State of the industry:

April 1, 2009
With dynamic forces at work, massive change is under way, and companies must adapt and stay ahead of the curve

Economic, global, and social issues are combining with industry dynamics to produce massive change.

“We could think in the past about where the future might be,” National Truck Equipment Association (NTEA) president Jim Carney said. “We had some sense of what it might be. But with the relentless changes we're seeing, there just doesn't seem to be any validation of truth or sense of where we're going to be in the next few years.

“We can tactically react to change. We can take a look at our business from the tactical standpoint — what we want to do with it. Or we can embrace change strategically. This is a long-term approach: whether you buy or sell your business, or merge with another business. What are your outsourcing opportunities? Look at your core business and how you might strengthen that so you're ready for any changes occurring in the industry.”

Carney, presenting “Keeping Ahead of the Curve” as part of a “State of the Industry” session based on two reports NTEA has commissioned over the past few years, said the issues that are driving industry change are consolidation, globalization, customers, technology, and government.

He said that all forces are in place in the truck-equipment industry for a greatly compressed sales and distribution channel in the not-too-distant future. Compression will result in more sales going through fewer outlets, resulting in a reduced number of suppliers and upfitters.

“The report indicates that we have not seen the end of consolidation,” he said. “In fact, we may be at the beginning stages of what will likely be years of consolidation. To a large extent, market-share consolidation is being driven by the truck manufacturers. Through their bailment pools and ship-through programs, they are driving a lot of sales with fewer suppliers. Consolidation is blurring the traditional roles in the industry. Manufacturers sell direct, many so-called distributors manufacture product, and, in some cases, it is not an exaggeration to say that everyone is competing for the same business.

“Manufacturers, in an effort to expand their market shares, have consolidated by expanding their product lines and by buying or establishing distribution outlets. And, finally, there has been a lot of private-equity money coming into the industry and fueling the consolidation movement. Companies like Reading, Crysteel and a host of dump-body companies, America's Body Company, Wassau, Everest, and Frink and a number of other companies have all been touched by private-equity money.”

Natural consolidation

Carney said 87% of members said consolidation will continue even in the recession, and 80% said it would even speed up during the recession.

“I guess you could say that as sales shrink and the market consolidates, we'll lose some of our distributors and manufacturers in the process, and that will lead to a natural consolidation,” he said.

“The truck-equipment distribution channel is in chaos. Everybody's trying to get to end users. Everybody's doing business with everybody. That's the reality we have today, and it's a situation that's causing a lot of turmoil in our industry.

“In light of what's happening in the industry and perhaps lower sales and lower volume, what happens to your business as a distributor? Where are you going to go?”

He said that parts and service sales were 27.5% of their business in 1984 but 30 years later had dropped to 16%, with equipment and accessory sales increasing 5% and truck-body sales increasing 9%.

“Distributors were able to shift their business,” he said. “Now, with truck sales falling, are we going to see a shift back to the old model? You have to look at your business and determine where you want to be strategically.”

He said work trucks are under stress, with two of the three largest markets — truck dealers and construction — down 54% and 39% respectively.

“So this recession is hitting us in the stomach, right where it hurts, and it's something where the individual is the largest buyer in most categories, and most individuals buy from truck dealers,” he said. “But there is a lot of business out there yet. In spite of all the horrible news you hear every day, there is a lot of optimism. Perhaps this recovery is going to happen sooner than we think.”

He said the report showed that 35% think chassis supplies will be the most critical issue when the recession ends, followed by lack of employees (20%), competition (20%), and lack of inventory (16%).

“Chassis are going to be a critical problem going forward,” he said. “Given what happened to OEMs over the months where gas prices spiked and they shifted production to small cars, they made significant changes that aren't going to be corrected easily. As a distributor or manufacturer, I would be looking at ways to improve alliances with truck dealers or with OEMs to see that I can have as much of a chassis supply as possible.”

Carney said that only 3% of companies reported that they are working at full capacity, 35% at three-quarters to full capacity, 55% at one-half to three-quarters capacity, and 11% at half-capacity or less.

“There's a lot of capacity in the industry,” he said. “As business improves, it's going to be very competitive. People have indicated they will not reduce prices to get business. Typically, when business starts to improve, people start selling on price just to fill up the factory.”

What should you do strategically?

He said companies must take a long-term view to position themselves for consolidation by: building value in the business, developing core expertise and products, targeting markets and establishing a stronghold, developing people, and building supplier alliances, especially with chassis manufacturers or dealers.

And they must understand their position in the market and strive to apply their core competencies to the fullest extent by: building value propositions to showcase competitive differentiation; considering bundling services; identifying parts and service opportunities for increasing sales; and researching and developing niche markets that match company strengths and expertise.

International angle

Carney said globalization is a double-edged sword. It presents some challenges — including greater demand for resources throughout the world, which is putting cost pressures on businesses in North America — but companies also have found that they can effectively outsource production in Mexico, South America, or even China, and save money.

He said that in terms of companies positioning themselves for a recovery, 70% said they would diversify, 18% are looking at niche markets, and only 2% are considering exports as a viable opportunity for growing their business.

He said 48% of manufacturer members, but only 26% of total members, are involved in international trade.

“Companies must adapt to changes in the economy and position themselves for global opportunities,” he said. “Consider outsourcing opportunities and importing products, research export trade opportunities, monitor and prepare for product mix changes, and prepare for a greater number of world truck chassis products. Look at your products and see how they fit with smaller, more fuel-efficient vehicles. Is there opportunity or threat there?”

He said customers are creating change in the products that are sold, in the way they are sold and delivered, and in prices. Businesses have to make a better effort to know their customers, he said.

“Customers are consolidating,” he said. “Just like their suppliers, truck buyers are consolidating and pushing more volume through fewer purchasing points. More often than not, purchasing decisions are not being made by specifications engineers anymore — they are being made by financial managers. This significantly changes the selling relationships throughout the industry. As many of the old fleet engineers and specifiers are moved out by way of attrition or retirement, it is extremely important that suppliers become more technically competent and knowledgeable about the products you are selling.

“Fleets and customers have access to more information and to more purchasing points. As a result, there is no long-term loyalty. Fleets, because of their size, and because of the information they have available to them, have more bargaining power. Fleets are driving standardization of products. They want to buy things that work for fleet operations spread over a large area and that are being used by a large number of operators. They want efficiency in parts and service operations and in the training of their people on the equipment they are using.”

Carney said that when asked what they would do differently during the recession, 36% said they would cut costs, 24% said they would look at new market areas, and only 20% would look at customer knowledge and strategies.

“I think that's been a mistake,” he said. “You have to get to know your customer and develop a certain mindset, so do customer research that's ongoing and relentless, and consider environmental issues the customer is facing. Look at green trucks and get to know what your green footprint is. A lot of customers are now asking for environmental impact statements with bids. You have to become the truck expert.”

Washington, DC: Your New Business Partner

Michael Kastner, the NTEA's senior director of government activities said the industry is part of an “historic transition” — accelerated by the economic crisis — in which the government is more involved in the business of business.

“There's no question that the government and industry are merging in a way we've never seen before,” he said. “The government hasn't clearly defined its role. Is it the regulator and taxing authority, or the equity partner doing what it can to make the business they partially own profitable?

“It's incumbent on us in the business community to work and shape that decision-making process. T Boone Pickens (earlier in The Work Truck Show) said we should go to the government and say, ‘This is what we need. We'll work with you, but we need you to be on board as well.’ That's what we all need to do. There's no question that government will always be to some extent the taxing and regulating authority. That doesn't mean that we have to have an adversarial role. There is a role government can have as a safety net and as a partner.”

He said the $787 billion economic stimulus package is “critical to our industry and will be beneficial, although it remains to be seen how long it will take to trickle down” — including $27.5 billion specifically targeted for infrastructure spending on highway and bridge construction.

“At least half of this funding must be obligated by the individual states within 120 days of enactment, and the other half within one year,” he said. “It goes to states and they green-light projects. That money should flow pretty quickly. As soon as construction companies' current vehicles start breaking down, that's going to be helpful to us.” He said an additional $32.8 billion will go toward clean- energy projects, $26.86 billion for energy efficiency initiatives, and $18.95 billion for green-transportation initiatives, including:

  • Diesel retrofit: $300 million to be administered by the EPA to fund the National Diesel Emissions Reduction Program, making grant money available to heavy-duty diesel vehicle and equipment owners to retrofit their fleets with cleaner engines.

  • Electric vehicles: $300 million to be administered by the Department of Energy's Clean Cities Program providing grant money to encourage the use of plug-in electric drive vehicles or other emerging electric vehicle technologies.

  • Energy-efficient federal motor vehicle fleet procurement: $300 million for federal fleet acquisitions of motor vehicles with higher fuel economy, including hybrid vehicles, electric vehicles, and commercially available, plug-in hybrid vehicles.

The US Truck Market: An International Perspective

Tim Campbell, managing director of the Campbell CV Marketing Group, said the NTEA gained insight by attending the IAA Commercial Vehicle Show in Hanover, Germany.

He said that while some of the vehicle designs and styles are foreign to the North American market, much can be learned from the vehicle engineering, the quality of the finished product, the aerodynamics, and the use of lighter materials such as aluminium and plastics.

“Can we translate some of these vehicle concepts and designs into practical application in the North American market?” he said. “Time will tell. It seems likely, though, that as the truck manufacturers consolidate on a global basis and the ‘world truck’ becomes more of a reality, many of the truck styles and designs will make their way to the Western Hemisphere.”

He said that in the past, the US asked, “Why do we need to know about Europe?” Now, many of the “heavy” manufacturers are owned by Europeans, the US will have to deal with the SCR/EGR issues that Europe already has learned from, China has entered the global market and leapfrogged the US to become the world's largest auto market, Toyota has overtaken GM as the world's largest supplier of cars, Fiat is poised to take a 35% take in Chrysler, Nissan will enter the US market with light trucks and vans, and GM might sell its medium-duty business to Isuzu.

“We're getting more complex relationships globally,” Campbell said. “You have two options: either bury your head in the sand and say, ‘I hope it goes away’; or you can say, ‘The world is changing. I can look outside the US.’ We are all interconnected. We're in that area of uncharted territory.”