Global Insight analyst bullish, especially for emerging truck markets

Oct. 1, 2008
In spite of economic slowdowns, the global truck market continues to hold promise for long-term growth, especially in emerging markets, according to an

In spite of economic slowdowns, the global truck market continues to hold promise for long-term growth, especially in emerging markets, according to an analyst with Global Insight.

“With the exception of NAFTA countries, the truck industry is in the midst of a boom,” said Richard Walles, director of heavy truck industry research for Global Insight. “It is being led by emerging market regions where extensive investment in infrastructure and major industrial projects is creating a strong requirement for more trucks.”

Walles was speaking at a special Global Insight seminar held in conjunction with the recent IAA Commercial Vehicles Show in Hanover, Germany, September 26.

Walles said there are sound business opportunities in selective growth markets for truck manufacturers and component suppliers. But as is frequently the case, the higher the potential reward, the greater the risk.

Demand among emerging markets has been strong for two reasons — expanding economies that require additional trucks and the ability to afford new vehicles and new technology to replace outdated, worn out trucks.

Looking out to 2012, Walles said the potential for volume growth is good. He expects global truck demand to average 4.3% growth per year between the baseline of 2007 and 2012.

If the world population continues to grow, and it continues to prosper, increasingly more goods will need to be transported. But by what mode? Air? Rail? Truck? Pipeline?

Echoing the outlook of analysts in North America, Walles concluded that trucking will hold tightly to its share of the overall transportation market and expand it, primarily at the expense of rail. It will be a trend that has been ongoing for decades. Trucking's share of the transportation market has been growing since the 1970s throughout Europe's four largest economies — Germany, the United Kingdom, France, and Spain. The UK has always relied heavily on truck transportation — roughly 75% of the overall market even in the 1970s when trucks were moving less than half of the freight in Germany and France. Trucking's share of the freight market in France is now in excess of 75%, while trucks in Germany move more than 60%.

Stats from July showed a market that was in a state of flux. Total truck registrations were up 7% through the first seven months of 2008 for Europe as a whole, but with significant differences among different countries. The United Kingdom was up more than 30% while neighboring Ireland was down more than 20% from the first seven months of 2007. The Netherlands, Finland, France, Austria, and Portugal all were enjoying double-digit increases in truck registrations through July. Registrations were flat in Germany and declining in Denmark, Switzerland, and Spain.

Highway tractors had been strong, posting six consecutive years of uninterrupted growth. Tractors now account for 45% of trucks sold in Europe, up from 27% in the early 1990s.

Heavy-duty straight trucks also had been growing in Europe. Strong gains in investment spending has been boosting demand for three- and four-axle construction trucks, but Walles expected sales to decline by the time 2008 sales were totaled.

Medium-duty trucks have not shared in the prosperity.

“Demand for medium-duty trucks continues to underperform and has managed only a modest recover in the present cycle,” Walles said.

European truck manufacturers, however, have been at or near capacity recently, the result of surging export demand.

“Both registrations and production of trucks are expected to log another record year in 2008,” Walles said. “The main ‘engine of growth’ has been exports beyond Western Europe, pushing OEMs to capacity limits.”

European truck manufacturers have enjoyed more than a threefold increase in exports during this decade — growing from 66,000 in 2000 to an expected 225,000 in 2008. Most of that sales growth has been in Eastern Europe.

“A bit of a dip is expected in 2009, but it still should be a good year,” Walles said. Overall, the outlook is positive.”

Among new member countries of the European Union, truck sales have been strongest in Poland (in excess of 20,000 trucks), Romania (approximately 13,000), and Bulgaria (8,000).

New truck sales tripled in Eastern Europe between 1998 and 2007. The reason: replacement of old generation trucks, expansion of the fleet, and the need for western-style trucks in order to comply with international transportation routes.

“The region has much to offer, but it is hampered by poor road networks, lack of transport and logistics infrastructure, and outdated business practices,” Walles said.

Countries included in the sales growth were Belarus, Bulgaria, Croatia, Latvia, Lithuania, Poland, Romania, Russia, Slovakia, Slovenia, Ukraine, and Uzbekistan.

Battle in Russia

Russia has been attracting considerable attention among chassis manufacturers. The country is a large, fast-growing market for trucks and equipment.

“The growth of Western imports has come mainly from the new European Union countries, but it is now spreading fast to Russia,” Walles said.

Not surprisingly, Russian has become a battleground for European and Asian chassis manufacturers. Hyundai, Isuzu, TATA, and multiple Chinese truck manufacturers are now doing business in Russia, Walles said.

In addition to selling there, Eastern and Western chassis manufacturers are investing in Russia. Volvo is producing trucks in limited volumes in Russia, but the Swedish manufacturer is planning to expand its production capacities there. Among the other manufacturers with plans to build trucks in Russia are Scania, Renault, Isuzu, and Hyundai, Walles said.

Mixed signals in North America

Walles said that the United States has seen a major shift in the types of trucks being used.

“Changing patterns of demand saw the revival of the low-end medium-duty sector (Classes 4 and 5),” Walles said. “This now accounts for 25% of all sales. At the same time, the move to Class 8 trucks has squeezed the upper medium weight segment (Classes 6 and 7).”

Walles expects a 14% drop in truck production in the United States in 2008, a 4% decline in Canada, and 15% down in Mexico. He called for a rebound in 2009 — 21% in the U S, 27% in Canada, and 10% in Mexico.

Walles did not specifically point out that 2009 will be the last opportunity fleets will have to buy trucks ahead of the tighter diesel engine emissions regulations. He did say, however, that the decline in for-hire carrier tonnage is expected to moderate in 2009. He expects a drop in excess of 2% in tonnage in 2008, followed by another 1% decline in 2009. Global Insight forecasts a sharp rebound in tonnage beginning in 2010. The 3% increase tonnage in 2010 is expected to be followed by an additional 4% increase in 2011. Increases in excess of 3% are forecast for 2012 and 2013.

Canada and Mexico are contributing an increased share of North American truck production, Walles said. In 2000, the United States contributed 83%. In 2006, the number of North American trucks produced in the U S slipped to 73%.

Here comes Asia

Asia has rebounded sharply from the recession that plagued the region in the 1990s. Between 1998 and 2004, truck sales more than doubled.

“The Chinese market took a leading role in the recovery as demand for trucks soared on the back of major infrastructure investment projects,” Walles said. “China's share of regional sales has risen to over 50% from less than 40% in the 1990s.”

Walles said that India has replaced Japan as the second-largest consumer of trucks in the region. Of the trucks sold in Asia, 21% went to India. He said that Japan's malaise continues, and that restructuring in the transportation industry has helped little. Truck demand has adjusted to a new, lower level.

Looking out over the next five years, Walles expects the strongest growth in the Asian truck market to be in India. Comparing forecasted sales with 2000 actuals, Global Insight expects truck sales to increase by almost 500% in India by 2013. Sales in China are expected to tail off somewhat between 2012 and 2013. But even then, truck sales are forecast to be more than 350% higher than in 2000. By contrast, the truck market in Japan is expected to remain relatively flat in 2013, just as it is in 2008.

In terms of truck manufacturing, China will be a hot spot. In addition to its own companies, foreign manufacturers are building production facilities in China. These manufacturers include Daimler, Isuzu, Volvo, and Hino.

The large domestic market gives China an advantage over Japan, a country that exports approximately 60% of its output. And restructuring has left output far below historical levels, Walles said.

By contrast, production in India is heavily dependent on the domestic market. A strong push has recently driven heavy-duty sales to 55% of India's output.