Truck makers today might well feel like beat cops trying to direct traffic at a frantically busy intersection. It is swirling around them — the changing needs of global customers, pressures to reduce product costs while improving efficiency, raw material and component shortages, wild swings in demand, even wilder regulatory requirements, rapidly evolving technologies, plus restricted access to capital. It is all there and more at this busiest of industry intersections.
OEMs are no strangers to managing change, but today's marketplace presents some unique new challenges and conflicting demands. Their success at this crossroads will impact fleets for years to come. The strategies they employ to guide them, and their customers, through this crossroads will determine their prosperity in the future.
All of this, though, is based on the simple economics of supply and demand. Without supply, specifically freight, there is no demand for trucks. The good news, according to the American Trucking Assns. (ATA), is truck tonnage is “surging.” The organization reported a 7.5% gain in April compared to the same period in 2009. It was the fifth straight year-to-year increase and it caused some forecasters to push truck sales projections up again. In its June North American Commercial Vehicle Outlook, ACT Research, for example, increased its forecast for heavy-duty vehicle production by 4,500 units — boosting year-over-year growth in 2010 to 23% and in 2011 to 62%.
For truck makers and their suppliers, the pressure is on to ramp up production again after scaling back build capacity to meet the much-reduced demands of the recession. Even for businesses accustomed to an often wildly cyclical marketplace, this is shaping up to be a heart-pumping ride.
“Production swings in the 20 to 30% range could be done with the workers [companies] already have and perhaps a few more,” observes Eric Starks, president of FTR, “but if demand goes up 50% or more, it will pretty much be a mad scramble to ramp up. There could be pain points for some. It affects profit when you have to do things like take factories out of mothballs, add large numbers of workers or rebuild inventories.”
During his keynote presentation at the Heavy-Duty Aftermarket breakfast this March, Daimler Trucks North America (DTNA) president & CEO Martin Daum discussed the cyclical nature of the industry and DTNA's strategy for managing through those cycles. “You can always put off buying a truck for a while. You can delay maintenance for a while, but eventually you have to buy, and this is what creates cycles,” he noted.
Using a graph which displayed the industry's short-term cycles dipping under and climbing above the long-term trend line, Daum explained that “everything you have above the trend line you will eventually have to pay for with a comparable dip under the trend line. The key to be a long-term player [in the industry] is the ability to manage the cycles.”
According to Daum, some of DTNA's strategies for doing just that and helping customers do the same include product innovation, maintaining a flexible production footprint, strict cost control, global leverage and expansion, a custom-tailored growth strategy for BRIC [Brazil, Russia, India, China] nations, and sourcing on a global scale.
“We do expect to see demand increase by at least 50% next year,” Mark Lampert, senior vice president-sales and marketing for DTNA, says. “The U.S. fleet is the oldest it has ever been; tens of thousands of trucks have left the country permanently and we are now four years below the replacement demand.
“How do you deal with swings like that? We discontinued a brand [Sterling] and eliminated production capacity during 2006 to 2009,” Lampert notes. “Now that things are picking back up, the big question is, will the supplier base be there?”
A SMALL WORLD
The return to health of the world economy is generating its own share of problems for truck makers. “Nobody wants to be left out in the cold during an upturn,” Lampert says. “We share data with our suppliers about our order board and the specific components we will need to help them plan in advance. We are getting a mixed response from suppliers. We're not worried about the majors, but the Tier Two suppliers are important, too. In vocational trucks, for instance, there are components like heavy-duty axles that have very long lead times.”
Access to raw material is also a growing challenge, according to Lampert, who cites the need for precious metals to make the catalysts used in exhaust aftertreatment systems as an example of scarcity. “It has gotten to be a small world,” he continues. “We are literally scouring the world for suppliers. Daimler has access to suppliers around the globe and we are using them.”
Like DTNA and other OEMs, Peterbilt is also gearing up to meet renewed demand, explains Tony McQuary, senior director of business development for Peterbilt Motors, who notes that the company plans a “cautious” reaction to the upswing. “The fact of the matter is that we've faced these heavy demand swings before, largely due to EPA regulatory events,” he says.
“We take a conservative approach to either extreme and stay geared to ‘normal business.’ Because we don't react to an upturn as quickly, we have an opportunity to manage more effectively, even if it means we can't meet the entire demand during a peak,” McQuary notes. “We believe we need to have a long-range vision. [What we do] has to be sustainable. It impacts our employee family and our supplier community.”
The recession was particularly brutal when it came to access to capital, particularly for smaller companies, and it has been agonizingly slow to improve now that recovery is officially here. Even truck OEMs with plenty of cash reserves have felt the impact of the dry lending spell on their businesses one way or another.
“Access to capital, our financial strength, has allowed us to keep our business fully funded and operating,” says McQuary. “Our dealers are the most financially adept in the business and they survived the recession intact. The real challenge is on the small-business owner and the owner-operator; used-truck financing has been especially hard hit.
“Now we are wondering if there will be a double-dip recession,” he continues. “If jobs aren't materializing when about 70% of the stimulus funds are already spent, what happens when the money runs out?”
“Access to capital continues to be a huge issue,” agrees Lampert. “If we did not have financial institutions within the industry, it would be even worse than it is. Because the used-truck market is strengthening, lenders are now getting tougher. Financial companies that worked with their customers in the past are not being so flexible [about payments] now. As a result, we will continue to see bankruptcies in the trucking industry for a while longer.”
Optimizing fuel efficiency is a companion concern to finding capital. “Fleet managers are actively seeking tools to insulate themselves from growing fuel costs and increasingly stringent emissions regulations, but at the same time they do not want to compromise on vehicle requirements,” noted Pike Research senior analyst Dave Hurst in the company's recent report on the hybrid vehicle market. Hurst's observations encapsulate the dual challenge truck OEMs are assuming on behalf of their customers.
“There is a glut of oil right now, but we believe that we will continue to see the price of oil go up,” says Lampert. “Fuel efficiency will be more important than ever. We are looking at the efficiency of our entire value chain and asking ourselves every day how we can maximize the efficiency of the people who buy our trucks.”
It is the question of the hour for most truck makers today, and it is driving the development of advanced aerodynamics, alternative fuel vehicles and a host of other fuel-saving technologies. To accelerate the R&D pace, truck makers are partnering with their suppliers and even customers to bring the best solutions to production.
“Over the last five to ten years, our focus on relationships with partner suppliers has grown,” McQuary says. “The goal is to get the best cost and the highest quality possible. That means we do business with fewer suppliers than in the past and we'll probably see more consolidation. We also have relationships with a few very large, very visible fleets that are always testing components and systems. Increasingly, they want to do that collaboratively, to share intelligence and share the benefits.”
“The relationship between truck makers and their suppliers is very cooperative,” observes a spokesperson for Ford Motor Co. “The supplier base has consolidated, and Ford is identifying long-term partner suppliers to grow with us globally.”
IT & GLOBALIZATION
A “huge challenge for our customers is the ability to absorb and implement new technology,” notes Ron Huibers, senior vice president-sales and marketing for Volvo Trucks North America. “Trucking companies will be challenged to attract or develop the necessary competence to implement and manage these technologies.”
The challenges tied to new technologies impact all the truck makers as well as their customers. “IT in the truck is a key issue,” says McQuary. “We all need and expect a steady flow of data from the truck back to the fleet and to the truck OEM. That means constantly evolving hardware and software. The question is, how are we going to update older trucks and what will be their shelf life?”
In the past, he explains, the engine electronic control unit was the biggest challenge. On today's web-ready truck, however, there are computers and sensors everywhere that can require platform changes as they add functionality. “How does that affect a truck's value?” McQuary asks. “Changes are also much more compressed than they were in the past. We have to make sure that onboard systems are upgradable, so that having the latest available technology is truly a benefit.”
“Trucks are the most flexible freight mode and are a natural platform for new communications technologies and telematics,” observes Kevin Flaherty, senior vice president, U.S. and Canada, for Mack Trucks Inc. “This all ties into the richer information flow our modern economy is based on. One of Mack's roles is to integrate these technologies into reliable, vehicle-based systems that deliver value to customers and to society.”
As makers struggle with the challenges brought on by technology, they are also struggling with the global market. It is challenging enough to build trucks for the domestic market with its many specialized application requirements. Extend your business to countries around the globe and the challenges and risks spiral up and out in often unexpected ways, as do the opportunities.
“For the future, you will definitely need to be a global player,” says Lampert. “That gives you access to technology, economies of scale and sourcing options you just don't have otherwise.” On the other hand, he notes, globalization also means tremendous diversity in demand. “Brazil is on fire in terms of development, for example,” he says, “and that [variation in demand from market to market] is something we all face.”
The need to build trucks in and for markets around the world also runs counter to the need for rationalizing and simplifying product lines to enhance engineering, manufacturing and servicing efficiencies. “We rationalize where we can,” says Lampert, “but you can't force-feed a market. In North America, for example, most customers want conventional models; in Europe, most trucks are COEs (cab-over engines). It is a hybrid of the two in Asia. In other words, not even a single cab works everywhere.
“On the other hand, as Europe's emissions regulations move closer to EPA 2010, we will be able to use our heavy-duty engine as the platform for engines around the world,” he says. “That is a tremendous advantage. So is having manufacturing production based in so many regions.”
Virtually all major truck makers now have interests and partnerships abroad and are also keeping a watchful eye on the impact emerging markets will have on the demand for sometimes-scarce natural resources. “[Concerning our global strategy], we are in an investment mode,” Navistar chairman, president & CEO Dan Ustian observed during his June financial report. That could well be said of the entire industry.
“[Being a major supplier to many global markets] is a good thing for our customers,” notes a Ford spokesperson. “Larger scale and sharing vehicle platforms drive costs down and also allows us to share technologies. Vehicle attributes developed for Europe and Asia have benefits for North American customers.”
TAKING THE “HILL”
Trucking, for much of its history, was generally on the receiving end of policies and regulations rather than actively involved in shaping them. Now, all that is changing as government programs, policies and regulations play a greater role in day-to-day business operations.
“If you take a look back, we've had a bull's eye on us as an industry,” notes Lampert. “We decided that if we don't take a more active role and be a part of the solution, we are going to continue to be dictated to. We are working to provide good information [to lawmakers and regulators] to help facilitate better informed decision-making. It is a responsibility we collectively have.”
“The truck/commercial vehicle business is very different from the car business,” observes a Ford spokesperson. “It is very difficult to develop legislation for trucks that are used in a wide variety of duty cycles…We need to work closely with the government to develop legislation that is environmentally responsible, yet serves the customers who use these vehicles primarily for work.”
“Paccar has taken the view that we will be in front of a lot of issues, such as environmental regulations, rather than developing a reactive plan for mitigation,” says McQuary. “The proposed cap-and-trade and greenhouse gas regulations, for example, have the potential to create the same steep peaks and valleys for trucking as other emissions regulations have in the past. We are extending our dialogues with groups like the American Trucking Assns. and CalStart, and are getting involved in mutual lobbying efforts on hybrid truck initiatives, for instance. In the past, we were not really active in government business. Now we are.”