THE global truck market is undergoing inexorable change with the rapid proliferation of low-cost trucks, which are priced 20% to 25% lower than conventional trucks.
This offers threats to truck manufacturers in North America but also opportunities for sustainable revenue generation to those manufacturers, along with system suppliers and all corners of the global industry.
“The demand for low-cost trucks is set to experience steady and robust growth over the next five years,” said Sandeep Kar, global program manager for Frost & Sullivan's Automotive & Transportation Group. “Asian OEMs, particularly those based in China and India, are creating low-cost global truck platforms that will be targeted at global markets. The North American and European OEMs are acknowledging the threat and are realizing the opportunities that they can avail through participation in the global low-cost truck market.
“The challenge lies in creating globally competitive low-cost truck platforms that can not only help them in defending market shares in their local markets, but also enable market penetration and growth in developing markets. Developed market participants must continue seeking partnerships with manufacturers in emerging markets. As a strategic response, market participants in North America and Europe should also consider creating new nameplates and well-differentiated product platforms. Diversification of supplier base and vertical integration of systems and components that enable attractive cost savings must be pursued.”
In “Emerging Market Commercial Vehicle Sales in NAFTA and Western European Markets,” Kar and Ryan Carmichael, Frost & Sullivan's research analyst, presented their findings based on 450 interviews with senior executives around the world, providing a global analysis focusing on six regions: North America, Europe, South Korea, China, Japan, and India.
Kar said the benefits (market presence, market access, supply network enhancement, local market defense, and sales growth) far outweigh the tradeoffs (quality, reliability, image, margin, and strategy dilution).
“Fleet managers told us they are willing to consider robust trucks from foreign manufacturers,” Kar said. “There are changing perceptions. In the truck market, foreign-made trucks are more welcome than ever before. While it's very true that the global market for low-cost trucks is growing very rapidly, it cannot take over the fact that regulations around the world are getting more and more stringent and making it difficult for truck makers and suppliers to build trucks cheaply. At the same time, all the over world, managers and consumers are demanding more reliable trucks. Rising material and labor costs are a problem all of us have. At the same time, a robust truck market offers very thin margins, which is making a lot of OEMs think twice before entering this market.”
Carmichael said market drivers are outweighing the restraints, which is accelerating rapid market proliferation. Those market drivers include: the emergence of Asian OEMs; financing constraints; vehicle replacement cycles, with a need to upgrade some seriously outdated technologies; urbanization, which is causing downsizing; and economic uncertainty, which is causing some companies to do a capital-risk model shift, going away from a 10-year life cycle.
MCV, HCV platforms
Kar said that because of those drivers, it's no surprise that in the next five years, over 21 key global low-cost medium commercial vehicle (MCV) and heavy commercial vehicle (HCV) platforms/models are likely to be introduced by global OEMs:
In HCV, Sinotruk HuangHe, Sinotruk Howo, MN 25/40, Tata Prima, MAN Force, U-Truck, Dongfeng DFL, Asia Motor Works, and Hyundai HD by 2012; and Daimler Brand X HD, Iveco LC HCV, GAZ-FAW HD, KamAZ LCT HD, and Volvo Dongfeng LCT HD by 2016.
In MCV, Volvo-Eicher VE, GAZ 3309c, Dongfeng Duo, and Isuzu FTR by 2012; and Iveco's Chinese platform based MD, Daimler Brand X MD, and Fuso FG LCT by 2016.
“We have the usual suspects, but we also have Iveco and Daimler flying solo,” Kar said. “Iveco has created a completely new platform and Daimler is creating a platform from six to 49 tons GVWR.
“Do you have a plan or a platform? Because in the future, the stage will get very crowded. In order to compete effectively and efficiently, you have to have a platform or a plan, whether you are a supplier or a truck maker.”
In benchmarking of key India-based global truck platforms, margins of 6% to 9% are possible through development of global market-focused volume driving low-cost truck platforms.
“All the platforms that have the most potential for market penetration come from India,” Kar said. “The OEMs using India as a manufacturing base can generate this 9% margin for a low-cost truck.”
In MCV, there is Volvo with the Eicher VE 20.16, which has a 6-cylinder, E483 TCI, 147-hp engine with European emissions regulations, a five-speed, manual transmission, 4800-mm wheelbase, 16.2-ton GVWR, 10.3-ton payload, an estimated global weighted price in 2016 of $35,500, and an estimated OEM margin of 5% to 7%.
In HCV, there is Navistar with the Mahindra MN25, which has a 210-hp engine with European emissions regulations, six-speed manual transmission, 4250- to 5000-mm wheelbase, 25-ton GVWR, 15.9-ton payload, an estimated global weighted price in 2016 of $72,000, and an estimated OEM margin of 8% to 9%.
“We believe they have a very good chance of success,” Kar said.
Daimler's Brand X truck has a 120- to 300-hp engine operating under the Euro IV+ emissions regulation, six- to nine-speed transmission, an estimated global weighted price in 2016 of $35,000 to $80,000, and an estimated OEM margin of 7%.
Kar said a key global truck platform from Tata Prima shows reliance on a global supply chain: various functional and aesthetic components for interiors and exteriors come from Tata AutoComp System; seating systems from ISRI-TJC (a joint venture of Tata Johnson Controls and ISRI); outer rear view mirrors from Tata Ficosa Automotive; chassis from Mexico; radiator and intercooler from Tata Toyo; headlamp cluster from Tata Visteon; suspension from TACO Hendrickson; air braking systems for truck and trailer from Knorr Bremse; nine-speed manual transmission from ZF; entire wiring harness, fuse relay box, and bulk head for interconnection connectors between front and dash wiring harness from Tata Yazaki; engine from Cummins and Fiat Powertrain; and cab styling from Italy.
The retail price is approximately $50,000 in India and $70,000 to $80,000 globally.
“We believe these kind of trucks offer new insights into how a global low-cost truck maker is operating,” Kar said. “They entered into foreign partnerships and are making trucks that are more reliable than they used to be. They carry systems from the most innovative companies. This is the exactly the kind of model that North American and European companies must model if they want to go global and compete.”
Alliances spur growth
He said that major OEM brand alliances worldwide are set to expedite the development and marketing of low-cost trucks globally. In Europe, Daimler has Mitsubishi Fuso,
KamAZ, Foton, and GAZ as its global partners; Volvo has Dongfeng, Eicher, and Mack; Iveco has SAIC; Volkswagen/Scania/MAN has Force, CNHTC (Sinotruk), and Wangpai; KamAZ has Tatra, Foton, and LongSeen. In North America, Navistar has Mahindra, Caterpillar, JAC, and Otokar; and PACCAR has DAF. In Asia, Tata has Daewoo; and Nissan has Dongfeng and Ashok Leyland.
“In terms of a low-cost market success projection, we are most bullish about Iveco and Daimler because of the strategies they are executing now,” Kar said, adding that Navistar is the choice in North America.
Kar said he believes that in 2016, there will be 1,413,642 low-cost truck options in China, 616,947 in Europe, 487,274 in India, 322,528 in Japan, and 129,728 in North America, almost triple the number of 2009 (44,090).
The global low-cost truck market is expected to grow at a compound annual growth rate (CAGR) of 8.6%, amounting to production of 3,199,571 million trucks by 2016, including over 2.2 million in LCV. The entire global market had 1,790,721 in 2009.
How does a company manufacture low-cost trucks? Frost & Sullivan looked at some best-practice OEMs and suppliers, and found that aggressive cost-reduction strategies are delivering 19% to 29% reduction in cost:
5-8% in the powertrain: downsizing of the engine with/without turbocharger; new materials; basic aftertreatment; and low-speed manual transmission.
3-4% in chassis: lower axle ratios; lower-priced chassis construction materials; basic brake, steering, and suspension technologies.
3-4% in comfort and convenience: optional A/C; limited infotainment; analog displays/integrated cluster; integrated headrest; and no central locking/power window.
1-2% in electronics: basic networking architecture; and low-cost multiplexing.
1-2% in margins: minimum to no discounts; and lesser warranty protection.
1-2% in safety: all safety features except regulated systems optional; and low-channel ABS, sensor fusion.
1-2% in marketing and sales: distribution through existing dealership networks; and advertisement cost/budget reduction.
4-5% in others: design changes (narrow cabins, cheaper materials, manufacturing design, etc).
“The idea here is not about making cheap trucks,” Kar said. “It's about making trucks cheaply.”
Of high importance are low-cost production locations (manufacture in local markets and leverage lower input and labor costs), design to cost (target market and find out if the vehicle will be successful, find the price point, and design the vehicle to find that price point), and de-contenting (removing comfort and convenience features).
Of moderate importance are material sourcing, standardization, R&D, marketing and sales, and after-sales service. Of low importance are manufacturing processes and management expenses.
Kar and Carmichael presented a cost breakdown of Tata Ace, a one-ton truck selling at $4,890 in India: 29.2% of the cost of truck is the powertrain, and 15% is in the chassis and comfort, with the chassis and cabin shell being one single unit.
“The high net profit margin (9.8%) of well-established models such as the Tata Ace is because of incremental gains from a project beyond break-even point, large economies of scale, only variable costs and minimal additional investments that result from a phenomenal level of sales,” Carmichael said. “The dealer margin (3.7%) is significantly less for low-cost trucks like Ace, but the dealers are compensated by the high volumes of sale.”
US heavy-duty fleet managers, when asked to rank the influences that impact their fleet's purchase of powertrain technologies, said that reliability is the most important (29%).
“The challenge will be ensuring that you can continue to deliver quality and reliability to get that vehicle the cheapest,” Carmichael said.
He said the ideal low-cost HCV for global markets would have:
A median price of $65,000. “That is the base minimum necessary to create a baseline platform that features globally harmonized technologies and systems.”
Payload of 25-40 tons. “China and India markets will grow and mature towards demanding higher GVWR engines.”
Powertrain with 8-10-liter, 240-280-hp engine. “There's a need for smaller engines than comparable conventional trucks. A cost advantage is expected for western OEMs due to in-house vertical integration.”
Chassis design with hydraulic powersteering, air drum brakes S-cam, inverted bogie suspension with option for air suspension, and C-frame chassis.
Target price recommendation: $16,000-$20,000 for LCV, $32,000-$40,000 for MCV; and $70,000-$85,000 for HCV.
Product positioning: LCVs with 1.8-2-liter engines, 120-140-hp and five-speed manual transmission; MCVs with 5-liter-plus engines, 200-plus-hp and six-speed transmission; HCVs with 16-25-ton GVWR, 250-300-hp, 8-plus-liter, and nine-speed transmission (non-long-haul type applications).
Barriers to entry include: steep regulatory barriers; stringent emission and safety regulations; strong position of local OEMs; the need for unique designs in MCV and HCV segments; and entry in the HCV segment is limited to intra-urban and intra-regional segments (day cabs, short-cabs, etc).
Reasons for entry include: wide-open price gaps in LCV, MCV, and HCV segments; the need for powertrain downsizing and lower horsepower engines; and the recessionary environment.
“There is short-term pain, but long-term gain,” Kar said.