The global shortage of microchips has hit the transportation business hard.
Demand for new transit buses has reached near-record levels in North America, fueled by increased government infrastructure funding in the United States and Canada and a surge in orders of electric vehicles.
While that should be good news for bus and motorcoach manufacturers such as NFI Group Inc., one nagging problem is resulting in unfilled orders and financial losses: the continued global shortage of microchips, crucial components of the microprocessor control modules on buses.
That, in turn, has resulted in hundreds of nearly complete buses being parked while waiting for modules to be installed before the vehicles can be delivered to customers.
“Demand is at the highest level we’ve seen in years, but we can’t get the supplies needed to complete all of the buses,” said Stephen King, Vice President of Strategy and Investor Relations at NFI Group, the parent company of New Flyer Industries and Motor Coach Industries (MCI), which manufacture heavy-duty transit buses and motorcoaches, respectively. “It’s frustrating. It’s something we’ve never dealt with before.”
Production backlog growing
It’s also costly to the Winnipeg, Manitoba-based NFI, whose work-in-progress inventory of contractually sold but undelivered buses is expected to grow by 350 to 400 in the coming months as a result of the module shortage, with the “potential for an up to $200 million temporary increase in work-in-process inventory from bus delivery delays,” the company said in a recent news release.
During the first quarter of fiscal year 2022, which ended March 31, NFI reported a net loss of $28 million, “driven by the reduction in deliveries as a result of the global supply chain and logistics challenges and escalating supply disruptions of critical electronic parts from China,” the company said in its quarterly report. “In addition, the company did not receive any government wage subsidy grants, as the programs were either discontinued or NFI was no longer eligible.”
Supply chain disruptions caused mainly by the COVID-19 pandemic have resulted in the shortage of various bus parts, from windows and seats to fiberglass and tires. But the chip shortage has been causing the most problems in recent months, not only for the bus and motorcoach industry but also for the automobile and trucking industries.
During the pandemic, demand for chips plunged as vehicle sales declined steeply, causing chip manufacturers to reduce production or switch to making chips for home electronics, which surged in popularity as people sheltered at home. When COVID infections began to wane last year, demand for vehicles rebounded quickly, forcing chipmakers to ramp up production.
“It all stems back to the pandemic,” King said. “Nobody ever saw that the demand would rebound so quickly. Now everybody is chasing chips.”
‘Brains of the bus’
Microchips are necessary for the operation of the control modules on buses, which monitor vehicle components. “They are the brains of the bus,” he said. “They tell the components what to do.” Buses cannot operate without the modules.
NFI has managed to keep producing buses during the shortage by using its supply of control modules during the manufacturing process. Once a bus is completed, it is parked and the module is removed and returned to the production line for use in the manufacture of another bus.
“It’s the only component missing, so we decided to keep building vehicles, then swap out the modules,” King said.
Less impact on private industry
The chip shortage also has affected the private motorcoach industry, but to a lesser extent.
“The private motorcoach industry was hard hit by the pandemic, which essentially stopped motorcoach travel,” King said. But because motorcoach manufacturers aren’t seeing anywhere near the level of demand the transit industry is experiencing, production remains low.
King said demand for new motorcoaches is strengthening, but it will probably take a couple of years for production to return to pre-pandemic levels, “so the impact of the shortage is not as great on motorcoaches.”
Prevost, a Québec-based manufacturer of motorcoaches and bus shells for high-end motorhomes, has experienced twice the normal level of back orders for coaches because of shortages of electronics and plastics. But the company has implemented workarounds that allow it to keep its production line going.
“It has been a bumpy two years, but we have been successful at managing our back orders,” said Janique Morrisette, Senior Director of Purchasing at Prevost. “And it has started to get more manageable.”
One advantage Prevost has is that it is a subsidiary of Volvo, a major truck and bus manufacturer with enough leverage to tap the supply chain for parts.
“We are small, so it is a challenge to find parts. Volvo has really helped us in terms of electronics,” Morrisette said.
Private demand slowly growing
Demand for new motorcoaches is starting to rise because of increased interest in tours and charters, but it remains below pre-pandemic levels, she said. That helps mitigate the parts shortage.
Because of such uncertainties as the war in Ukraine, inflation and fears of a recession, Prevost doesn’t expect motorcoach sales to reach pre-pandemic levels until at least 2024. “We’re slowly ramping up,” Morrisette said.
Contributing to the higher demand for transit buses is an increase in orders for zero-emission vehicles, especially battery-electric buses. At the end of April, NFI had a backlog of 8,908 vehicles that have been ordered but not yet produced, valued at $4.9 billion. That includes 1,496 zero-emissions buses, or 17 percent of the orders. Active public bids are up 21% year-over-year, with zero-emissions buses representing 43% of total bids.
“Electric is moving faster than anyone thought it would,” King said.
Turnaround may come later in year
NFI said in an April news release that it expects the shortage of control modules to continue into the summer before supplies will increase.
“NFI was recently notified by the company’s primary North American multiplexing control module supplier that it will be unable to provide consistent module supply in the second and third quarters of 2022 due to microprocessor shortages,” the news release said.
“NFI is working with alternative suppliers and other microprocessor sources to address this disruption and assist in production recovery plans. The company has seen some success from those efforts but anticipates that it will need to lower production at select facilities and build and hold a number of vehicles in inventory in the second and third quarters. This is expected to grow inventory by as much as $200 million on a temporary basis until modules can be installed and vehicles can be safely delivered to customers.”
King said the company expects negative earnings during the first three quarters of the fiscal year before turning positive. He said they expect supplies of modules, including alternative parts that perform the same function but include different chips, to increase by August, with shipments of completed buses increasing during the fall through the end of the year.
“If we can get the buses out before the end of the year, we should see improvements,” King said. “In our view, there is lots to be excited about in the future.”
NFI, in its first-quarter earnings report, echoed his optimism.
“While supply issues are anticipated to be near-term headwinds, NFI’s longer-term outlook remains strong based on its backlog (of orders) and broader market conditions,” the report said. “NFI has received significant new orders over the past twelve months that support the company’s plan to ramp up production and delivery volumes in 2023. These new orders, combined with an existing backlog of 8,908 (orders) … other recent bid activity, and continuing growth in government investments in public transportation, are expected to drive significant revenue and (earnings) growth for NFI from 2023 to 2025.”