Too many used trucks?

Too many vehicles on the market is the name of the game for both the automotive and commercial sectors. But their ability to absorb the excess is not equal. Let's look at the auto segment first. The argument that demand for automobiles, including light trucks, will remain high well into the future is based on a number of factors. One is that the primary population of new-vehicle buyers is either growing

Too many vehicles on the market is the name of the game for both the automotive and commercial sectors. But their ability to absorb the excess is not equal.

Let's look at the auto segment first. The argument that demand for automobiles, including light trucks, will remain high well into the future is based on a number of factors. One is that the primary population of new-vehicle buyers is either growing slightly, or remaining stable. Then there's an aging population that wants maintenance-free automobiles, which means they'll continue to buy new cars. Baby-boomer offspring are entering the market, thus supporting sales of both new and used vehicles. In addition, increases in car prices have not outpaced salary increases, which bodes well for sales. The fly in the ointment, however, is the limited demand for used cars.

If demand for used vehicles cannot keep pace with supply created by the new-buyer population, prices will drop. Prices for “substitute” products, e.g., prospective used-car buyer's current vehicle, will also fall. The exception is used specialty and collectible models.

This is what happened in the automotive sector two years ago, when the value of the 1998 SUV population declined nearly $7 billion in just six months. Similar decreases in book value for model-years 1999 and 2000 may have also taken place during this time, resulting in some serious adjustments to balance sheets both for leasing and finance companies, as well as individual owners.

The market instituted some rather impressive incentive strategies to attract new buyers, and sales reached record levels. A supply of high-quality used equipment at “constant pricing over time” became available. In other words, if someone had $9,000 to spend on a car, the quality they could get for that money would increase each year. Older vehicles were often scrapped. The theory is that as long as the average age of scrapped equipment decreases every year, the market can sustain the demand for automobiles.

What about the commercial vehicle market? Do these assumptions hold true, especially for Class 8 vehicles? The answer is a resounding “yes” and “no.”

The heart of the matter for Class 8 is how quickly the first owner puts miles on the truck, and whether or not the used-truck buyer sees the value in upgrading-especially if they're not putting lots of miles on their equipment to begin with.

Used-truck buyers for Class 8 equipment can be divided into two groups: those who put lots of mileage on a vehicle (significant-use group) and those who don't (not-significant use group).

Those in the significant-use sector will still demand substantial useful life in any truck they purchase. As a result, they may be willing to pay more to get newer, more useful equipment.

The not-significant use sector will benefit from declining used truck prices and will purchase the least expensive vehicle, as long as it still functions.

One key element in determining replacement demand-defined as the number of vehicles that need to be put into the fleet each year to sustain the current carrying capacity — is the degree to which new truck users are locked into trade cycles. Another is the rate at which the useful life of the equipment is being used during a fixed time period. I think this rate is increasing.

Finally, there is the rate at which buyers of used trucks are willing to upgrade. That remains to be seen. I think the used-truck market will remain uncertain and volatile for the next several years. Historic buying patterns and the factors affecting choice will be slow to change.

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