Webinar: Managing supply chain & acquisition difficulties

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Manhardt: Hello and welcome to the first session in our new webinar series here at Mike Albert Fleet Solutions. My name is Laura Manhardt. I'm a marketing manager here at Mike Albert and today I'm joined by two of our resident fleet experts who are going to talk us through what we're currently seeing in the automotive supply chain from a fleet perspective and how to manage any challenges or concerns related to that through 2023. So please let me introduce you to Jason Kraus, our Director of Vehicle Acquisition and Lease Structure and Matthew Gast our Director of Remarketing and Vehicle Valuation. Thank you both for joining us today and sharing your expertise and your experience. Before we get started, I want to share a quick note for those watching via Vimeo or LinkedIn Live. You can use the interactive chat feature to submit any questions or comments and we will do our best to answer those at the end of this session. If you are watching this as a recording, please visit mikealbert.com to chat, call, or email us, and we are more than happy to answer your questions or concerns at any time. As a reminder for current clients, you can always reach out to your Client Partnership Manager and they are happy to help you. So with that we'll go ahead and get started. Jason and Matthew, can you share some insights into the current state of the automotive supply chain, specifically from a fleet perspective? Tell us a little bit more about the trends that we're seeing.

Kraus: Absolutely. I'll start off, Matthew. I think first and foremost you just have to understand where we are for economic indicators and things of that nature. So clearly depending on who you talk to, everyone agrees on one thing: we got headwinds, right? We don't have tailwinds. Things are a challenge depending on who you talk to. There are different levels of how strong those headwinds are and those challenges might be. But you look at the the US gross domestic product or GDP. The initial forecast, if we were six months ago, we're talking about north of 2%. Now we're talking about a fraction of a percent for the balance of the year, so that's, that's not gonna make things easier. The federal funds rate has gone from being microscopic at less than 1/10 of a point to now being north of 4%. The, the federal reserve came back yesterday with a little bit of good news and said, well, instead of continuing to do the, the 75 point increases, we're only gonna do a 25 point increase. So that, that tells us that things are a little better, are a little bit more under control, but it's still with its challenges. But though there are a few glimmers out there, right? Inflation, if the Fed is able to only increase by 25 points, that says that there's a belief that structurally things are more under control than, than less under control. Also true that if you look at different consumer sentiment reports, Cox Automotive publishes one, as an example, and if you look at where things are now versus in October of 2022, that has increased or, or grown more positive by 7%. So I can't say we're done with all the challenges, but there are little glimmers I see that that are positive in nature. What do you think?

Gast: Yeah on the automotive side, you know we've, we've seen seasonally adjusted annual rates of north of 17 million. You know, we're seeing that depending upon who you ask these days, that's between 14 and 15 million. Obviously supply chain constraints and things like that have taken a big toll. The fleet is just a portion of those numbers, around 1.8 million vehicles of the total. We've seen retail inventories continue to improve as manufacturers are getting vehicles to the dealership lots. And that's helping us out as well.

Manhardt: So we're seeing some positive trends on the whole, slowly moving the needle. How do we expect that to change throughout the coming year?

Kraus: You want to start this one? OK, so as Matthew mentioned where we ended up last year, 2022 was around 13.7 million vehicles from a, from a perspective. As we look at different forecasts, depending on who, who you're talking to for 2023 again, 14 to 15 million units, somewhere in that ballpark, depending on how how certain variables end up performing, our supply chain dynamics, ok, what's up with transportation of vehicles, things of that nature, but, but again, whether you take one person's forecast or another, they're all saying if you're gonna see growth. You mentioned fleet, right? That it's, it's a portion, it was just 1.8 million of the the 13.7 million units in 2022. Fleets is expected to grow by 30%, by 400,000 units. So that to me, indicates that dealer inventories, which I I think is kind of a leading indicator for how much fleet is going to get or not get, that would tell me that dealer inventories are getting to about where they want them to be different than where they have been historically for sure. But, but they're certainly in a much better place. And with interest rates being where they are because of of inflation and the fed funds rate we just mentioned, I think, you know, it's, it's likely that the the retail demand is gonna continue to fall off a little bit, which frees things up from a fleet perspective in the future. So I, I think when I look at 2023 and I think about what is likely to hold, I think fleet incentives, I think fleet incentives in some way, shape or form could come back. They're not saying the 2019 levels, right? We're, we're not gonna have a publisher clearing house check show up at the door. But I do think that there is some money that, that will come, um, based on those interests being high trying to combat inflation. I think that dealer inventory levels along those lines are also gonna continue to be where they need to be. And so that means that if you were doing a dealer locate, we're not looking at MSRP+++ as we've toiled through in much of 2022. But I think you're looking at MSRP. It may be different right? Vans or pickups are a little bit more of a challenge, that might still be a little higher than a sedan or an SUV. But I think what's also true is you could perceive it on an OEM by OEM basis, you could see more factory order allocation for fleet than what we would know about at this point in time. So I think, I think you know, your incentives, I think your dealer inventory is getting better and then last but not least, I do think a lot of our our existing clients utilize smaller vans and that segment is going away, and it probably is just a good reminder to everybody to start planning accordingly after model year 23. You can't get, you can't get a Transit Connect or a Metris or Pro Master City or an NV200. All those will have gone away from production. So you have to be looking at evaluating different options and that might be looking to upgrade to a full size van, that might be looking at going to maybe an SUV with upfit, a mini van and there are some, some other options from a battery electric perspective that will be coming out of the market model year 24, model year 25, that might be an option depending on range and other dynamics. So I think to me, those are the things that I'm, I'm seeing as we look forward and and throughout 2023.

Manhardt: Based on everything that you've shared, we are expecting some positive trends. We are still trending forward from 2022 and all the trends in the past couple of years since the COVID pandemic started, but we're not quite seeing the jumps we're really looking for. That is definitely a source of worry for some clients. We don't wanna be worried, we want to make sure that everybody is prepared. So what are your best recommendations for organizations who are seeking to acquire vehicles through 2022?

Kraus: I, I mean, Matthew, my take is you gotta recognize what the market conditions are, right? That this is - today is not the time that, that you do all the plays that you had historically, where you did an all in leverage strategy, trying to maximize your, your, what your incentive was gonna be. Instead you gotta look at flexibility to achieve, honestly availability. And I, I think of it in terms of a time and terms situation. If what you need is a vehicle today, well we can do that, that's gonna be a dealer locate and that's gonna be at a premium price, that's somebody else's uh terms to achieve your, your time. If what you need is a specific price, those are your terms, you can get it, but you're gonna need to look at at a factory order or maybe a bailment order based on upfit scenarios. I think that honestly, in some instances you might not be able to get what you want. You can't get what you need, you may not get what you want and your best option might be holding on to the existing asset you have. And so I mean, looking at better fuel, or not better fuel economy, but better oil change, preventive maintenance and things of that nature. Maybe not at 7500 miles, maybe you up it to every 5000 miles because you want to baby that vehicle until you know, you got a sure thing coming in versus the "what might be." What do you think?

Gast: Yeah, I'd say definitely,you know, plan ahead, be prepared, you know, you need to identify and understand what your needs are for the immediate future and for the upcoming 12-18 months, allowing us to consult with you to figure out what exactly we can do to help you maximize your opportunities to get what you need. And then flexibility, you gotta be flexible. You know, you may not be able to obtain everything you want or need. So, you know, explore alternatives, allow us to help explore alternatives and figure out what else could potentially be available.

Kraus: It's probably also important just to, for everybody that's watching this today and in the future, if you mind, if you've got your, your trusted partner at Mike Albert, if your Client Partnership Manager comes to you and says, hey, the order banks are gonna close, that's not a sales pitch, right? They're, they're not trying to close the deal, they're trying to be honest and say if we don't have this order by this day, then have you thought about the next model year? And that's ultimately, they're trying to help you to achieve your plan. We get that feedback from time to time. And our approach is one of honesty. Here's when the order banks open, here's when it closes, here are things that you can do specific to the manufacturer that improve your likelihood of not just an order being accepted, but perhaps being scheduled and ultimately produced and delivered. So I think that's also important to keep mind for sure.

Manhardt: We've been talking about industry wide shortages in particular. You mentioned a little bit, some small van alternatives might be needed. Are there any other vehicles in particular that you're seeing shortages of?

Kraus: Tough, tough vehicle segments. Well, I, I mean I, I mentioned it earlier. Um, vans, vans is probably the toughest segment to, to get. Pickups is probably number two and then it's one, not that every client gets involved with like heavy duty trucks, class 6, 7, and 8, a lot of folks will complain about what uh, what the on time delivery kooks like for an SUV, a pickup, or a van, you're at a year plus for class 6, 7, or 8. So those are absolutely the toughest. That's not gonna resolve itself in a couple of years. It's gonna take a couple of years longer probably to fully get on the other side of it. I would admit if you're talking to somebody two years ago, they probably told you two years. So there's probably a snicker going on on the home front here, in those words, but based on what the OEMs are indicating to us in daily and weekly conversations, it seems like it's there right now, but it's still specific to those segments. It's even more important why preventative maintenance cycles and you know, enhancing those is a really, really big deal.

Gast: And like you said earlier, I mean, being flexible, you know, seeking alternatives and being open to alternatives that they could possibly get to these people.

Kraus: Flexibility, maybe the word of the year!

Gast: Right.

Manhardt: Well, let's take this to the opposite end of the spectrum We're also seeing organizations that are looking to sell off their vehicles in what continues to be a changing used car climate. What's the recommended path forwrd for those organizations and in particular how might they prioritize selling off their vehicles?

Gast: You know, the recommendations would likely vary based on the client and their fleet situation. Selling the oldest vehicles in their fleet may or may not make the most sense for those vehicles depending upon their utilization, depending upon their maintenance needs and things like that. On the other hand, some older vehicles that may be experiencing significant maintenance issues, and/or issues that can lead to catastrophic issues, could be the ones that, that you do wanna cycle. Another consideration would be replacement. If you are going to be cycling the vehicle, can you get a replacement? Have you been able to plan ahead of time and, have a, a vehicle on order for that? Again, back to the planning and overall flexibility for replacement. Overall though, you know, we're seeing the market is softening quite a bit. COX reported recently that the December 2022 wholesale prices are down about 15% as compared to a year ago and we're expecting that to continue for certainly this quarter and probably the next, as the pattern continues.

Kraus: You know, one other aspect I think that's important for our client - a lot of them utilize upfit on their vehicle. Right? So I get my vehicle, can I get my upfit? Can I get my upfit and my vehicle? You may get one not the other. So you just want to be mindful and again, vans pickups - toughest segments to get your hands on. Well, you want to make sure that, that whoever is doing the upfit work, they know how to go about getting the upfit, not only the vehicle but the upfit and seeing it the whole way through it. It's amazing the supply chain challenges, and they change day to day week to week, but there's a reason why we're there to support our clients with honesty and transparency and just sharing as much information as we have at that moment and what we anticipate in the future. Upfit would probably be another factor in my mind. So, certainly.

Manhardt: So we've covered what to do if you need to acquire vehicles, what to do if you're selling off vehicles, how to best manage that through upfit and that supply chain that we have. What do organizations who are just seeking to maintain their fleet throughout this year - what do they need to prioritize to make sure that they get to the other side with their fleet intact? And protect their total cost of ownership?

Gast: I think maintaining the fleet maintenance is important. It's crucial as as the vehicles continue to age and making sure that the preventive maintenance and things like that are, are being handled is crucial.

Kraus: I think part of that, you start just getting into telematics and - are you looking at total cost of ownership? Are you factoring in routes? Are you looking at idling, idling being exceptionally challenging on the engine for that vehicle? If the engine's not working, how good is the rest of the vehicle for you? So I, I think for those things, telematics absolutely matters as part of that. It's not where you're at on, on the map anymore, right? It's all this other data and sometimes it can feel overwhelming. It's why you want to make sure that you've got something that leads you to managing by exception, not seeing all the masses of information on every single vehicle every moment of the day.

Gast: The days of dude, where's my car! I mean that's, you can see that everywhere now. But the telematics, the data that the vehicles are able to provide with you know the vehicle health, the driver behavior, understanding all of that and really getting ahead of some of the potentially catastrophic events, is really important these days and you know we have solutions to help with that.

Kraus: And there are, I mean there are a number of different telematics providers that are out there, including but not limited to the OEMs themselves - would love to talk to you about that. And all those things work very well. They're different one way or the other but something that that we can offer would be having everything encompassed within Overdrive using our Albert IQ platform. So you just go one place for all your vehicle information, including but not limited to those exceptions based on telematics and your maintenance and your everything else. It streamlines and simplifies your life if you're the the fleet administrator.

Gast: It's amazing the amount of real time data you can get relative to vehicle health, relative to driver behavior, and make decisions on the fly in the moment.

Kraus: I had a client that flipped the switch on a number of vehicles and they had four right away that popped up for Alber IQ repair orders and said we're seeing the data and we've got problems. We didn't have that visibility before. The client didn't realize that the drivers were driving around with engine lights on but we're able to immediately take care of it because they have that visibility within Overdrive. So I think those are some of the different things to keep in mind.

Manhardt: Thank you both. If there's nothing else you wanted to add to those questions, I do have a few submitted questions I wanted to run through with you guys.

Kraus: I don't have anything further to add.

Manhardt: Ok, so I have someone who messaged into us asking about the near future state and indications of recovery. You know, they know that we've seen these incremental slow changes, last year's growth definitely did not measure up to I think what we were all hoping for. Do we see us getting to that return to pre-2020 status anytime soon? Do we see us recovering? Tell us a little more about that.

Kraus: Yeah I'll take that one. I liken it to we're in a very very very long tunnel, right? We see lights on the other side at different moments. You look to the person next to you and say, "Is it the other side or is it the train?", but I, I think at this point it's the other side. It's just, it's taken us longer than certainly any of us would want it to and probably longer than we want to admit to. I mentioned earlier, you know, you're probably two years away from full recovery and certain segments may take longer than that. Vans, pickup trucks, might happen around two years. Some other vehicles may happen sooner than that. Vans might take longer than two years. Heavy duty may take three years or or longer as that sorts itself through because you've got so much demand that far exceeds whatever the supply dynamics are, the production dynamics. Dealer inventory levels are up 67% from where they were a year ago. So that's really good. It's really scary when you understand that some of the OEMs are managing and measuring their dealer inventories in hours versus days. Thankfully we're not just back to days, we're back to weeks, but it's not going to go back to where it was in 2019. You're probably looking at at, you know, and each of the OEMs will put out statements, but 60 to 70% is, is the number I tend to hear of where they were before, it could be a little bit more at, at times, certain models, but it's not gonna be, you know, filled to the gills in terms of inventory on the dealer lots. I also think that you know, another one of those positive signs we've heard from different OEMs that have done allocation programs for inventory where you can't just openly order anything and everything. They have to say, "We got you on the list and you're allowed in the club and place the orders." We've had several manufacturers with allocation programs and they come back to us and say, "Hey, we're willing on this model and this model to allocate this much more to an existing client. We're able to open it up to people that maybe we haven't talked to before." So I think all those, those are positive signs. It's not that you can order whatever you want whenever you want, you know, this is, this is not an Uber Eats program. This is not a soda machine. But I think that, that we're getting better. And I also think if you think of supply chain dynamics, that's also changed. We, depending on who you talk to, there might have been 50, 60, 80 different issues, commodity-wise in one given moment. Now it's usually one or two depending on the model or the manufacturer they're chasing down for that that week or that month. I did cry out bingo recently. Um, tires, I had heard, microchips, everybody's heard, uh, seat foam headliners, headliners was a new one. I had not heard before. So if, if that's any indication of it, there is a lot of variability and that has to do with manufacturing things, it has to do with labor, raw goods as well as transportation and one of the manufacturers just put out a a blurb on a press release that said they bought 400 tractor trailers so that they could go and haul vehicles from the plants and the ramps out for delivery purposes. So I think that, that tells me well, production's okay, now we gotta get the delivery method up and running. Well okay, this is a path to go ahead and resovle that. So I think things are, things are getting better. It's just gonna take a while.

Gast: Yeah, I think being prepared, understanding what your needs are, whether we can fulfill 100% of those or whether again, flexibility and being able to pivot and use, you know, multiple sources for fulfilling these needs is quite important.

Kraus: But on the flexibility pieces, again, if, if you're gonna go look at dealer locates, you may be paying less than MSRP+++, but you know, depending on what you're looking for that, SUV is probably not gonna be a base model, fleet friendly one, right? It's gonna be a higher trim. So it's not to say that doing that again, the time and terms mentioned I had earlier, you're gonna be paying a premium for that and the premium may be because everybody gets a sunroof and you didn't necessarily want to spec that for everybody that's a driver of yours.

Gast: You'll move away from fleet standardization.

Kraus:Yes.

Manhardt: Thank you for your answer. Are you guys ok if I move on to the next question? Perfect. So this person says that they are unable to work with the current high vehicle prices but they do need vehicles. Is it recommended that they just try to manage and maintain their fleet till we get to a better position? Do they try to downsize and keep their fleet running with fewer, newer vehicles or really just, they're trying to figure out what the ideal strategy is for getting through the remainder of this shortage with high cost.

Gast: You know, I don't know that there's a one size fits all approach or an answer for every single situation. I mean, I think it varies and we really need to look at the specific, situations to analyze the fleet and develop a recommendation. Overall the, with the higher prices, if that's something that they can't, that isn't sustainable today, then maintaining, before downsizing is probably the right recommendation in that situation. But I think it, it varies based on utilization and really the needs.

Kraus: And I think all of that points towards you wanna not go with your gut, you wanna go with numbers and data, and having the right partner to help consult in figuring out what are the right things to do. What today, what tomorrow? What, six months or or a year from now? And we can certainly help with that.

Gast: And with all the data that's out there and available today. I mean, you know, it's almost, predictability is becoming a lot more important and a lot more prominent. It's a great thing.

Manhardt: The next question I have for you is really just, what about EVs? What about hybrids? Where do those stand right now? Are those a good idea to start investing in? How do I approach that?

Kraus: I think this is a topic of conversation for virtually every client meeting we have. What's your take?

Gast: I mean EVs are definitely, you know, they're here to stay. It's pretty obvious they're not going anywhere. I mean, they're becoming a lot more mainstream, a lot more available. But I think hybrids are still, you know, very dominant and I think will continue to have a place in our, in our fleets and with our clients. So again, I think depending upon the utilization and depending upon the use cases that a client has, EVs can absolutely be the right thing for some use cases. Hybrids for others and maybe there are some that frankly it doesn't make sense based on the utilization to move into the EV or hybrid space.

Kraus: Now, I like to to think that it's not just, everyone wants to talk to you about an EV. Not everybody is ready to go there yet. But they're curious and I think electrification is the broader term to use and hybrids, a lot of people are gonna make a stop at hybrid before they get to EV Town. They think of it in that context. The telematics data, we, we've mentioned that once or twice, but I think it has a play of pertinence here as well that if you have that information, you know, for a fact what daily ranges are for different drivers versus you perceive. Well, Sue and John, Joe and whoever, they, they drive about this much. You look at the data, we find time after time where they drive a whole lot more or a whole lot faster or a longer and all these different factors on why an EV may or may not be their best option. So, the, the analysis, the flexibility, the, the understanding and awareness, also, if you're talking about electric vehicles, you should really be talking about charging and what is your charging strategy to get keys to an electric vehicle and then turn it into a brick because you didn't know how to charge it is not a fun day. We've all had those different calls before. We've helped people out. But you, you really want to make sure that if you're placing that order for that electric vehicle, by that point, you either have your charging present or you're pulling the trigger at this exact same moment and you do not, do not, do not want to rely solely or wholeheartedly, you don't even want the majority of the time to be using public charging because it's expensive and you really want to be utilizing that vehicle as much as possible instead of having your drivers parked, not doing the job because they got to charge up during the middle of the day. If you depot charge or you home charge, and can do it overnight when the vehicle is not being used. It's probably the least expensive version. In a number of different ways. So, charging and EVs don't just think of the shiny vehicle, the torque and the everything else that you read about in the papers. The charging piece is a really big deal.

Manhardt: Well, thank you both. Those are all the questions that I had already submitted. I'm gonna go ahead and give everybody just a few more seconds to submit it as they would like to, but also send a reminder for any current clients who have questions. They are more than welcome to reach out to their Client Partnership Manager. That's why we're here. We're happy to assist you with any questions or concerns, especially as we prepare for, you know, a continual rocky way through this industry right now. And then for any prospective clients, please visit mikealbert.com where there are call options, chat options or email options to be able to get in touch with one of our team members and get started on putting together a fleet plan for you. And I don't see any more questions submitted. So we'll go ahead and cut it off right here. Thank you Jason and Matthew for your expertise for your time, your knowledge, your thoughts, we really appreciate that. And we'll see you all at our next webinar session. Thank you so much. Bye.

Kraus & Gast: Thank you.