After a bumpy ride in 2022, will the auto industry roll around in ’23?
Shifting down. It’s becoming clear with a new year less than three months away that 2022 isn’t going to be the year the U.S. auto industry was anticipating. The optimism of accelerating growth entering this year has slowed with each passing quarter.
Since coming out of the economic pothole of the 2009 Great Recession, light vehicle sales (cars and light trucks combined) rose rapidly plateauing at over 17 million units from 2015-18 before a slight dip to 16.96 million units in 2019 – the first year of COVID-19. In the pandemic-hobbled year of 2020, sales fell to 14.47 million units before making a recovery to just over 14.92 million units in 2021. Early forecasts estimated vehicle sales to crack 16 million units, a 7% increase over 2021, and pave the way for a return to something approaching the 17 million unit figure posted during the 2015-2018 pre-pandemic period. Cox Automotive, a company that tracks vehicle sales, noted in their first quarter forecast, “Unlike 2021, the second half of 2022 will likely be stronger than the first half,” a prediction, which like many for ‘22, has been run off the road. Cox in their Q3 update of the “2022 FORECASTS” is now predicting 13.7 million units of new sales, a sizeable shift downward from the original 16 million unit projections.
Tapping the Brakes
So, what happened? The short answer – is just about everything.
In fairness to Cox Automotive, whose analysis of the auto industry is often said to be the best in the business, Cassandra herself couldn’t have predicted the confluence of disparate events that undermined the auto industry in 2022.
For starters, the forecast looked right…and positive elements of the forecast are still in play. There was and still is considerable pent-up demand for new vehicles coming out of the COVID-19 period. Lots of people were ready [including this writer] to buy a vehicle after being confined for the better part of a year. It has been a “sellers’ market” and new vehicles are selling at historic highs, averaging over $47,000 per vehicle – a popular refrain was “the sticker price is the price”. Yet even with prices at historic highs, cars were flying off the lots, often sold before the vehicles were even delivered to the dealership.
2022 started with tight inventories, as automakers tried to replenish stocks after plant disruptions due to the pandemic. But parts shortages – particularly stocks of the well-documented microchips – forced automakers for some models to cut back production while supplying chips to higher-end vehicles.
To handle the chip (and parts) shortage, GM pioneered a strategy tagged “build-shy” or “shy built” which involved assembling some of its vehicles – generally the lower-priced models – “just shy” of all its parts. So, rather than delivering “complete” vehicles to the dealerships, the unfinished models were set aside at nearby lots…awaiting parts. In some cases, the “parts shy” vehicles were sold to consumers and the “missing” parts were fitted later at the dealership.
However, the chip shortage has eased, and the acres of vehicles are now moving off the storage lots to dealers and customers.
Ben Buben, chief operating officer (COO) at AMPORTS, a major vehicle processor, remarked, “We seem to be seeing the light at the end of the tunnel for the chip shortage. The acres of “shy-built” units are easing as chips become available, allowing the manufacturers to ship their vehicles to their designated markets. This influx of traffic is putting extra pressure on the rail, truck, port, and vessel network to get these units to market quickly.”
For this reason, vehicle inventories are building but still below pre-COVID levels. In September, Cox reported in their US automobile dealer sentiment in Q3 2022 index, “While still historically low, the new-vehicle inventory level index improved from last quarter and is up significantly from one year ago . Still, at 31, the new-vehicle inventory level index indicates inventory remains a major challenge for franchised dealers. For comparison: In Q3 2019, the index was at 61, meaning more dealers felt their inventory was growing, not declining.” [editor’s italics].
Of course, part of the problem is this year the U.S. auto inventory is extremely uneven. For example, the “Days of Supply” for a Full-Size Car is over 60 days while at the other end of the spectrum Hybrids, Subcompact Vehicles and High-Performance Vehicles are just over 20 days. Overall, the Days of Supply is up over 2021, but below the pre-COVID period.
Is JIT Out of Time?
Part of the reason is the whiplash impact the auto supply chain is having on the industry. There are few supply chains as global as that of the auto industry. A disruption at any “tier” within the supply chain can be ruinous: from the raw materials necessary to build the 30,000 odd parts needed to assemble an auto to the delivery of the finished vehicles to the dealerships. And when disruptions happen at multiple tiers, as happened during the pandemic, the supply chain is crippled. And the “recovery” of the auto supply chain involves multi-tiered solutions that rarely occur in synchrony. The result is a push-pull effect – a whiplash of surge and drought cycles.
As a result of the uneven flow of vehicles, auto logistics providers have had to adjust their delivery strategies. In the case of vehicles coming in from Asia, there have been diversions both to the East Coast and surprisingly to the West Coast. As Buben explains, “AMPORTS is currently seeing traffic diverted in both directions due to new vessel routing. Some APAC (Asia-Pacific) vessels that would typically call ports on both coasts are now looking to call just the West Coast.
This allows the vessels to return to the APAC region quicker to help ease the influx of traffic from APAC to the U.S. In turn, the OEMs are then land-bridging the West Coast traffic over to the East Coast via truck or rail.”
Land bridging (the movement of autos by rail) acts as an auto logistics balancing mechanism. As Buben conveyed, the movement is “not very unusual. In recent years, the OEMs have used this method in both directions to help ease congestion between rail, truck, and vessel carriers, all to get their cargo to the end user quicker.”
“Quicker” which in supply chain terms, means Just-in-Time (JIT) has been elemental in auto-logistics. But that may be changing.
Foley & Lardner LLP in their October 2022 white paper presciently observed, “For decades the traditional model in the automotive industry has been lean, just-in-time (JIT) inventory management, as suppliers and OEMs alike maintain only minimal levels of inventory. This is an incredibly efficient model — as long as everything is running smoothly and on time. However, as the pandemic and supply chain issues have laid bare over the last two years, once all of the proverbial “fat” has been stripped out of the system, there is nothing left to cushion a blow.” Read AJOT Ro/Ro edition for further explanation [May 16 Issue 741 “Bumps in the Road for Automakers in 2022”]
In recent years, auto processors and other parties in the auto supply chain because of the uneven supply chain have had to build in additional storage, adding acreage to enable them to “stockpile” autos – sometimes because of the parts shortage but also to handle vehicle delivery surges. This is anathema to JIT logistics.
And there are other factors influencing a rethink of the auto supply chain. As the parts shortage so aptly illustrated, a dependence on importing parts from other countries comes with risk…a risk that might outweigh the cost benefits.
Lockouts, shutdowns, delays, higher freight costs, and attendant dislocations associated with supply chain disruptions are now unignorable features of the logistics equation. In this new post-pandemic world, lean inventory might well be an unaffordable luxury item in the auto supply chain.
Will the Auto Industry Roll Out a Better 2023?
Most analysts are predicting a better 2023. The general feeling is that demand for new vehicles is still running strong. But there are a number of caveats on what a better 2023 might actually look like. Will it be a return to pre-COVID levels – something approaching 17 million units? Inflation and a weaker economy both in the U.S. and abroad exacerbated by the ongoing Russia-Ukraine War, and China’s friction with the West are mitigating factors to a robust forecast.
Nonetheless, EVs (Electric Vehicles) and hybrids continue to sell well, and a new auto supply chain is emerging around EV manufacturing. Battery production is being located near EV manufacturing facilities and there is a new emphasis on near or onshoring sourcing of parts, particularly microchips. With Canada and Mexico already being the top auto parts supplier for the U.S., the short sea could become a major feature of the emerging auto-supply chain.
So, will the auto industry roll out a better 2023? At the moment the auto industry seems to be spinning along in that direction. But as the challenges in 2022 demonstrated, the way to full recovery could be a long and winding road.