Commercial Vehicle Market Outlook

Saying, "There's a lot more pain before any gain," Eli Lustgarten, senior vice president, Longbow Securities, kicked off a panel session on the commercial vehicle market outlook.

Lustgarten explained that even before the financial crisis that hit last fall, the U.S. economy was already looking markedly weaker. Consumer spending was weakening as stimulus rebate checks ran out, consumer and business confidence were deteriorating, the housing outlook was uncertain as the sub-prime crisis began to spread, manufacturing was slowing, global economic growth was slowing markedly, and corporate profits were under pressure.

Yet, he said, "There was still hope that the industrial sector would muddle through. Last time we had a recession, 70 percent of the economy didn't know it.

"That hope disappeared with the credit crunch. The credit crunch basically shattered all hopes for the industrial sector and dragged it into full-fledged recession."

Domestic manufacturing activity plummeted as industrial production turned negative, manufacturing capacity utilization plummeted toward recessionary levels in the low to mid 70s. The ISM PMI fell sharply to levels of clear contraction at 43.5 in September, 38.9 in October, 36.2 in November, 32.9 in December, and 35.6 in January 2009. (A number over 50 reflects economic growth.)

The big question is, when will the financial markets stabilize?

"The lynch pin of investment decisions rest on timing of financial market stabilization," Lustgarten said. "If you don't get the financial market stabilized, you don't want to think what 2010 will look like. It will be worse than 2009."

In looking at the market for on-highway vehicles, Lustgarten said, forget any pre-buy this year ahead of 2010-emission engines.

Looking back to the last downturn, he said, it was clear that the boom in truck sales in the late '90s was not sustainable. In 1999, there was a truck sales boom of over 300,000 units, thanks to a very strong economy, as well as rail mergers followed by integration problems that shifted some freight from rail to truck. "Most importantly, the fleet replacement cycle was shortened from 4-5 years to 3-4 years, [largely] due to guaranteed replacement residual values by Freightliner. It caused ballooning of used truck inventories and real problems."

The pre-buy in 2002 saved the year, as fleets bought engines ahead of the October 2002 emissions deadline, boosted by relatively stable fuel prices and low interest rates, despite recessionary pressures, a credit crunch and higher insurance costs.

Don't expect a pre-buy to save us this time, Lustgarten said. The weak economy will keep freight demand soft for most of the year. Current equipment is in good condition; even though the average fleet age is creeping up, at 6.2 years, those fleets are also getting fewer miles put on them in many cases. There is plenty of capacity available, including cheap used trucks. And, he said, it's looking like the 2010 engines may actually be a better financial bet than the 2007 engines, if a predicted increase in fuel economy for SCR engines proves correct.

Other factors affecting low truck demand this year include slowing exports to Mexico and other countries, and tight credit making it harder, even for companies that want to, to buy trucks. The military vehicle market is also slowing, he said.

So when will Class 8 truck demand return to normal levels? "We think there's a chance of rebounding to a more normal level as soon as 2010," Lustgarten said.

ACT/FTR projections shared by Lustgarten showed estimated Class 8 demand for 2009 at 150,000-165,000, down from last year's estimated 205,000, but estimates for 2010 at 195,000-225,000.

Lustgarten said his firm's surveys suggest that smaller trucking concerns couldn't care less about pre-buy and emissions and are just trying to survive. Larger fleets are definitely paying attention to the 2010 mandate, but have not made any definitive decisions yet with respect to pre-buy or the use of area.

Right now, surveys show fleet owners are "still scared to death and don't want to buy," Lustgarten said.

A survey done in January saw modest increases in the "unsure" and "don't plan to buy" categories. It showed 8 percent fewer trucking companies plan to buy in 2009. In fact, 64 percent said they don't intend to buy trucks at all in 2009, compared to 45 percent last July and 50 percent in September. Only 19 percent are planning purchases in the coming year, compared with 27 percent in October, 20 percent in September and 33 percent last July.

"Most of our contacts intending to buy intend to purchase an equal or lesser number of trucks compared with last year," he said. "This is unsurprising, given current market conditions and lower than normal utilization rates."

The percentage of trucking firms expecting to grow their fleet remains low, at 5 percent.


George Zirnhelt, CEO, Power Systems Research: "We need to accept the fact that we serve a cyclical industry and we don't control the cycle." Those are the words of Henry B. Schacht - chairman of Cummins Engine Company, in a 1988 letter to shareholders, Zirnhelt said, saying that has not changed.

"It is a cyclical industry," Zirnhelt said. "We've been there before, we'll be there again. We really do believe that we're going to see this come back, probably not at some of the levels we've seen more recently, because we are essentially a mature market. Trucks are getting better, they last longer. The point is the challenge for people in the industry, the margins aren't that big, and you've got to live through the difficult times and we'll see people thin out as time goes on."

One of the challenges, Zirnhelt said, is the staggering number of variations available for each model of truck.

"When you consider the number of engine options, transmission options and axle options, 2,056 basic models turns into 245,000 final products," he said. "We can see going forward that's just not going to be sustainable. That's probably good for just about everybody, the idea that the integrated truck is certainly going to be a factor.

"In the end, the integrated drivetrain is a better solution for optimization than the Lego-type system," he said.

Engine technology, he said, has made tremendous strides - but at great cost.

"A few years ago, being an engineer myself, I thought, I don't think this Clean Air Act is such a bad thing. You could look at it as the engineers' full employment act. I really wonder if we would have made the kind of technology investment if it hadn't been required. In some ways you have to look at it, it is remarkable to me, the vehicles that are out there today."


The problem, he said, for engine makers, is that if you track engine prices over the same period of time, "there were year upon year when the competitive nature of the industry was such that they just weren't making any money. So the engine itself has represented really good value. I think the question is, how much further can it go?"

Looking to the future, he said, there are better ways to spend R&D money than in trying to get more and more fuel efficiency out of the engine, including alternative fuels, hybrids, and reducing parasitic loads on the truck with better aerodynamics and other new technology.


Dave Andrea, vice president, Industry Analysis and Economics with the Original Equipment Suppliers Association: Andrea spoke more about the light-duty end of the market. According to figures he showed from CSM Worldwide, we're looking at five years until North American light-duty vehicle production gets back to "normal."

That reduction in vehicle production, he said, drives "demand destruction" in all markets, cutting the demand for steel and other raw materials, and therefore prices.

"If we're going to be down by 30 something percent this year, that flows down through the whole materials market," he said. But prices that are too low aren't good, either.

"I can tell you that $200 a ton won't support the steel mills; $1,000 a ton puts the customer out of business. We're probably going to be in that $400 to $500 dollar band going forward."

However, he said, "There still are going to be months of downward pressure on materials, which is very positive for us" as suppliers.

OESA is also proposing a buying consortium that would allow suppliers to leverage price through volume buys of certain resins.

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