Date: Friday, March 10, 2023
Supply chain disruptions during the pandemic affected many sectors of the U.S. goods economy, from the sudden demand shocks that consumer packaged goods companies faced in the spring of 2020 to rolling shortages of building materials, furniture and electronics later on.
But the automotive industry was hit perhaps the hardest, and it’s not difficult to understand why: A modern car is made up of tens of thousands of individual parts, and assembling them at a constant rate requires orchestration among multiple tiers of suppliers. U.S. domestic auto production still has not recovered to pre-pandemic levels: January 2023’s production of 137,400 units was down 38% from January 2019’s 223,600 cars produced.
It’s an open question as to whether the pandemic accelerated a long-term secular trend in declining U.S. auto production, or whether production will bounce back to approximately pre-pandemic levels. The Mexican automotive industry, where General Motors and Chrysler are major players with 22.9% and 14.3% market share, respectively, has posted a stronger recovery but is still lagging behind 2019 production levels.
Charles Klein, Detroit station manager at the non-vessel-operating common carrier (NVOCC) OEC Group, which moves substantial volumes of international automotive shipments, told FreightWaves that automotive shippers were “cautiously optimistic that the second half of the year will be pretty good in terms of ordering, supply and buying.” Class I railroad motor vehicles volumes were up 10% year to date as of March 4, signifying a strong start against fairly easy 2022 comps.
Klein said that the supply chain issues — or at least the snarls in transportation networks — that were constraining automotive production are easing up. Trans-Pacific container transit times are reasonable now, and while rail service still leaves something to be desired, the extreme congestion at inland intermodal ramps has improved by “leaps and bounds over the last three months,” Klein said.
The inventory question
Limited automotive production coupled with monetary and fiscal stimulus led to today’s low inventory environment, which would normally be bullish for transportation volumes. When inventories of a good are lower compared with historical trends, replenishment drives transportation demand; but when inventories are higher compared to historical demand, freight velocity often slows as firms wait for sales to catch up and burn off inventory. In the automotive industry, lower inventories have meant historically high used car prices, which don’t yet seem to have been brought under control by higher interest rates. The Manheim Used Vehicle Value Index, which analyzes millions of used car transactions to produce a price index, was up 4% sequentially in the month of February.
Persistently high used car prices suggest that there could be pent-up demand that would respond well to higher new car production — on the other hand, higher inflation could be pushing would-be new car buyers into the used market.
Some supply chain analysts speculated that after years of disruption and unpredictable service levels in freight markets, shippers might return to just-in-case rather than just-in-time models for inventory, pivoting from a perceived overemphasis on “lean” to make their supply chains more resilient with an extra buffer of inventory.
But Klein said that if anything, he’s seeing automotive shippers start to prefer premium, expedited-style services that facilitate tight inventories and higher freight velocities. Some automotive customers ask for transloading in port cities, preferring the speed and visibility of truck movements to intermodal rail. Both trucking and intermodal contract rates have fallen hard in 2023, and the spread between the two has compressed.
The chart above shows the percentage difference between national average intermodal and truckload contract rates, which has compressed from more than 15% for much of 2021 to 10.4% as of March 8. Shippers who want to carry less inventory are paying a smaller premium to move their freight via truck than rail.
Ocean carriers are happy to offer premium services, too, Klein said.
“We’re seeing a trend among steamship lines to offer actual premium expedited services, where cargo will have priority getting loaded overseas, priority getting unloaded at destination, and faster rail transit, and I would urge shippers to look into it,” he said.
The pronounced negative environment for ocean container rates, particularly on the Trans-Pacific, caused by lower volumes and consequently a loosening of capacity, may be encouraging steamship lines to find points of differentiation and accelerate customers’ cargo.
Inbound container bookings to the United States have turned a corner and picked back up in 2023, although they’re nowhere near the elevated levels of 2021, which saw ports, terminals and rails clogged with excess containers.
At least some automotive industry analysts don’t think that the industry will even attempt to return inventories to pre-pandemic levels. Barclays equity analyst Dan Levy, who published a 258 page initiation note on the automotive industry in February, thinks that automotive OEMs and suppliers will stay leaner for longer.
“The current set-up is unprecedented, with US vehicle prices at all-time highs and US inventories still at depressed levels,” Levy wrote in the initiation note dated Feb. 15. “On one hand, recession risks imply challenges for the cycle, as does elevated (even if normalizing) inflation. Yet there are offsetting positives. With global auto production volumes still at depressed levels, we expect an upward trajectory, albeit only reaching normalized 90mn LVP by 2026. US pricing should remain strong, even if moderating, and while inventory build may last until 2024, we expect it to settle at only ~75% of historical levels. Lastly, pent-up demand should support sales in the US.”
Automakers are keeping a close eye on the American consumer, too: While there may be pent-up demand in the sense that drivers have let their cars age, on aggregate, Americans are overleveraged. Even as interest rates have risen, the amount of revolving consumer credit held has reached all-time highs, implying that they may be short on cash. Meanwhile, real personal incomes were negative in January 2023 compared with December 2022.
Automotive shippers may find it difficult to square an upward trajectory for production with weak consumer fundamentals, and indeed, their supply chain strategies reflect their awareness of downside risk to demand. For now, suppliers and OEMs are playing it safe: staying lean on inventory while exploiting loose transportation capacity to accelerate freight velocity in their networks as they wait to see how the consumer story unfolds.