IF YOU THINK driving the freeways near your home requires nerves of steel and lightning reflexes, imagine what it is like to be a NASCAR driver. You cruise 180 mph just inches from the car ahead of you while another driver is a hiccup away from your rear bumper.
In an environment like that, no one in this chain of vehicles has any margin for error. One little surprise. One small mistake. One little system failure. One big mess.
That's the way trailer manufacturers raced through the 1990s. Pedal to the metal. Drafting the guy ahead. Running on the thinnest of margins and crashing into the new millennium.
As we put together this year's Truck Trailer Manufacturers Association convention report, we recall a comment one of the manufacturers made at a time when everyone's plants were racing at top speed, and the industry as a whole was approaching red line. His basic point:
“Our volume is great. Our profits are lousy.”
Looking back, this was a clear warning of the slowdown that was to come. The obvious question: If profits are lousy in the good times, what's going to happen when the customer slams on the brakes?
As one trailer manufacturer after another felt the crunch, it was clear that our friend with the thin margins was not the only one in the race.
Trailer manufacturers follow closely behind the fleet customer. Unfortunately, the customer doesn't have much margin, either. One of the more significant facts to come out of this year's TTMA convention was a simple statement by Prassad Sharma, assistant legal counsel for the American Trucking Associations — that trucking companies on average operate on a 2% profit margin.
The statement may not have been news to those familiar with fleets, but it is important because of its implications. When the lead car slows down, it affects the entire race.
With thin margins, what does the trailer customer do when insurance rates double? When fuel costs rise? When freight volumes fall? How able — or motivated — is he to expand or replace trailers when his eye remains on the yellow caution flag?
The 2% average margin for U S fleets speaks volumes about how challenging it will be for trailer manufacturers to strengthen their bottom lines. Of course, profits will improve as trailer customers begin stepping on the gas a little more — and industry analysts believe the market is poised to do just that. A substantial number of aging trailers needs replacing, and the need increases daily. At the same moment in time Peter Toja was telling TTMA members that demand for trailers should increase during the third quarter of this year, trailers all over the country were wearing out just a little bit more. They were delivering loads, having scrapes with loading docks, and suffering wounds from hard-charging forklifts.
Tens of thousands of these trailers already would have been replaced under better economic conditions. Only 140,000 trailers shipped last year, and another 140,000 are expected to roll off the assembly lines this year. Given the size of the trailer population, 140,000 is well below the number normally required merely to replace those that wear out each year. Under Toja's scenario, the second half of this year will kick off a boom period during the next five years that will be comparable to the last one. (For details of Toja's trailer forecast, see page 28)
But while the number of trailers that will be shipped during the next boom is expected to be about the same as the last one (which incidentally was the greatest five-year period in industry history), what about the companies that will produce them? Who will they be, and what will they look like? While some of the manufacturers that have been severely harmed during the past few years may come back, it's clear that this crash has left many drivers jockeying for position and others unable to finish the race.
When the pace intensifies, how will we drive the car? Will we keep it right on the bumper of the guy ahead of us, or is there a way to put some margin of safety between the customer and us and still remain competitive?
Today is a far cry from the inflationary 1970s when companies could make price increases stick. Back then, you charged more because your suppliers charged more. We didn't necessarily like higher prices back then — they were expected, just like death and taxes.
But double-digit inflation is over for the foreseeable future. And when your customer's margin averages only 2%, it seems clear that no one in our industry will be able to bump up his P & L just by inflating prices.
Putting a safer distance between yourself and the others in this race may require some new ways of doing business, especially as the race speeds up. It may mean approaching the market in a different way, choosing not to pursue some orders that aren't profitable, or finding new niches that are. It may mean making a commitment to make money on every single trailer that goes out the door.
It may mean, as Bill Greubel said a few days after taking the wheel at Wabash National, “getting our house in order.” It assuredly will mean driving out product costs without making the product cheaper. This becomes a relentless war against inefficiency, a constant battle to do things better, and a nonstop search for new materials or components that offer more value than they increase costs.
It's been a nasty collision. As the survivors drive past their damaged competitors, they can appreciate the value of maintaining enough of a margin to avoid a wreck and remain in the race.