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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
