THE strong recovery of 2011 for Class 8 trucks will give way to a slowdown in 2012, according to Eli Lustgarten, senior vice president at Longbow Securities.
Class 8 sales are expected to continue to grow, but not nearly at the 63% rate of 2011. With gross domestic product (GDP) growth of 3%, Class 8 sales would be an estimated 300,000 (a 19% increase over an estimated 252,000 in 2011), and with 2% growth, they'd be 280,000 (11%).
“Looking at fourth-quarter production in 2011, that number is going to come in north of 75,000,” Lustgarten said. “That means that the industry produced more trucks than people expected. Unless the economy strengthens — and they're still talking about hiring more people — the industry cannot sustain production for 2012 at the fourth-quarter rate. We're leveling out.
“Why do you a buy a truck? The answer: to ‘move freight’ (Class 8) or for the ‘delivery of goods and services and support a business’ (Class 4 to 7). The truck-demand recovery has primarily reflected replacement demand after several years of below-normal purchases. We are not all that far from market equilibrium. Truck tonnage continues to grow. Capacity is tight and rates are holding up well. Large fleets are now making money and have access to capital; medium/small fleets are still having a somewhat difficult time getting capital.”
He said 2011 production was limited by supply-chain bottlenecks including chassis components, transmissions, tires, carpets, and floor mats. Tax benefits helped drive a surge in demand in the second half of 2011, possibly borrowing some from 2012 purchases.
Economic growth and industrial production are key drivers of truck demand, Lustgarten said, and driver shortage is also a key to the level of future demand. Slower economic growth of around 2% compared to 3% translates into growth of industrial production of around 2% rather than 4%, which usually means a stabilization of truck fleets rather than an expansion of fleets.
Lustgarten believes the major freight end markets may see demand reach a new normal level (especially automotive) well below the peaks of 2006-2008, with the recovery of the construction sector still likely to lag in 2012 and 2013.
He said housing activity continued to remain muted in 2011 but ended the year on a positive note, finally gaining some momentum. The National Association of Home Builders' 2011 housing start forecast has been increased slightly for the first time to 605,000 (was 593,000, down from 615,000, 688,000 and 739,000) — or 3.4% above the 585,000 in 2010. The 2012 preliminary forecast is now 709,000 (was 681,000, down from 728,000) — up 17%. The preliminary 2013 forecast of 920,000 (up 30%) may still be “optimistic,” he said.
He said new regulations such as the Compliance, Safety, Accountability (CSA) program and the upcoming Hours of Service (postponed for now to mid-2013) could eventually require more trucks on the road (about 6%) to service freight to offset reduced hours of work.
In addition, the re-shoring/near-shoring effect could sharply increase North American manufacturing.
“Global companies are endeavoring to reduce and diversify supply chains after difficulties in 2007-08, when freight rate surged, ports were clogged, and containers in shortage,” he said. “They were required to take product in the first quarter of 2009 that was on the water despite the global recession. Then there was supply-chain disruption from the Japanese tsunami and earthquake and Thailand flooding.
“They were running out of capacity in emerging markets, and are moving production back toward end markets — Asia production for Asia and North American production to supply North America. That's what is behind big change between General Motors and Caterpillar, which have an enormous amount of plants going up, and every one of their suppliers has to increase capability. That's what will drive truck demand over the next couple of years. It's very subtle, but there are a ton of new plants going up, which means suppliers have to follow suit to rebalance the supply chain and move manufacturing around. Re-shoring is going to be a big factor and a real driver for truck demand.”
The Global Outlook for Class 4-8 Trucks
Director, Automotive Reports Ltd
The overall world economic outlook is gloomier than a year ago, but “uncertainty is the dominant theme,” Storey said.
The outlook steadily deteriorated during 2011. The forecast for 2011 world growth dropped by 0.4% to 3.8% between May and November, and the outlook for 2012 dropped by 1.2% to 3.4%.
The trend growth in truck demand is driven mainly by emerging markets, with mature markets reflecting replacement demand. Global truck demand rose by 19.4% in 2010 to 2.32 million, a 33% rise from 10 years earlier, but still below the 2007 peak. In volume terms, Asia has grown most rapidly since 2000, nearly doubling its share of global sales. Demand in NAFTA and Europe began recovering in 2010, but remained at the second-lowest level in at least 15 years.
Highlights of 2011:
The NAFTA recovery gained momentum, still led by Class 8.
Most European markets saw double-digit growth, with eastern Europe particularly strong after having plunged more sharply in the downturn.
South American sales were up over the full year but turning down, with a 17% year-over-year fall in December in the Brazilian heavy sector.
Asian demand dipped by an estimated 4% as China's domestic truck market turned down.
The rapid increase in China's truck market since 2007 far exceeded forecasts of OEMs and analysts both inside and outside the country, but the market is not yet at a mature stage where a cyclical demand pattern can be seen or reliably predicted.
Demand drivers in China: economic expansion means more goods to be transported; hard infrastructure investment offers the twin benefit of near-term truck demand during the construction phase and long-term demand boost as better transport links are developed; soft infrastructure development (credit, logistics, know-how, etc); aged truck population needed renewing; and a tougher approach on overloading could boost demand, though much will depend on enforcement.
Demand constraints: fiscal tightening has slowed economic expansion; in a bid to lower inflation, the jury is still out on whether the government can engineer a soft landing for the economy; higher interest rates and tougher credit conditions; in the long term, increasing competition from rail for long haul; a trend toward larger trucks, with fewer trucks needed per given amount of freight; and aged parc has been substantially rejuvenated — there were about four million trucks in circulation in 2006, and an additional four million have been added.
Storey said overloading has serious consequences. All clients overload their trucks — sometimes by 400% — according to Chengdu Wangpai. And Beiqi Foton says, “The overload of trucks is considered in the designing of the trucks.”
Western trucks remain the desired product for most operators. Premium western brands took 0.7% share in 2010.
The proportion of medium trucks has been falling for a number of years as: operators switch to larger trucks for long haul, helped by some maturing of the logistics industry, with more operators having the resources to purchase larger trucks; operators switch to smaller trucks/vans for last-mile connectivity; and overloading restrictions encourage larger truck purchases.
Volume in 2011 was estimated to have fallen by about 8% after non-recurring factors boosted 2010 demand.
“A further decline or, at best, modest growth is anticipated for 2012 as measures to cool the economy remain in place,” Storey said. “In the longer term, we expect the already-established trend towards heavier vehicles to continue, gradually improving the efficiency of the fleet.”
Elsewhere in the world
In India, the growth in truck sales slowed in 2011. Over the full year, estimated sales rose by a still-respectable 10% to 290,000 units, following a 30% rise in 2010.
The slowing growth reflects: high base-effect; steadily rising interest rates (13 increases since March 2010), which have increased costs and reduced credit availability in a market where 90% of truck purchases are bought with credit; contracting industrial output; increased vehicle prices due to higher input costs and new emission standards; increased operating costs (fuel prices, road tolls, finance costs, etc); and stagnant freight rates.
However, the negatives were outweighed by positives, including: strong demand for tippers (vehicles sold in the peak years of 2006 and 2007 are starting to be renewed); ongoing road improvements; high utilization of fleet capacity; and enforcement of overloading restrictions.
Infrastructure improvements are sorely needed, he said. Rail still provides strong competition over long distances but new roads such as the “Golden Quadrilateral” have boosted truck transport. Road and rail have reversed their shares since 1980. Rail share of freight traffic fell from 62% in 1980 to 38% in 2009. Infrastructure spending is expected to double from $500 billion in the five years ending in 2012 to $1 trillion in the following five years.
“The investment is sorely needed: India is plagued by malnutrition and soaring inflation,” he said. “It is the world's second-largest grower of fresh produce, but loses an estimated 30% to 40% of its fruit and vegetables rot because of a lack of refrigerated trucking, poor roads, inclement weather, and corruption.”
Growth of core industries such as construction and mining has boosted tipper demand to about 35% of the total. Tippers typically operate on shorter replacement cycles of four to five years. Demand for tractors has been steadily trending upward from around 6% of the market in 2003-04 to 12% in 2010-11. The trend is set to continue as infrastructure improvements enable longer hauls.
Medium-duty trucks have lost volume and share as operators switched to heavier trucks for haulage and lighter trucks/vans for last-mile connectivity.
For 2012, he said he anticipates a further small increase in sales of 2% to 4% as tougher conditions persist in the early part of the year but ease in the latter part. Fiscal conditions should loosen and the Reserve Bank of India is expected to begin lowering the interest rate. The GDP is forecast to rise by 0.2% to 0.4% for a gain of 7.6% to 7.8%.
“We anticipate sales reaching a cyclical peak in 2013, prior to the emissions change in 2014,” he said. “Longer term growth prospects are robust and the proportion of heavy trucks is expected to rise further.”
In Europe, recovery in demand was set back by the Eurozone crisis. OEMs are increasingly unsure about the outlook for Europe in 2012, some anticipating a downturn, others seeing stability or modest improvement.
“Our expectation is for broadly stable demand in western Europe, though weak in the first half, and growth in eastern Europe, particularly Russia, where the truck parc is still aged,” he said. “Macro-economy aside, the next cloud on the horizon is Euro-6 in 2014 — Euro-5 for Russia — which we expect to prompt a pre-buy from late 2012 through 2013.”
He said demand growth in Russia was driven by economic expansion and the need to rejuvenate parc (over 3.5 tons), which numbered about 3.2 million units at the beginning of 2010. The parc is aged: 79% of the vehicles are over 10 years old, though at the heavy end vehicles are younger — the over-16 tons sector accounts for 36% of the parc but about 60% of the vehicles under 10 years old.
He said Russia's road network is “small and much is poor quality.” Roads carried just 9.5% of overland freight in 2010, though share has risen from 2.6% in 1990. That's far lower than corresponding figures for the EU (81%), US (42%), and China (62%). The aim is to build 12,000 miles of federal roads by 2020. Long distances and a high proportion of mineral-resource shipments will continue to favor rail overall, but road are expected to gain share.
In Japan, parcs have all reached plateaus, and some are in decline. The average age of the truck parc has risen by 67% since 1995, and the average service life has risen by 32%. Truck sales more than halved from 2006 to 2009, with some recovery in 2010 and further improvement in 2011. Standard truck demand began recovering in 2010, helped by the improving economy and by tax incentives and subsidies for the purchase of eco-friendly models.
For freight carriers, the average rate of truck ownership has been in decline since 2006 and stood at 10.9 units in 2010. The average duration of truck ownership in 2010 was 10.6 years, maintaining a trend towards longer ownership periods. In a 2010 survey carried out by Jama, a majority of haulers reported that freight rates were lower than in 2005 and 60% reported a decline in freight volumes handled.
Demand was ahead of year-ago levels in the first quarter of 2011, then fell 36% in the second quarter in the wake of the earthquake / tsunami. Sales moved ahead of year-ago figures in July and remained higher over the rest of the year as reconstruction got underway, rising by 5.5% overall.
Demographics are a long-term constraint on the economy. Japan's population peaked in 2007, falling slightly over the next three years. The working-age population as a proportion of the total is already the lowest among major economies and set to fall significantly. Heavy trucks are set to gain the most from reconstruction effort.
Brazil is now the world's fourth-largest truck market.
“It used to be said, ‘Brazil is the country of the future and always will be,’ but nobody makes that joke anymore,” he said.
Brazil very much conforms to the expectation of greater volatility in emerging markets, he said. Volatility has eased somewhat in more recent years — it still saw a 10% drop in 2009 and a 45% rise in 2010, but many markets displayed that level of change in the past two or three years.
“Heavy trucks have been outperforming the wider market,” he said. “This mirrors the pattern seen in many other markets of maturing transport sectors, turning to heavier trucks for efficiency gains, plus the increased activity in mining and construction sectors where heavy trucks are used.
“The common trend across major emerging markets is the increasing share of heavy trucks. Opportunities for western OEMs should increase as this trend continues.”