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No Immediate Relief in Sight for Supply Constraints on Truck Industry

26 October 2021 Antti Lindstrom

The current supply chain constraints will see us cut our Class 4-8 production forecasts for the remainder of this year and 2022, despite tight forecast accuracy early in the year. In our next forecast release, planned for November 2021, we will remove as many as 25,000 trucks from the North American production forecast for the second half of 2021 and 14,000 units from expectations for the first half of the next year. We expect that improvement in production will likely be seen by the third quarter of 2022, with part of the strong production activity then going into building back the depleted stocks. The inventory rebuilding process will continue deep into 2023, probably through most of that year, before hitting a plateau and slowing down before 2024 starts. One enabler of inventory rebuilding will be the predicted moderation in new-truck demand as of 2023. The economic up-cycle should have run out of breath by that time, even with the new Greenhouse Gas II regulations kicking in that year. Expected interest-rate increases as well as related slowdowns in parts of the construction sector will loom large. Moreover, no major pre-buy activity is foreseen in the truck manufacturing sector in preparation for the next stage of Greenhouse Gas rules because the new technologies used to meet those requirements have already been built-in in the current products and their prices.

We are adjusting our near-term view downwards in response to developments in late summer and early fall. It has been clear as the congestion on both coasts of the United States has persisted that the restrictions on manufacturing are not only about the chip industry not being able to deliver enough components to truck manufacturers. The limits are also about how our current-day supply chains have been built on the premise of all the process steps working in harmony, from the raw material site to the original production to carrying those products to points of export and shipping them to other countries where manufacturers use those parts to build vehicles.

From the production perspective, earlier signs of positive developments vanished with the onset of the Delta variant of the virus claiming ground in North America and globally, leading to new lockdowns in some countries and regions, and compounding delays. The unavailability of product has meant that the demand for new trucks has been fulfilled to a greater degree from existing inventories, which have not been replenished as normal because of the supply issues throughout the industry. Inventories of new and used trucks are at unusually low levels relative to demand which means the prices are strong because of the limited number of alternative choices. Class 8 inventories in the United States are down to about half of what a typical month before the pandemic was, at roughly 60-65,000 units nationwide. At the end of August, the US dealers had barely over 30,000 Class 8 trucks in their stocks. Now that the supply chain issues are so widely spread, and prices are firm, sales are also softening. On top of that, some OEMs have stopped accepting new orders because of the uncertainty about when they would be able to fulfil those orders. The same is true for most of the other weight classes, with each new month bringing the inventories lower than before. The only notable exception to this consistent trend is perhaps Class 7, which behaves more "erratically" and reached a low point at the start of the second quarter.

Manufacturers have responded in several ways. First, in order to keep lines running, OEMs had to partly resort to the production of incomplete vehicles that miss some features or components that normally would be included in the finished product. Rather than not building such vehicles at all, manufacturers are building such vehicles as best as possible and setting the incomplete vehicles to the side to wait for installation of the missing components later. The number of such "red-tagged" vehicles varies manufacturer by manufacturer but is estimated to be in the low five figures of units for Class 8, as of this writing. In "normal times" their total is relatively insignificant within the industry total.

Another strategy to minimize losses has been to shift production to those lines that have the highest profitability and/or demand, or in some cases are new products that need to be pushed to the market to claim their share and keep the brand image. Conversely, some older products may have been stopped or paused. While IHS Markit does not maintain per-vehicle profit margin estimates, our analysts observe that some of the North American lines have de-prioritized older, less sophisticated product families. At the end of the day, there has been no single answer to how to deal with the shortages and where to allocate the tighter resources. Manufacturers and product managers struggle with this daily, operating in a virtual "shifting sand" where the parameters change, often without warning, and forcing quick reactions from all parties involved. Conversations with both suppliers and OEMs see the continuous repetition of low visibility regarding the supply chains for the coming months.

It's not only the shortage of microprocessors, but a combination of factors that keeps the visibility cloudy: the pandemic, the shortage of truck drivers, the shortage of chassis to move the containers at ports, the shortage of warehouse workers to process the goods at the receiving end, shortage of various, rather basic, materials including steel, certain chemicals used for making parts that should be built in the products that are in high demand, and behind it all, the massive shift among consumers from purchasing in a brick-and-mortar stores to shopping online for everything. In addition to moderation in vehicle demand, mentioned already for 2023, gradual improvements in truck manufacturing capacity is expected to result from the abatement in new COVID cases during the current Delta variant wave, unlocking the flow of goods and the return of labor; improved semiconductor allocation to the automotive industry; and increased global semiconductor production capacity. These last elements are forecast to help clear the stocks of so-called "red-tagged" units.

Posted 26 October 2021 by Antti Lindstrom, Principal Analyst, Commercial Vehicle Forecasting, S&P Global Mobility


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