Auto industry forecasting is suddenly really tough

TRAVERSE CITY, Mich. — These are challenging times for companies all over the auto industry. But for economists and analysts employed in the dark science of forecasting, the times are just nuts.

"It's gotten much harder to forecast what's going to happen," sighed Jeff Schuster, president of global forecasting for the international firm LMC Automotive. "There's just too much uncertainty out there."

Schuster's sentiment echoed through an industry gathering here this week for the Center for Automotive Research's annual Management Briefing Seminars. Despite the exhilarating outlook for the decade to come, with a tidal wave of electric vehicles and brilliant new technologies in safety and manufacturing, many in the industry are struggling with a lack of clarity in the here and now.

The reasons?

• Consumer curiosity and interest in electric vehicles is clearly growing. But automakers simply don't know how many EVs they will be able to sell in the next seven to eight years, nor whether they will have their factories, EV batteries and supply chains prepared for their big plans, nor what to tell suppliers to plan for on new EV programs vs. legacy internal combustion vehicles.
• A worldwide shortage of microchips has bedeviled factory output for the past year and a half, making it harder than usual to plan operations and launches.
• COVID-19 continues to hang over planning meetings like a vulture, affecting staffing efforts and the ability to ramp up production lines.
• The war in Ukraine is threatening to further stress European auto market conditions for the next several months as households in Germany and elsewhere face winter weather and higher-priced home heating fuel.
• And inflation is pushing prices higher, especially on raw materials, wreaking havoc with some suppliers and their business plans.

"A lot of Tier 2, Tier 3, smaller suppliers have thrown contracts out the window and said, 'This is what you've got to pay or you won't get the parts,' " said Pat D'Eramo, CEO of Martinrea, a supplier of metal parts, assemblies and modules, and fluid management systems in 10 countries. "In other areas, like Europe, they don't necessarily throw contracts out the window, but they go bankrupt. I think every week we have a bankrupt sub-supplier in Europe. It's a very difficult situation with Tier 2 and Tier 3."

Inflation, which stood at 9.1 percent in June, also is resulting in higher sticker prices. Kelley Blue Book reported a record average transaction price of $48,043 in June, compared with less than $36,000 five years ago. That, coupled with worries about a potential recession, is making some consumers withdraw from their new-vehicle search, according to Michelle Krebs, executive analyst at Cox Automotive.

Krebs appeared at the conference as part of a panel discussion titled "2023: A Return to Trend?"

"I'm glad 'A Return to Trend' has a question mark on it, because I think it's very questionable," Krebs told the audience. "Forecasting is really hard right now."

She pointed out that Cox began this year with an upbeat forecast for 16 million new-vehicle sales in 2022. However, soon after that, production setbacks and complications from the chip shortage cut the expected full-year total to 15.3 million. At the end of March, Cox revised its forecast to 14.4 million.

This week's underwhelming industry sales report for July has Cox considering another downward revision, Krebs said.

"Our current forecast is 14.4 million," she said. "It could change tomorrow."

Schuster appeared on the panel and echoed her words.

"The name of the game right now is real-time revision," he said.

What's clear about the years ahead for the industry is that it's on the brink of a historic transformation into EVs in accordance with the Biden administration's target of making plug-ins represent half of U.S. sales by 2030. But the daunting and unanswered question is how smoothly — or painfully — that transformation will happen for automakers, parts suppliers, retailers and consumers.

"We know the tipping point is coming," said Eric Wilds, chief sales and marketing officer at Magna International, North America's largest supplier. "We're making lots of scenarios just so we can be flexible."

EV programs represent 70 percent of the projects Magna is engaged in, he said.

"Electrification is a big piece of what we're building our future portfolio to be," Wilds said. "But which year? We'll have to be flexible and adjust."

The problem for anyone who needs to look ahead and plan, like a parts supplier that has to anticipate production volumes, is that the market is not behaving like it normally has. Even though there are signs of a recession, people still have their jobs, wages are rising, and demand for new autos is strong. Yet inventories are so low that retailers can't deliver enough vehicles to customers. And automakers can't provide more vehicles because of all those problems in the supply chain, such as not enough chips.

"This is where you throw your models out the window," Schuster said. "They don't work in this environment. You really can't predict using your traditional macro indicators like consumption, GDP and interest rates, given the uniqueness of this environment."

What many companies want most in the summer of 2022 is not necessarily record sales, but simply stability.

Because of the roller-coaster feel of the past two years, Volkswagen has begun looking to automate some of its parts-purchasing activity, said Inga Von Seelen, Volkswagen Group of America senior vice president of purchasing. Some parts can be "completely bought by a computer," with approvals being set ahead of time, she told a conference audience.

"That gives us a huge opportunity for our people to focus on the right topics" instead of the current supply chain complexity, she said.

Robert Young, Toyota Motor North America's group vice president for purchasing and supplier development, said a nice period of stability would allow the industry to rebuild adequate inventories.

"If we don't hit 17 million units in the next five years, that's OK," Young said. "We'll take 16.2 million with stability anytime. The industry will thrive in that kind of environment."

But forecasters are shying away from predicting a return to 17-million sales levels anytime soon because of all the headwinds.

"We believe there's a shrinking pool of new-car buyers," Krebs said. "A lot of people have taken themselves out of the market. They've moved to used cars, and they've just been priced out of the market.

"So if you sell parts to automakers based on volume, that's going to be a problem, because we don't see volumes going up substantially until 2025."