Orth of General Mills.

Fleet Order Volume to Increase

The percentage of companies responding to the AF survey looking to increase fleet orders in the 2020 model-year was comparable to those reporting likewise in MY-2019. For fleets that anticipate increased order volumes, the primary reasons cited for increased order volume were ongoing business growth and the need to replace aging inventory. This sentiment was echoed by one surveyed company after another.

For example:

“We will acquire more vehicles than last year as our sales continue to grow,” said Clay Gaudet, senior global fleet manager for AutoZone.

“As AGCO continues to grow through its acquisitions, we will acquire more vehicles,” said Ralf Wessel, manager, global security, global fleet and corporate facilities for AGCO Corporation.

“We will order more vehicles due to business growth and additional hiring,” said Dave Dahn, CAFM, corporate fleet program manager for Erie Insurance.

“Purchases will be up about 25% in model-year 2020. New project work is driving vehicle acquisitions. Things are going well this year,” said a fleet manager from one construction management company who asked not to be identified.

“We will be acquiring more units,” said Maggio of GFA International. “We expect a growth in the company this year to be between 10% and 25%.”

“We will acquire more, primarily due to growth in our cable markets,” said Bigelow of Cox Enterprises.

“We will acquire more vans due to company growth,” said a fleet manager from a restaurant services company.

“My company is doing well and growing by hiring more people, which is making my fleet grow too,” said a fleet manager at an insurance company who wanted to remain anonymous.

In addition to business growth, another recurring theme by many fleets is replacement of aging units that have been kept in service for longer-than-normal mileage guidelines.

“We will likely acquire more vehicles in MY-2020. We have an aging fleet and are just now implementing a cycle policy. While I expect some resistance, there’s no question that replacing is the right thing for our business,” said McAdams of MORSCO. “In previous years, the vehicle specifications were left to the branch managers to decide; however, there is a push for standardization of our fleet going forward. For some branches this will be a change, but with the change brings the flexibility of being able to redeploy a truck to a market that is in need based on usage, fleet age, and safety.  The older a truck, the higher the potential for an unplanned event that affects productivity and ultimately the bottom line.”

Other key market segments of the economy that are larger purchasers of fleet vehicles are likewise experiencing an increase in business activity. One example is the new-construction market in both the commercial and residential sectors. All  industry indicators, such as the issuance of building permits and starts for new-home and commercial construction, continue to be up, which bodes well for commercial sales of pickups and full-size vans, which are the primary vehicles acquired by the construction companies, independent contractors, and subcontractors.

Likewise, some pharmaceuticals are increasing their fleet buys as a result of corporate acquisitions or to accommodate business growth by providing company vehicles to new hires to market new drug products.

In other cases, it is part of the ordering cycle. “More vehicles are scheduled for replacement in 2020 than in 2019,” said Rita Harris, senior manager, global fleet operations for Vertex Pharmaceuticals.

Most Purchases will Remain Unchanged at Many Fleets

The strong economic indicators in CY-2019 are causing the overwhelming majority of the surveyed companies to keep acquisition volumes at that same level as the prior model-year, which was a strong year for commercial fleet orders.

“Vehicle acquisition volume for MY-2020 will be flat. Our normal plan is to replace 8-10% of on-road assets annually,” said an anonymous fleet manager. “Our order volume for manager cars was heavier in 2019-MY due to reduced buying in 2018.”

While some companies will change OEM sourcing in MY-2020, many companies are in multi-year purchasing agreements with specific OEMs, which precludes shifts in vehicle sourcing.

Another factor influencing OEM sourcing, from the perspective of smaller-sized fleets, is to aggregate order volume with a single OEM to be eligible for volume discount incentives.

“We will remain with only one OEM since we don’t purchase enough vehicles annually to earn CPA/CAP/VIP incentives from the Big Three if we split the business with another OEM,” said a fleet manager who wished to be anonymous.

Factors Putting Downward Pressure on 2020 Fleet Orders

One factor supporting AF’s new-vehicle acquisition forecast is there was a strong decline in the number of fleets reporting that their order volume will be lower in 2020 compared to 2019. For those fleets planning to reduce new-vehicle orders for the 2020 model-year, various reasons were given.

“We will be buying fewer vehicles in the 2020 model-year because our business model is changing, and we are allowing natural attrition to shrink our vehicle count. We are also keeping the vehicles for 100,000 miles instead of 85,000 miles,” said a fleet manager at a major manufacturing company who wanted to respond anonymously.

Corporate reorganizations and pending acquisitions are other factors exerting downward pressure on 2020 fleet buy at several companies. Also, successful initiatives to increase fleet utilization influence new-vehicle purchasing volumes since it often results in fewer vehicles being ordered.

Factors Influencing Model and Engine Selection

Most fleets do not anticipate changes to vehicle types, as choices of vehicle segment types are dictated by business requirements. However, there is a growing number of fleets considering and choosing crossovers instead of mid-size and compact sedans, which is causing a shift in the type of vehicles found on corporate selectors. Today, there is a growing acceptance of crossovers as a fleet vehicle. Once crossovers were considered an upgrade; however, today, these vehicles are now in fleets in representative ratios as the retail market, which promises to continue with 2020-MY ordering.

Other factors stimulating fleet acquisition of crossovers are better ergonomics with easier ingress and egress, an all-wheel-drive option, increased cargo-carrying capabilities, and higher resale values. More commercial fleets are migrating from sedans to crossovers and SUVs for the same reasons that retail customers have migrated toward utility vehicles.

In addition, there is a continuation of the industry trend to downsize to a smaller class of vehicle (or different vehicle segment). The decision to downsize to a smaller vehicle is typically determined by TCO and fleet application. In addition, fleets are reducing engine displacement size from V-6 to four-cylinder engines with turbos.

One of the noteworthy accomplishments cited by Wessel at AGCO that occurred in the past 12 months was its engine displacement reduction initiative and the ensuing fuel consumption reduction and subsequent cost savings.