The challenging combination of rising new car prices in Canada, a possible shift back to a factory-order model, lower incentives and other factors may be part of a 'new normal' for fleet operators. Brian Murphy, Managing Director, Kelley Blue Book & Data Solutions (Canada & Brazil) at Cox Automotive Canada, provides some insights.
"The biggest question in my mind about all this is how long all these challenges will last," comments Brian. "The situation is hard to deconstruct until you realize that it all relates to the old-fashioned principles of supply and demand. Our business is strange in some ways because we produce very expensive products as an industry, but typically the industry runs with oversupply. Not so much for large fleets because the OEMs usually build them to order, but as an industry around the world, we usually have too many cars. Now we're completely the opposite where we don't have enough supply."
Stability and supply
Brian adds that the measurement of 'enough' supply can be subjective and varies among OEMs. In general, that supply can be considered adequate around the 20- to the 30-day mark (although nearer to 60 days in the pre-pandemic world), but the microchip issue is affecting that supply: "It all depends on who you ask. For example, one OEM CEO may believe it will be all be fine in six months, while reports from the microprocessor industry suggest it will be well into 2023 before there's stability and supply of microprocessors."
He believes it could be 18-24 months before the supply of microchips stabilize and the OEMs can fully get back on track in terms of meeting orders, and adds that the fairly long wait is despite everybody's efforts because he recognizes the OEMs are putting in "an incredible amount of effort to try to make the best of it."
Another factor affecting fleets is the used vehicle prices.
"It's something I never thought I'd see in my lifetime," says Brian. "We're seeing crazy prices in the used vehicle market. That may be good for fleet operators selling vehicles, but not if they're trying to buy. We're seeing the highest prices we've ever seen in the marketplace, and this is all driven by the shortage of new cars, which immediately causes a shortage of used vehicles as fleet operators turn over their fleet."
He adds that while fleet operators have historically been a tremendous source of used cars, some are now keeping their vehicles longer because they can't source new ones, or the vehicles have fewer kilometres on them than normal.
He explains further: "We're seeing some three- or four-year-old vehicles sell for almost what they sold new. Some older vehicles are doubling in value. But the value retention is much higher than it normally depending on the type of vehicle, but sports cars and pickup trucks are two particular segments that have seen the largest increase in prices of all the segments. From a new vehicle standpoint in Canada, pickup trucks are a very big segment, so the shortage of them is just pushing the prices up of what's still available in the market."
While every market segment in the auto sector has increased, Brian has not checked out how it's specifically affecting electronic vehicles (EVs), while adding that EVs usually those vehicles don't keep their values very well.
Brian says another challenge is being unable to know how long the high prices will last, although the expectation is that they will stay high until some degree of normalcy returns to the new car part of the business.
"It's like an ecosystem," he adds. "When manufacturing and sales and delivery get turned upside down it instantly affects used car prices. So, there's a dual effect: There's the difficulty in getting vehicles and then when fleets go to sell the ones they've got, they're getting more money for them than they would have normally, but at the front end, they're probably getting less discount from the OEM because generally speaking, we're seeing OEMs spend less money on incentives. And, even though you're getting more for your vehicle, you still have to pay out at the other end for new vehicles."
He believes that the big question mark now is when to buy because while fleets are sensitive to when they need the vehicle, there's uncertainty around when a plant making a given product could go offline for a few weeks if they start to run out of parts.
"I think we're talking about the 'new normal', when factories will periodically close for some time because they lack parts, which previously would never have happened, " he adds. "It's tough for manufacturers because fleet customers are very good customers, and they want to keep them happy. Challenging times."
Brian and his team regularly keep an eye on the dollar exchange rate, because a certain amount of used vehicles are exported from Canada to the United States (US). As he explains: "It's a common practice to see about 200,000 to 300,000 vehicles shipped across the border each year, simply because they can get more money in the U.S. market. Fleet operators know if they take a hundred trucks to the auction, there's a good chance that more than half of those vehicles could end up in the US because vehicles are simply worth more there."
He adds there's been a "tremendous amount of instability" since COVID-19 when the Canadian dollar fell in the spring of 2019 and then peaked in Jun 2021 before falling again. That fluctuating exchange rate can result in a Canadian fleet operator getting less for trucks now in the US than he would have done 18-24 months ago.
"The Canadian dollar doesn't usually move around that much, but it fell from 75 cents in the early part of March to 69 cents – that just doesn't usually happen, "says Brian. "Since March of 2019, it started going up although values have started to stabilize now, and the Canadian dollar is around 79 cents, which is probably where it's going to stay for the next little while. Fleet operators are getting caught where the dollar fluctuations affect the amount of money they can get. So, even if they can get higher vehicles prices in Canada, they're still going to pay more as well. So it seems like they're really getting squeezed."
Historically, the industry has had surplus inventory, creating a buyer's market. But as Brian comments, one of the things that's changed is that now it's the seller's market – dependent on who has vehicles to sell, and what types of vehicles.
"For example, a dealer might find they have none of one brand and lots of another," he says. "So that's a big change because it used to be, if you had money to buy a vehicle, you could easily get what you wanted, whereas now you have to spend a little bit more time shopping around.
"I'd speculate that many fleet operators are spending a lot of time trying to source vehicles. Instead of making one phone call, they might now have to make calls to four or five different possible sources of vehicle supply, or even look to what they would normally buy, just to make sure that they actually get a car. For instance, while some operators may normally buy compact SUVs, they are now buying compact cars because they can't get compact SUVs. So, there may be some internal complaints about doing that, but at least they have some vehicles."
He adds that it gets really tough when sourcing specialized vehicles: "For instance, if your fleet is going up north or you're in that kind of heavy construction industry where you have to a particular kind of vehicle – well, you can't really substitute. If you need a heavy-duty truck, it's not like you can put in a family sedan because it's just not going to work."
While Brian believes the challenges currently facing fleets are temporary, he also knows it's difficult to estimate how long it will take to get back to some sort of more normal state of operation.
"Car manufacturers may see some benefit in running with less inventory because it's better for the bottom line, but I think we will slowly get back to normal because the OEMs are generally incentivized to make a few more cars and make a little bit more profit, " he says.
"It might take some time and I certainly empathize with fleet operators that have a business need to source a vehicle. It's difficult to say as it all relates to microchips. Right now, I think the focus is probably simply on producing anything. There are so many chips in those vehicles, that manufacturers can't make a particular model right now because they simply don't have a certain necessary part, so they're frustrated. Hopefully, there aren't any other shortages of anything else. I'm sure they're having to be very patient these days. "