Class 4-7 market continues its slow, steady climb, with FTR forecasting 209,300 units for this year,
then 212,300 and 216,800
North American production of medium-duty vehicles is expected to continue its slow, steady climb from the low point of 2010, according to FTR COO Jonathan Starks.
In his presentation, “Medium-Duty Equipment Outlook: The FTR Perspective,” Starks said his forecast for the Class 4-7 market is 209,300 this year, 212,300 in 2018, and 216,800 in 2019. That breaks down to 131,200 in Class 6-7 and 78,100 in Class 4-5 this year, 132,800 and 79,500 in 2018, and 136,600 and 80,200 in 2019.
This comes on the heels of 197,800 in 2016.
“In 2017, we’re going to be well above last year—12,000 units higher,” he said. “It’s a solid, stable, slow-growth environment. There is some positive potential building up in 2018 and 2019. But again, it’s not transformational. It’s incremental. We might add 10,000 or 15,000 units. Not 30,000 or 40,000 units.
“We’ve been predicting this very stable marketplace, this slow-growth environment, for some time now. Back in 2014, we predicted 184,000 for 2015, 193,000 for 2016, and 201,000 for 2017, and the actual numbers are 188,100, 197,800 and an estimated 209,300.”
Starks said medium-duty inventories have been growing pretty steadily, going from 50,000 units at the end of 2015 to 62,000 midway through this year.
“They’re actually pretty high,” he said. “If you look at the inventory-to-sales ratio, it’s been a pretty stable environment. There’s not a lot of pressure up or down.
“Medium-duty production is a very volatile number from month to month. We had a pretty stable recovery in production for several years. Last year, we had a market that surged at the beginning of the year and had some payback in the latter half of the year, so it ended up being pretty flat. We had a recovery in the first part of this year. We’ll see that trend line moving up the rest of the year. From a production standpoint, we seem to be going up.”
Class 4-5 retail sales are up 109% from the first half of 2010 to the first half of 2017 and 13% from July 2016 to July 2017.
“If you look back at 2010 versus where we are now, we more than doubled our monthly output in sales,” he said. “So the market has grown pretty significantly.”
Class 4-5 production is up 315% from the first half of 2010 to the first half of 2017 and 40% from June 2016 to June 2017.
“We’ve had a much more significant production response,” he said. “Imports don’t seem to be having a significant impact on what’s going on in the production environment. So it’s not like imports are going away and getting replaced by domestic demand. A small part of it is the fact that Ward’s is reporting additional products that they weren’t previously, so that adds several thousand units. But it still doesn’t change the picture. We’re still up about 280% instead of 315% from where were in 2010. So the market has shown a pretty dramatic recovery. The thing is, it’s been a very stable recovery. It’s been spread over seven years.”
Class 6-7 retail sales are up 78% from the first half of 2010 to the first half of 2017 and 1% from July 2016 to July 2017.
“They have a little bit of weakness, but not nearly the weakness that Class 4-5 did in 2016,” he said. “It’s basically a flat market.”
Class 6-7 production is up 91% from the first half of 2010 to the first half of 2017 and 14% from June 2016 to June 2017.
“Also a flat market, but at a pretty high level–almost 12,000 units a month in retail sales,” he said.
North American bus production, estimated this year at 25,500 units, is expected to remain the same next year and then drop slightly to 25,000 in 2019.
“For years, the conventional wisdom was that if you’re having a good year, it will be up around 30,000 units, and a bad year would be down around 20,000 units,” he said. “And now we get the Great Recession, and that’s no longer valid. We got down to 15,000 units, and that was three years after the Great Recession. So it was a market that had no recovery in sight.
“And then it hit a small recovery and stopped, and basically didn’t move for about four years. So we’re thinking, ‘OK, we must be hitting the new norm.’ And then last year, boom! It picked back up, from 22,300 to 25,300. This is mainly focused on large school bus manufacturers. But there was significant jump back up to what I would call a normal market: 25,000 units. There is potential you could get some additional increases from there. Some of the demographic data would probably limit your potential for any further growth there, but at least it’s back to what I call a normal market.”
Starks addressed a number of economic factors:
“It’s a big piece of medium duty. When you look at construction, you get two different pictures. Overall construction spending is still pretty positive. Obviously growth is slow and not nearly as dramatic as early in the recovery. That’s not a surprise. But the market is still growing. When you look at the new housing market, that’s really stalling; it’s a pretty flat environment for the next couple of years. That puts some limits on how much growth potential there is in the marketplace, and there’s not enough pressure to drive additional equipment.”
“A relatively weak picture. It obviously weakened pretty substantially for a couple of years. There were some things outside the normal transportation market, but those do have an impact as far as the medium sector. It does look like a positive going forward.”
“Stabilization has occurred, especially at the state and local levels, but it’s weaker than anticipated. There are wildcards: Political gridlock that doesn’t seem to be changing in the near term. Infrastructure has positive impacts in the marketplace. The problem is, even if they started getting somewhere soon, it still wouldn’t have an impact for quite a while. So now you’re talking about 2019 as a potential impact, not 2018. There are debt/finance issues, especially on the national level.”
Starks said it’s much more difficult to nail down replacement demand in medium duty than it is in Class 8 or for trailers, because there are so many different segments to the medium-duty market. He said a top-down analysis is necessary.
“We’ve had a really strong recovery in sales for about five years,” he said. “We’re still growing for the most part, but the market is stabilizing. If you look at replacement, we saw that levels were generally falling as we were going in and through the Great Recession. And that had an impact on the market. These are starting to turn. We want to see a bigger replacement market that helps stabilize the market.”
After Starks’ presentation, FTR held a panel, “Understanding the Changes to the Medium-Duty Segment in a Service and E-Commerce Economy.” The panel: Jeff Sass, SVP of North American truck sales and marketing for Navistar; and Brien Scheffee, VP of sales & marketing for Reyco Granning.
Here’s a brief look at what they talked about:
Q: We’ve had a couple of presentations this week looking at some of the big changes in the marketplace that are occurring right now. Straight trucks and medium-duty vehicles do a lot of final-mile. There is big growth potential. How do you guys try to quantify that?
Sass: Over three years, the projection for Class 6-7 is really flat and the growth is all coming from Class 4-5. So then it comes down to delivery density. If you think of even a Class 3 Sprinter van, it has a GVW of 11,000 pounds. The actual structure chassis weighs about 5000 pounds, so that gives you about 5000 pounds of payload. If you go up to Class 5, you have 19,000 GVW and a 6000-pound chassis and a 3000-pound body. You’ve got double the capacity on a Class 5 than you do on Class 3 for cargo. So if you can grow that delivery density, then you’re going to be able to capitalize on the Class 5 versus the Class 3 sprinter van. It makes no sense to buy a more expensive Class 5 and drive it around half-empty.
Q: Aside from e-commerce—the big overriding thing—what do you see as having the biggest impact as you look at the next two years? Are you looking for the big impacts from infrastructure or housing?
Sass: For the medium-duty market, we’re finding that it’s really tied to the economy, because the people who are buying the medium-duty trucks are people who are your landscapers and your bakeries and commodities people, and they’re buying and hauling usually short distances and multiple trucks. As the GDP continues to grow slightly, that’s why you see the real consistency in the Class 6-7 market in particular. So the tie between the overall economy and medium duty is very strong.