Row of fleet vehicles

The hidden costs behind the microchip shortage

Monday, October 4, 2021

By: Steven Jastrow, VP, Strategic Consulting and Analytics

Fleet costs are expected to increase in 2022. OEM production delays caused by the microchip shortage are delaying vehicle replacements. This can have a negative impact on fleet budgets in two primary ways: delayed gains on sale and higher fleet maintenance costs.

 

Let’s take a closer look at these two budgeting impacts and what you can do to control costs.

fleet budgeting

Delayed gains on sale

Note: Gains on sale are typically credits to a client invoice when selling vehicles. They are calculated by the difference between the vehicle resale price and the remaining book value.

The average gain on sale per vehicle is trending up due to a stronger secondary market. However, total gains on sale are being delayed due to a reduced volume of replacements.

The average gain on sale per vehicle increased by nearly 4x in 2021 relative to 2019 due to several factors:  

  • A stronger secondary market 

  • Limited supply of new vehicles  

  • Lower book value of sold units as vehicles are kept longer  

On the other hand, the percentage of units sold over the last three years is trending downwards due to new vehicle production cuts.  

Although this is a temporary issue, clients need to be mindful that the impact of delayed gains on sale may stretch from one fiscal year to another for many fleets.  

Delayed gains can make a material difference in overall fleet costs for the year. Many fleets count on this credit to keep costs in line with budgets.  

In 2022, we expect to see continued vehicle availability constraints and gain on sale delays. As the resale market normalizes post the microchip shortage, average gains may be larger than expected. Vehicles will be sold for less but with less book value as they will have been on the road longer than normal.

Higher fleet maintenance costs

Unscheduled maintenance repairs become more frequent as vehicles age.  

Based on our portfolio maintenance data, aged vehicles have a higher frequency of roadside events, increased anticipated downtime hours and average repair costs per unit.   

Let’s compare vehicles under 100K miles to those over 100K miles: 

  • Roadside events per vehicle are nearly double 
  • Anticipated downtime hours per vehicle per year are 50% higher 
  • The average repair cost per unit is again nearly double

As vehicles put on increased mileage, they are prone to more unscheduled maintenance which can be very difficult to manage. This translates into more complexity in operating the fleet and more stress on operations and logistics departments to meet their customer demands.

The percentage of fleets with odometer readings over 100K miles is steadily increasing. This trend is likely to continue with delayed vehicle replacements.

On the other hand, average monthly miles have rebounded since 2020 but are still down from pre-pandemic levels (1653 miles per vehicle in 2019). As monthly miles continue to rebound and lack of vehicle availability pushes out replacements, we expect the average odometer reading to continue to increase.

What you can do

Connect with your finance teams: 

  • Ensure they understand gains on sale may be delayed and may stretch beyond the typical fiscal periods/years 

  • Maintenance costs may increase more than expected 

Connect with your operations teams: 

  • Vehicles may become more unpredictable with repairs and downtime events 

  • Make sure to have plans in place for when vehicles are out of service 

Take action to control fleet costs:  

  1. Manage pool vehicles for increased flexibility given vehicle availability constraints.  
  2. Redistribute vehicles from high to low mileage drivers (and vice versa) to extend vehicle useful life. 
  3. Keep current on preventative maintenance cycles. This includes oil changes, tire inflation to the proper PSI, tire rotation and fluid flushes.  
  4. Use Element’s national account maintenance network as it realizes 8% - 15% cost savings. 
  5. If you use customized upfitting, hold on to spares since rentals are likely not an option. 

For more information about how Element can help you prepare for 2022 and beyond, get in touch with us.

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