Supply Chain Update

There are rumblings in the media that there may just be a pinprick of light at the end of the supply chain tunnel. That is hopeful news, but the supply chain is a complex animal, and while we want to be optimistic, we foresee that recovery will continue to be more of a marathon than a sprint.

For the automotive industry, manufacturers are telling us that MY2024 will be similar to MY2023. The expectation is that by 2024, supply will improve for fleet as a result of retail sales softening due to inflation and the potential for recession. However, in 2024, even with improvements, we will continue to see the pressures of more demand than vehicles.

Pent-up Demand—Still a Lead Character in our Story

The main problem continues to be “pent-up demand”. It is difficult to calculate the depth of backlogs or how long they will obstruct the vehicle supply chain. Anticipated decline in retail sales could help, but currently, in the rental, commercial and government markets, pent up demand is still fueling vehicle sales.

The expectation for vehicle production will be approximately 15 million this year, with an anticipated 15 to 16 million in 2023. With the potential for recession and the rise of consumer interest rates, we should see fleets receiving more allocation from the OEMs. Recently, some OEMs have opened up limited quantities for MY23 for fleet, which we see as a positive sign.

We are looking to the future with cautious optimism.  The major OEMs will be using allocations for the foreseeable future and will continue to refine and improve their systems. In broad terms, progress for supply chain resolution will be slow. The best advice that we can provide is that you should continue to be proactive in speaking with your OEM reps for allocations and watching ordering cut-offs going into the new year.

Shifting to EVs

Another factor in managing demand will be the corporate mandates for fleets to transition to Electric Vehicles (EVs). Manufacturers are concentrating on the shift to EVs and the introduction of new models in that market, with some OEMs focused on ICE and Hybrid engines.

The move to EV manufacturing puts a strain on the supply of certain raw materials such as lithium, nickel and cobalt. Many of these materials have as much as doubled in cost during the pandemic. Geopolitical events continue to impact supplies and pricing.

Microprocessor Manufacturing

For chip production, there is both good and bad news. While manufacturing will increase slightly by 2024, with new production facilities up and running, the demands on supply will also increase due to new vehicle designs and components that need more and more chips.

Any chip production progress will be additionally countered by the demand for home and depot chargers which are all “smart” and put more pressure on demand for chips. Currently, components for both home and depot chargers are six to twelve months back ordered. So, unfortunately, for the current time, increased supply will be counterbalanced by accelerated demand. We encourage you to speak with your fleet representative to plan around these issues.

Other Supply Chain Pressures

There are a variety of factors that continue to have the potential for impacting the automotive supply chain:

• The demand for over the road (OTR) transport continues and we are currently in the highest demand season for OTR trucks. CDL driver shortages continue.
• Labor shortages continue to be an issue across many industries. The “great resignation” is still impacting the labor pool, with approximately 2.5 million fewer workers in the work force than before the pandemic. Finding skilled and competent labor continues to be a struggle. Understaffing impacts the remaining workers and provides the impetus for unionization.
• Rolling shutdowns in China and throughout Asia in reaction to COVID outbreaks will continue have downstream effects.
• Climate continues to add to supply chain stresses. For example, the Army Corp of Engineers is dredging the drought-impacted Mississippi River, now at record low levels, in order to allow this critical freight artery to continue with the necessary level of barge traffic as farmers prepare to ship grain. Shipping rates are up 50% from last year. In Europe, which experienced the driest summer in 500 years, rivers that serve as freight arteries are seeing some of the same pressures.

The Settled Rail Strike is Not Settled

The rail strike of September 16^th was averted with a tentative agreement with just hours to spare. It appeared that all had been resolved, with union ratification expected. However, in October, The Brotherhood of Railroad Signalmen and The Brotherhood of Maintenance of Way Employees, which combined, represents 17,000 workers, rejected the agreement. To date, this is what we know:

• The current union contracts for the five class one railroads representing 60,000 employees, expired in 2019. Since June of 2020, the unions and railroads have been in mediation.
• The Brotherhood of Maintenance of Way Employees Division, which maintains the tracks, is poised for a November 19^th strike.
• The Brotherhood of Railroad Signalmen could strike as early as December 4^th.
• In order to avert a rail strike, all 12 unions must accept the agreement. It is unlikely that any union will cross picket lines.
• The sticking point for unions voting down the agreement, remains the issue of paid sick days.

Approximately 30% of freight in the US is touched in some way by rail and over 60% of containers at ports are destined for rails which could cause freight backlogs. According to Union Pacific, nearly 75% of new cars and light trucks purchased in the US are moved by rail at some point. A rail strike could fall into the area of being a national emergency, as we reported in August. Congressional intervention may be needed.

Wheels Donlen will be in continual communication with the major automotive manufacturers who in turn will be in constant contact with the railroads and the White House. Both the manufacturers and the railroads have prepared operational contingencies, and we will keep you posted with any changes.