Another strain on automakers: Meeting fleet demand

Fleet operators — rental car agencies, commercial businesses and governments — have purchased more than a million vehicles from automakers this year, and they would like to purchase many, many, many more if they could.

Like mother birds staring down at nests full of hungry chicks, automakers are facing tough decisions about which mouths to feed as they continue to struggle to manufacture vehicles — franchised dealers with empty lots or fleet operators willing to pay more than ever to keep their businesses moving. And each of those hungry mouths are motivated to do whatever it takes to stay fed.

"Today, the fleet customers are saying I'll take anything within reason on four wheels," Bob Carter, head of sales for Toyota Motor North America, told Automotive News last month. "Those discussions are just starting to open up, but clearly we're not in a position to make further commitments until we have further input into our supply chain outlook."

Traditionally, most automakers negotiate their fleet purchase agreements on a yearly basis, usually at the start of a model year — in the second or third quarter. In normal times, those high-volume, long-term agreements allow automakers to smooth out their production schedules and keep their factories running as efficiently as possible by filling in the ordering gaps in demand from franchised auto dealers.

But of course, thanks to a one-two punch of COVID-19 and the global microchip shortage, these are not normal times.

Dealer lots across the U.S. are at historically low levels of inventory, and retail customers are putting deposits down on new vehicles before they're assembled. Meanwhile, fleet operators' desperation is just as palpable.

Rental car companies sold off much of their inventory when travel collapsed in early 2020 because of COVID-19. As tourism and business travel resumed this year, they face shortages so severe in some places that consumers have resorted to renting moving vans.

Many commercial fleet operators similarly put off their regular fleet purchases last year because of uncertainty around the virus, and now face vehicles that are well past their prime and in need of replacement. Government vehicle purchases were also delayed in 2020.

A survey of large and small fleet operators published last month by Global Fleet Management found widespread pent-up demand.

"We will most likely be ordering more vehicles in 2022 as the ongoing chip shortage is limiting our orders this year," Mark Leuenberger, vice president of enterprise vehicle operations and logistics for Cox Enterprises, told the publication.

Many fleet buyers faced their own COVID-19-related challenges that might have cut income and forced layoffs or other expense reductions last year, and now they are facing tougher negotiations with automakers swamped with demand.

Enterprise Holdings, the parent company of Enterprise Rent-A-Car and National Car Rental, as well as other subsidiaries, is one of the largest private purchasers of vehicles in the U.S., and buys more than a million vehicles each year from 21 manufacturers representing 30 brands. A spokeswoman for the company said it had "taken a very thoughtful approach to our fleet strategy throughout the pandemic. While we reduced the number of vehicles in our fleet last spring when travel came to a virtual standstill, we did that thoughtfully so that we could continue to support ongoing transportation needs that continued throughout the pandemic."

As travel demand returned, Enterprise "started adding vehicles back into our fleet and making commitments for new vehicle purchases from our manufacturing partners so that we could refresh our fleet as we normally would and also to meet the demand," the spokeswoman told Automotive News by email. She said Enterprise's "relationships with our manufacturing partners remain strong and we continue to work with them to secure additional rental vehicles to meet leisure travel demand and broader transportation needs."

But the same production issues that have kept cars off dealer lots have impacted fleet sales, and automakers will have to choose which bucket to refill first.

"The profit margin on fleet sales is usually low," said Doug Betts, a longtime top executive with Nissan Motor Corp. and Fiat Chrysler Automobiles who is now president of the automotive division of J.D. Power. "They're buying in bulk, they're good at negotiating, and they're not emotionally attached to a particular model, so they know they can usually go across the street to get what they need. But fleets are in a situation right now where the pricing that they could normally get is just not going to be available because there are plenty of customers out there right now who want these cars."

Betts said automakers are in an unusually strong position this year as they negotiate their fleet contracts, as long as they can keep their production flowing amid microchip and other supply chain challenges and concerns about the delta variant of COVID-19.

"I would imagine it's going to be pretty difficult for [fleet buyers], and the only solution is the normal capitalist solution: They're going to have to pay more if they want the vehicle, because I've got somebody else who will buy it," he said.

Not all fleet sales are direct, of course. A spokeswoman for General Motors said that in a typical year, "about 10 percent of fleet business is sold out of dealer stock. Fleets generally order vehicles as needed to ensure timing of the unit and equipment."

While not all fleet contracts are negotiated in the third quarter, many have traditionally been done at this time of year because it is mutually beneficial for automakers and large fleet operators, Betts said.

"The people buying fleet cars want to get on the front end of the new model year, because they hope to dispose of them before they become an old model year, because their biggest cost is depreciation," he said. The timing helps automakers because "January and February are not usually great consumer selling months, so you know that you can fill those [fleet] demands in that window of time and keep your factories operating efficiently."

Toyota's Carter said that last year the automaker talked with its dealer council about the need to fulfill contractual obligations to fleet customers that were made in the third quarter of 2020.

But as those contracts come up for negotiation this year, Carter said the company's traditional practice of dedicating 8 to 10 percent of its production volume to fleet is likely to come under pressure.

Toyota's total fleet volume through July was just over 175,000 vehicles, up about 71 percent over 2020. Included in that number were about 28,000 sales to traditionally more lucrative commercial fleets, and the remainder to rental car operators, a spokesman for Toyota confirmed. The Japanese automaker's year-over-year jump is the highest of any large mass-market automaker. Nissan's fleet business is up by about 48 percent this year, while fleet sales for General Motors are down 6.9 percent, Ford Motor. Co.'s are off 10 percent, and Stellantis' are down 18 percent, according to industry sources and confirmed by Automotive News.
Charlie Chesbrough, senior economist with Cox Automotive, said automakers that are able to keep factories operating are in the best position to capitalize on the outsize demand from consumers and fleet buyers.

"It's an interesting situation that is a real plus for the manufacturers," he said. "They can keep their retail channels stocked, and when and if retail demand starts to wane, they can shuffle the production off to the fleet operators at an increased price."