TIMES may be tough now for tractor and trailer manufacturers, but Nick Panza, Peterbilt vice-president, sees an exciting time ahead for truck and trailer manufacturers and their customers.
The following is a digest of what Panza said during his “A Tractor Manufacturer's Perspective” presentation at the TTMA Convention May 18 in Orlando.
We are in a challenging, yet exciting, time in our industry. There are a number of factors that are affecting our businesses. These issues and how we manage them will affect us for years to come.
The economy continues to reflect uncertainty. Manufacturing has been particularly hard hit, losing more than 450,000 jobs since last year.
In our industry, credit delinquencies are growing. Repossessions are increasing, and lenders have tightened credit significantly. Many are requiring higher downpayments and are limiting the level of financing available, even to customers who have been loyal for many years. This is the Achilles heel of truck and trailer sales. Without the reasonable flow of credit, the market will be very tough for the balance of this year.
Our market remains weak compared with the last few years. Orders for Class 8 trucks in April were 10,800, the second time they have fallen below 11,000 in five years. The construction segment has been the lone bright spot so far in 2001.
Unfortunately, there have been no signs that demand will increase anytime soon. The fourth quarter of this year or the first quarter of 2002 are the best estimates. Optimistically, the lower interest rate and tax cuts may improve consumer confidence and eventually increase demand for trucks and trailers.
Truck fleet ton miles, another indicator of changes in truck and trailer demand, are expected to decrease by another 1.2% in 2001 and increase by a mere half percent in 2002. Declines are expected in both long- and short-haul modes of transportation.
Trucking companies continue to be impacted by the increased cost of fuel. Fuel represents between 23% and 33% of a trucking company's expenses. This is a cost that is difficult to pass on to shippers. Diesel prices have increased in each of the last four weeks. The national average is now $1.47 per gallon — 20¢ below the high we saw last year, but up from a low of $1.30 per gallon in April.
Some major trucking companies have been able to pass part or all of these costs along to shippers. But the smaller carriers and the owner-operators have a bigger challenge. Their clout with customers is in their level of personalized service and reliability in the eyes of the shipper. Without the ability to recover these costs, this segment will likely see more failures.
Used Truck Glut
It is no secret that the glut of used trucks is affecting our business significantly. Some estimate that there are 70,000 used trucks on dealer lots. As a result, used truck prices continue to decline after stabilizing the first couple of months of this year. Manufacturers and dealers have not managed this area well and are in risk of seeing continued losses and potential failures.
We have advised our dealers to take their hits quickly and not sit on used inventory. Our dealers have responded, and our used truck inventories are at their lowest levels since the summer of 1998. Some are now actively pursuing good used equipment.
Many trucking companies with considerable equity in their vehicles now find themselves upside down in today's market. Book values must get closer to market values, and overall field inventories must reach more manageable levels. The challenge for all truck manufacturers is to do this while balancing the need to maintain minimum production levels.
This will take some time to sort out, but I believe the age of guaranteed buy-backs as we have known it during the past decade is over. New truck buyers will run their vehicles longer.
Trucking companies are facing higher liability premiums — sometimes as much as 100%. These higher costs are causing fleets to think twice before adding equipment and are serving as a barrier of entry for entrepreneurs looking to begin a new career.
Truck and trailer dealers struggling to move used equipment are finding fewer companies willing to provide financing. Many of these companies prospered during the strong markets of the 1990s, only to find that they were not financially strong enough to manage the risks associated with the downturn in the marketplace.
The best source of financing available now is the OEM captive finance company, but even the captive finance companies are more cautious when reviewing risks, balancing credit worthiness with their role of supporting the sales of new equipment.
Fewer companies are able to take on all the risks associated with funding new and used trucks. Dealers are now being required to take on some level of recourse.
Dealers who have grown their businesses, expanded to new markets, and managed well will be in a better position to absorb the risk of recourse and may prosper in this market. The challenge will be for small, single-location distributors whose appetite for risk is limited. This will hamper their ability to hang on to or increase market share and impact their long-term viability.
Labor Shortage Easing
I expect more consolidation in the distribution network over the next six to 12 months. The strong will take advantage of the weak, and some will decide to exit the business. The big will get bigger, and the door will be opened for new blood and capital to enter the distribution system.
The slower economy is benefiting the shortage of drivers and technicians. Layoffs in the manufacturing sector have brought more drivers back into the industry, and concerns about operating costs have brought some owner-operators back to driving for fleets. This growing supply of truckers should provide some wage stability, and fleets may be able to reduce the costs of recruiting as driver turnover rates come down. Some carriers calculate the rate of recruiting a replacement driver as high as $10,000, so cutting turnover by even 10% is a significant savings.
Many technicians who migrated to assembly jobs in the high-tech sector are reentering the truck market, filling some of the service vacancies in the shops of dealerships and large fleets. The shortage of skilled technicians remains, however, as trucks and trailers become more sophisticated and technology-driven.
The decline in the economy has had an effect on the financial health of truck dealers who are facing increasing costs and declining revenues. Many dealers successfully saved for a rainy day the last few years, but others have not been as forward thinking.
Those who maximized their total customer support revenue opportunities in finance, insurance sales, and preventive maintenance programs will be the ones that will be well-positioned for growth.
Sum It Up
To sum up today's environment, the truck and trailer market is in the midst of a decline, the likes of which we have not seen in a decade. Class 8 truck sales in the United States and Canada will continue to decline from the 291,000 units that were sold in 1999 and 238,000 units sold last year, to 160,000-170,000 units this year. Next year should fare better, with sales of 175,000-185,000 in the United States and Canada.
As the industry has contracted, it has put tremendous pressure at all levels of the supply chain — even though sales are at levels we would love to have had 10 years ago. In the 1980s, 125,000-140,000 trucks would have been a solid market. Even when sales were at record levels the past five years, profits across the supply chain were not where they should have been.
The result is a need to drive costs down and a new trend of consolidation between OEMs, between OEMs and suppliers, and alliances between companies across the entire chain. Examples are Mack and Volvo's new relationship, Freightliner's purchase of Western Star and Detroit Diesel, and the relationship between ArvinMeritor and Dana Eaton. International's relationship with Ford, Paccar's with Cummins, and Swift's acquisition of Dick Simon Trucking are examples of long-term relationships and consolidation that are occurring and will continue.
Some will be successful, and others will not. The key will be how well the alliances deliver value to the end-users of the products and services while enhancing return on investment. They must squeeze out redundancies and costs.
One of the biggest issues affecting truck manufacturers is related to engine emissions. The EPA regulations define a level of reduction of particulate matter released into the atmosphere. The initial requirements will be implemented in 2002 and will affect the engine manufacturers who sign a consent agreement to meet these regulations. The design changes are significant, requiring new cooling systems and some method of exhaust gas reduction or selected catalytic reduction — not to mention testing and installation redesign for trucks.
These components represent a long line of challenges — including the possibility that each installation may be unique to the technology used, increasing costs and inefficiency. Final costs to the customer are still undetermined, as are the impacts on fuel economy, reliability, and engine performance.
Following the implementation of 2002 standards are additional requirements to further reduce NOx and particulates by 2007. The technology to meet these requirements has not been developed. It could include an array of options, including alternative fuels, urea injection, and other combustion chamber reduction technologies.
Regardless of how these emission levels are achieved, costs are going up and performance potentially compromised. We expect that there will be much more focus on alternative fuel strategies as well as the potential reduction of horsepower availability.
The challenge for us as manufacturers and distributors is to promote the value of these changes to the end-user and to recover their associated costs.
Another proposal worth watching involves changes to size and weight regulations that will make various interpretations of existing size and weight standards. Some of the proposed changes could impact previously excluded items such as mirrors, safety handles, and depth of steps. The final rule is due out later in the year.
Proposed changes to regulate geometric visibility should impact OEMs and lighting suppliers. Geometric visibility is a laboratory term that describes the various angles at which brake lights and turn signals may be viewed. This proposal is not safety-driven. Instead, it is intended to harmonize U S and European regulations. Noncompliant manufacturers will incur increased tooling and added costs. A final ruling is expected soon, with implementation lead time likely to be five years for automobile manufacturers and seven to nine years for heavy trucks.
There are also rules designed to reduce the glare of daytime running lights and to define the configuration of LED lights because their patterns and intensity levels vary significantly. Rulings are expected later this year.
Electrical and disc brakes are being investigated in an effort to see if the stopping distances for heavy trucks can come closer to that of passenger cars. Initial testing has shown improved performance with disc brakes. OEMs are already looking at the potential benefits of disc and electronic braking systems, and we could see their introduction in the next few years. But can we achieve similar results simply by using larger drum brakes? These investigations are going on now.
Our industry will be facing a number of regulatory issues in the coming years. It is our job as an industry to ensure that we communicate the benefits as well as the downside that may result in added costs to the ones who eventually pay the bill.
A Look at Logistics
A number of logistics trends have emerged recently that may reshape the way we do business. In order to be more nimble, freight companies are running smaller shipments, buying smaller equipment, and developing high-density distribution networks. These networks consist of multiple warehouses that support a common region instead of one big one that serves a 500-mile radius. These centers replenish the inventory of each point, resulting in the efficient flow of goods and increased customer satisfaction.
Complicating this system are regulations being implemented by local governments. Some of these regulations involve the noise that trucks generate. Others such as those being studied in Los Angeles control the time of day that trucks are allowed to operate.
Just-in-time delivery, once the buzzword of choice, will be replaced by real-time delivery. JIT involves significant planning. Parts must be scheduled days and weeks in advance. We as manufacturers are in many ways no different from society — when we need something, we want it right away. With real-time delivery, we will be able to submit an order, receive an immediate confirmation, and take delivery on the same or next day.
The challenge we have is to move toward little or no inventory. JIT has served us well, but imagine the efficiency we can gain and the amount of space that could be freed up if our material managers were able to get parts on the same or next day without fail. This would require a new level of teamwork.
To make this happen will require a greater use of the range of communication equipment that exists today. This includes the use of digital communication such as the ability to transfer a drawing to a toolmaker to produce a new tool and die. It also means taking advantage of the onboard devices that are on trucks to transmit a wealth of information. One problem is the latest equipment may be obsolete next year. We may need to slow down the speed of change so that we can realize a return on our investments.
One of the most complex and exciting developments in our industry is PLC4Trucks. What began as a requirement for an ABS warning lamp in the cab has evolved into a technological marvel. It has given us the opportunity to develop potential value-added technology to the truck and trailer.
The amount of information that can pass between truck and trailer is limited only by the J-560 connector. Multiplexing systems are being developed that are capable of monitoring brake, suspension, and axle loading. Drivers will be warned about abnormal vibrations that impact wheel-end assemblies. Brake sensors will indicate failures and issue reminders when service is due. Refrigeration units will be monitored to ensure that temperature-sensitive freight is properly cared for.
The possibilities are endless. Imagine a truck and trailer that, at the push of a button, can give itself a complete physical to advise of needed maintenance or project when needed maintenance will occur.
Drivers will benefit from new technologies in the areas of safety, comfort, and amenities. New windshields will be introduced that will bead water and improve driver visibility. Rollover detection systems will connect with braking systems to adjust brake and airbag pressures to assist in keeping the trailer upright. In the event of rollover, batteries automatically will be disconnected to reduce hazardous conditions.
Lane deviation systems already are being tested and are not far from being ready. Adjustable foot pedals will create a more ergonomic environment, while climate-control windshields will block out the heat of the desert and draw in the sun during times of cold. Cab suspensions will adjust to road conditions, eventually eliminating the need for air-ride seats.
Getting More Gadgets
The proliferation of communication gadgets will continue. Cell phones and PDAs will continue to become more cost-effective. Wireless communications will transmit data about the truck as it reaches communication points. A truck pulling into a dealership will be diagnosed, and payment methods will be defined as the driver prepares to fill his tanks at fuel stations.
Ultimately, drivers will be able to watch movies on demand with their families as wireless video feeds from the driver's home are transmitted through laptop computers. Drivers will be able to order hot meals and preventive maintenance from truckstops before they ever enter the parking lot.
The critical issue is whether customers will be willing to pay for the fees associated with such programs. It is our responsibility as manufacturers to ensure that customers are getting value from these technologies. We also must have sufficient cooperation between tractor and trailer OEMs, suppliers, and the developers of these technologies so that we have integration throughout the vehicle.
These systems are on the horizon. They have the potential to reduce costs, increase productivity, and increase customer satisfaction. In my almost 30 years in the trucking industry, I have not seen a time where we have had so much coming at us with so many challenges, and so many opportunities for growth and profitability.
Current market conditions are not all doom and gloom. The good news is that we are in an industry that is the backbone of North American trade.