Good News and Bad News for Auto Suppliers in 2023

When can we expect consumer demand to return as the primary factor driving vehicle production output?

Although some models in the U.S. market — such as Ford's Maverick compact pickup — remain deeply back-ordered, consumer demand it will be some time before consumer demand returns as the industry's chief factor that drives manufacturing output. (Ford)

The Fall season brings the annual rite of passage for the industry — setting budgets for the next calendar year. The balance of building revenue forecasts driven by vehicle demand, while constructing the commensurate cost side to establish profitability, is given extra attention at this time. While most suppliers will lay out a three- or five-year AOP (Annual Operating Plan), the primary focus is on the forecast for next year. Budgets determine available capital for reinvestment, labor rates, expected material costs and in the end – a forecast of profitability. Looking toward 2023-2024, forecasting both revenue and costs is more difficult than at any time I can recall in my 35 years of vehicle forecasting.

While historically there have been minor supply interruptions to slow vehicle output, nothing in the past compares with the events that have hammered the industry since late 2019 — a multi-week labor dispute between the UAW and General Motors, followed in the last 12 quarters by more labor stoppages, a global pandemic and a semiconductor supply crisis. For three years, production output has been driven by a supply dynamic, not consumer demand. Suppliers have struggled to find balance as OEMs cut shifts of less desirable vehicles to allocate microchips toward output of more profitable vehicles. Inventories have slipped badly in the process.

The auto industry does not adjust well to a constant barrage of supply disruptions because the business is very linear. One issue at a time, please.

Beyond the slowly improving chip-supply situation, geopolitical events of 2022 and related economic factors have spurred inflation levels not experienced in decades. Russia’s invasion of Ukraine and the war that continues, coupled with the reckoning of China’s dominance in materials and processes critical for electric vehicles, have driven a new focus on supply security. Complicating the significant material-cost increases has been the inability for many suppliers to raise prices in concert with these rising costs. Fixed contracts, combined with the lack of volume guarantees from OEMs, have been a gut punch for suppliers.

In a previous column, I wrote about ILL — Inputs, Labor and Logistics — impacting the profitability of players at every tier of the supply chain. Many months later, those factors continue to force additional caution into already conservative future planning.

That brings us to setting budgets for 2023. The good news is that many supply constraints are easing, if gradually. The output dynamic is slowly improving. But inflation and shortages of labor and some materials remain significant challenges. So, when can we expect consumer demand to return as the primary factor driving vehicle production output?

Suffice to say, as global banks quickly raise interest rates to stave off higher-than-desired inflation, retail affordability is compromised. Slower economic activity is the unfortunate result.

The industry eventually will work through the supply-driven constraints, raise vehicle inventories, and reduce waiting times for new vehicles. In the process, understanding how the extreme inflation of 2022 (extending more modestly into 2023) will impact vehicle demand – and knowing how to successfully navigate through it — is key. S&P Global Mobility expects energy and material prices, labor, and logistics costs to slowly moderate, with the auto industry shifting to a demand-driven dynamic by 2024 — four years after supply constraints were the order of the day.

The industry is beginning to understand how to deal with slow demand while it simultaneously grapples with a constant barrage of supply constraints.