Greenhouse gas (GHG) regulation started with the 2011 EPA/DOT release, sometimes termed as GHG Phase 1. One foundation of this regulation was that it applied only to new vehicles built by larger OEMs who would need to balance their annual production mix of compliant vehicles with non-compliant ones so their annual production averages overall would meet the standards.
The pain of compliance was then squarely on the OEMs. That is changing.
OEMs have always had to make decisions on build mix. They plan their supply chain and tooling around expected production volumes adjusted as dealer orders become visible. Sometimes the market works within those OEM forecasts. At other times, the market demands more of certain vehicles than the OEM is willing or able to produce.
Simply speaking, build mix planning is a matter of traditional supply and demand forecasting.
Vehicles in short supply tend to come with cost premiums. Those fleets willing and able to pay premiums likely get what they ask for. Those that do not simply go to another manufacturer, or accept a lengthy delay (added lead time) that may push the vehicle build into another year’s production, and that likely means running existing trucks longer.
Supply and demand imbalance often forces new truck buyers into buying used trucks. This has the ancillary effect of driving supply and demand issues into the used truck market, raising the cost of used trucks.
The recent COVID pandemic, with its associated supply chain challenges, saw a number of new truck supply and demand issues and it raised used truck pricing. Existing orders for new trucks were delayed and those delayed orders had to be renegotiated because of higher prices required by the OEMs. Fleets wishing to trade in vehicles were faced with the prospect of high residual value. Offsetting those high residual valuations was the challenge of being able to get a replacement new truck and used trucks being sold at premium prices. That is, if either could even be had.
Balancing supply and demand for trucks is just a daily thing at OEMs and something fleets have always dealt with. GHG rules introduced some added complexity to the planning, but the fundamentals were the same. OEMs have to plan ahead. They have to plan production. They have to determine what and how much they will sell, and for how much, and when they will deliver their vehicles. Those plans are adjusted as the year progresses, but very rarely do customers get everything they want, or OEMs sell everything they wish they could.
The latest twist, though, is that some OEMs are pushing build mix decision making down to their customers and dealers. It’s been labeled ratioing. If you want to buy a number of diesel trucks, you also have to buy some zero-emission ones. A California Air Resources Board letter describes the ratio process:“Some (OEMs) have expressed plans to begin implementing a rigid policy to require each dealer or upfitter to purchase a certain number of ZEVs from the manufacturer before they can get any ICEs whether or not the manufacturer offers ZEVs in the market segment the dealer specializes.” The ratio may be 10:1 or perhaps 15:1.
Clearly this is pushing the burden of OEM compliance onto the customer.
Let’s put this marketing decision in the perspective of going to the grocery store to buy cans of food. Your grocer has been directed by the canned goods maker to require that for every 10 cans of chili purchased, one can of corn must be bought.
What if you don’t like corn? Tough. You have to buy that can anyway.
What if I’m only buying one can of chili. Tough. You still have to buy the one can of corn to go with your one can of chili.
You can see why both dealers and customers aren’t thrilled with these new ratio arrangements.
Many customers don’t buy more than a few (or even just one) truck a year. What are they supposed to do?
OEMs have always had build mixes planned out a year ahead of time. They would adjust that during the year as the market evolved, but build slots were always limited and decisions always had to be made on what got built that year.
During the supply chain crisis and pandemic challenges, fleets had their order build slots slipped out, had their trucks delayed or shipped without some option content, and some had orders cancelled and had to reorder at higher prices for later delivery.
So why is GHG suddenly being handled differently? Is it a political statement? I wonder.
In discussions with some fleets, I know that ratioing is occurring in northeast and west coast states that are working under the Omnibus rules.
I expect small and medium-size fleets may want to form joint efforts to buy new vehicles, pairing up those with ZEV plans with those fleets that are not ready yet. Maybe dealers will see these “cooperative” purchases as an opportunity to help their fleet customers work together rather than individually.
As for the OEMs, passing the buck to dealers and customers has not been the practice under GHG 1 and 2 rules to the best of my knowledge. The change in marketing approach with GHG 3 and the Omnibus rules seems like marketing desperation. In the past, traditional supply and demand free-market processes seemed satisfactory.
Are OEMs worried that their ZEV products can’t find suitable markets? Are they worried that incentives don’t make these products competitively priced? Why are they telling their people in their investor and public presentations that the future is in zero-emission trucks?
I expect internal to the OEMs there are disagreements on technologies. There are people advocating to continue to push ICE engines. This occurred in the past with the introduction of electronic engines, automated manual transmissions, electronic driver logging devices, aerodynamic cabs and fairings, and other major industry shifts. Full support of initiatives may have been voiced outside the companies, but privately, not everyone got on board.
In passing the responsibility for OEM compliance to the customers and dealers, OEMs should keep in mind that brand loyalty is about as permanent as dry erase ink on a marker board.