Builders Hunker Down
Lagging truck sales bring dramatic changes.
STEVE STURGESS
SENIOR EDITOR
Most of the truck manufacturing industry is buckling down to turn around flagging fortunes. Not least is Freightliner, facing a shortfall that industry estimates put at a billion dollars or more. In a turnaround plan announced in mid-October, the company is looking to cut —short term — $850 million annually out of suppliers, plant, product and staff. If it can do that, management believes it can make a paper profit in 2003 and a real profit by 2004. And that's despite predictions that the truck market will see little or no economic improvement throughout the restructuring period.
This no-growth heavy truck scenario is a worst-case base for Freightliner's turnaround plans, said Roger Nielsen, chief operating officer. Chief Financial Officer Udo Schnell declined to confirm how much the company expects to lose this year. It has been policy since Freightliner was taken over by Daimler-Benz (now DaimlerChrysler) that the truckmaker not publicly report individual results.
Despite Freightliner's struggle, DiamlerChrysler's worldwide truck operations are expected to make a small profit this year, said Rainer Schmueckle, Freightliner president and CEO. Schmueckle said he has full approval of the Daimler Board and Chairman Jeurgen Schremp to put the U.S. restructuring into place.
To cut costs and boost revenues, Freightliner will close some plants and further reduce its total labor force (see Hotline).
These closings are not unique to Freightliner and its three brands (Freightliner, Sterling, Western Star). Just two weeks prior to the Portland announcement, Volvo Trucks North America said that as a result of the acquisition of Renault's truck business worldwide — including subsidiary Mack Trucks — it will close Mack's Winnsboro, N.C., plant and move the production into the Volvo New River Valley plant.
Slumping heavy truck sales are down more than 40% from the peak year of 1999, when the North American market (U.S., Canada and Mexico) topped out at 309,000 Class 8 sales. Nielsen projects this year's Class 8 sales at 175,000 units. The day before the mid-October Freightliner announcement and two weeks after an interview with Volvo Global Trucks President Tryggve Sthen, HDT interviewed PACCAR President David Hovind who projected 2001 heavy duty sales in the region of 170,000 (see sidebar story).
Meanwhile, Navistar International managed to post a profit in the second and third quarters of 2001, after paring production and employment. Earlier, it said that long term, its plant employment could drop by 40% from pre-slump levels with this year's changeover to its next generation trucks. It does not see lagging sales picking up anytime soon.
Volvo Global Trucks chief Sthen told HDT that in North America, the company will maintain both the Mack and Volvo brands and their respective dealer and service support. But in areas not seen by the customer, the companies will substantially merge operations. The brands will be retained and will compete head-on in many markets, with both offering products for vocational as well as over-the-road applications.
Freightliner's turnaround plan seeks to integrate and complement brands — unlike the approach of former President/CEO Jim Hebe. The plan proposes to retain the three brands, to some extent redefining and refining them: Sterling will be focused on vocational (construction, refuse and utility/municipal). Freightliner will serve the on-highway segment while Western Star will continue as the extreme service brand built for mining, logging and oilfield exploration. And each division will likely continue to court the owner-operator niche, Sterling with the Silver Star and Western Star with the Constellation, now with a high-rise sleeper. From the parent corporation there's also the Freightliner Classic XL and — when the good times roll again — the Century-based Coronado.
Furthermore, where Volvo and Mack are to maintain a strict separation between the dealers for the brands — like Kenworth and Peterbilt — under the rescue plan Freightliner, Sterling and Western Star dealers who qualify will be able to sell all three brands, said Nielsen.
This is a departure for Freightliner, which under Hebe saw some heated debates between the company and dealers over franchise conditions and exclusive facility requirements.
Freightliner is known to be struggling with the buy-back debt from aggressive truck deals with major fleets throughout the last decade. When the market turned soft at the same time used trucks flooded back in record numbers, further depressing used values, it left Freightliner committed to buy back trucks at considerably higher prices than their market values.
According to CFO Schnell, the company has reserves to cover its exposure and those reserves were added to as necessary. But he confirmed reports that executives have been re-negotiating agreements with fleet customers, saying some had been completed successfully. Freightliner is reportedly asking customers not to turn the trucks in as promptly as the agreements call for, but to run them for a year or more longer. The strategy is obviously to push the problem down the road a piece while hoping used values will harden in the interim.
Nielsen said that the company will not abandon guaranteed residuals, but that new vehicle price and used values will be carefully scrutinized when making the deals.
In his interview, Volvo's Sthen was quick to underscore two messages: (1) the whole Global Truck enterprise has been and will be quick to respond to changes in market demand with available plant capacity; (2) there will be close scrutiny of the profitability of every deal made in the future.
Freightliner also is proposing to reduce some of the complexity in its product offerings. Today, said Nielsen, there are six truck "platforms" that include Sterling, Sterling Acterra and Western Star in addition to Freightliner FLD, Century Class and Business Class. They will be reduced over the next couple of years to three:
• Century Class, which is the chassis for the conventional, cabover Argosy, Columbia, the premium Coronado, and the Classic XL. It will also be under the Sterling branded heavy duty products, which will continue to be built with the ex-Ford HN80 cab at the St. Thomas, Ontario Canada plant.
• Western Star Constellation will be the other heavy duty platform, covering the severe-service end of the business.
• Next generation Business Class, to be available as an aluminum-cab medium duty and a light heavy duty when it is introduced, likely early to mid-2002. The medium duty Business Class chassis will be the basis for the steel cab Sterling Acterra medium truck range.
Again, this is closely paralleled by what is going on at Volvo/Mack. Both brands will continue with their own power and chassis. As Sthen said, a Mack buyer looks for a Mack drivetrain. Increasingly (currently as many as 40% in North America) Volvo buyers are opting for Volvo power. And the combined company has a new medium duty product — a low cabover — in the Freedom, based on a Renault chassis. While there is no medium duty conventional like the Business Class/Acterra in the Volvo line-up, increasingly customers in medium duty seem to be less wedded to conventional configuration. This accounts for the popularity of another Class 6/7 in the Peterbilt 330 and the Kenworth K300, based on a chassis from Paccar's DAF subsidiary.
Freightliner expects that narrowing down the chassis choices to three platforms will translate into significant savings as it reduces the number of vendors it deals with. Other savings will come from product redesign that will reduce the overall build complexity of the many models it produces.
Sidebar
Used Trucks
More Coping With Crisis
Before & After The Terror
Hazmat Safety
• Fast Facts on Drivers
Insurance Recovery Shattered
Wheels of Hope
• Dumps To Ground Zero
• Going A Mile For America
• From Victims To Victims
Staying The Course
