The situation for builders of Class 8 trucks is in a great deal of flux. The primary reason for this uncertainty is pre-buy activity, i.e, fleets deciding to purchase equipment ahead of their “normal” buying schedule to avoid an upcoming change in equipment. Pre-buy can gave an impact on manufacturers, dealers and the economy.
The most significant example of pre-buy that I am familiar with is the one that occurred in the mid-1970s when the 121 brake standard was issued. That was the worst I have seen and hope ever to see.
Currently, pre-buy is being driven by uncertainty surrounding the engines being developed to meet EPA's stricter emissions rules, which take effect this October. Issues such as availability, fuel economy, maintenance, and durability of the new engines, not to mention their higher price, all contribute to uncertainty from the fleets' point of view. While these may be valid concerns, fleets should exercise some caution in deciding to pre-buy equipment.
Pre-buy orders have actually surged faster than I had expected. Anxiety surrounding trucks spec'd with the new engines accelerated lately. This increased anxiety is reflected in the surge in orders.
I'm concerned about how this will impact the fragile profit margins of this industry and its suppliers. The current order rate is not indicative of final demand in 2002 from carriers. There will not be enough traffic through the next five quarters to sustain the current level of demand. As a result, the industry will be putting more used equipment into the marketplace, which is fuel for sustaining downward pressure on used trucks. When we get information on April orders, we'll have a better handle on the extent of the pre-buy.
The impact of a significant pre-buy would extend to truck OEMs as well as regional economies. Over time, higher transportation costs, increases in off-line production, and production quality issues could force manufacturers' margins — already minimal — to decrease.
Of course, this could be offset with significant price increases beyond that already required for the newer engines. That doesn't bode well for carriers. In addition, price increases would have to be sustained after the October deadline to recover lost profits as demand falls through the floor. And that's not good for the industry in general. But events are likely to unfold this way because carriers and OEMs alike have to make decisions based on their respective needs, regardless of its effect on the market.
Although the pre-buy will likely be larger than we originally anticipated, build rates are not likely surpass our current build forecast by much in 2002.
This could result in more layoffs in November and December, longer shutdown periods at year-end, and significantly reduced line rates at factories for several months. While the impact for the individual truck manufacturers is evident, the impact on the local communities is less obvious.
Increased unemployment will affect seasonal shopping patterns, suppliers to truck OEMs and local businesses that survive off the vibrancy of local manufacturing. State and local revenues will also be affected, since the amount of money collected in sales tax will be down.
The trucking industry will be doing itself a significant disservice if it allows too many pre-buys at the expense of production numbers for the fourth quarter of this year and the first quarter of 2003.
Unfortunately, our economic model makes this inevitable. And I feel that unreasonable regulations are at the root of the problem — but that's another column.