Last year will certainly go down as a time period no one will forget.
Headlining the extraordinary events that impacted us were the terrorist attacks that knocked the country into a recession after teetering on the brink for months before. Not a single person in the U.S. was unaffected by the attacks or from the resulting havoc they wreaked. The trucking and commercial truck tire industries were especially impacted by the plummeting economy in 2001. But what can we expect in 2002? Is there light at the end of the tunnel?
Well, economists seem to think there is.
In fact, some say that everything is in place for an economic recovery. Federal spending has been boosted sharply. Interest rates have been cut to record low levels. Mortgage refinancing has tripled, pumping billions into the hands of consumers.
Most surplus inventories have been worked off and early reports for October show a nearly complete rebound from the September shock.
Hard times for truckers
In recent weeks the U.S. Labor Department reported drops in new claims for unemployment insurance, which peaked at nearly 600,000 after Sept. 11. There also have been declines in the number of people receiving unemployment insurance benefits, which mean that more people are finding jobs than losing them.
However, a higher than expected 331,000 jobs were lost in November, bringing the unemployment rate to 5.7 percent-its highest level in six years. It is expected that the labor market will worsen until well into 2002, but perhaps not as much as first feared.
For trucking specifically, freight volume in 2002 is predicted to rise a slim 1.1 percent over that of 2001. The freight business is driven by manufacturing activity, which is driven by consumer spending.
As reported in a survey by the University of Michigan during the first few days of December, there has been a recent boost in consumer confidence. However, it will take until next summer for freight volume to recover to the peak level it reached in the first quarter of 2001.
By late 2002, freight volume should be growing at a 4- to 5-percent annual pace, consistent with a 4-percent growth rate for the general economy.
Trucking had a tough time in 2001. About 2,145 fleets with five or more trucks closed their doors during the first 6 months of the year. High fuel, labor, and insurance costs ate into carrier profits.
With freight volume down, freight rates uncertain and insurance costs skyrocketing, it would not seem unrealistic to expect a similar number of fleets to have failed in the second half of 2001. The first half of this year may well bring more of the same.
Even when freight demand accelerates, truckers will be squeezed by high costs and tight credit. Although interest rates are the lowest they've been since July 1961, trucking is thought to be a high-credit-risk business. So few truck operators will enjoy low interest loans.
The shortage of affordable capital is bound to get worse before it gets better, which could mean long-term consolidation in the truckload sector. This could result in a consolidated truckload segment, which, like the less-than-truckload (LTL) segment, is dominated by a relative few fleets.
The good news of 2001 is that fuel prices plummeted in the last few months due to a weakened world economy and reduced demand.
Figures released during the second week of December by the U.S. Department of Energy put the national average for diesel fuel at $1.173 per gallon. Prices haven't been this low since August 1999.
The bad news is that OPEC voted to cut production by 1.5 million barrels a day, but only if non-OPEC countries (Russia, Mexico, and Norway) agree to an additional cut. Should these countries cut production as OPEC hopes, OPEC may reach its target crude price, which would result in diesel fuel costing $1.50 per gallon in 2002.
Prices could be volatile for several months and there's still risk of conflict with Middle Eastern oil countries that would disrupt oil supplies.
New truck builds should pick up in 2002. Class 6-8 truck sales for 2001 should come in at around 281,300 vehicles, which is down 38 percent from 2000. Sales for 2002 are projected at 312,300 units-an 11-percent increase. However Class 8 production should remain level in 2002 at around 170,000-175,000 vehicles.
On an interesting note, Congress did pass a compromise bill that gives Mexican trucks full access to U.S. markets in 2002 and ended a long-running battle over the North American Free Trade Agreement (NAFTA).
According to this new legislation, the U.S. Transportation Department will conduct on-site safety inspections of half of all Mexican fleets wanting to operate in the U.S. The DOT also will verify all Mexican truck drivers' licenses carrying high-risk cargo into the country and half of all other Mexican truck driver's licenses at the border.
Weigh-in motion scales will be placed at five U.S. border entry points immediately and at five more within a year, and Mexican trucks can enter the U.S. only at border crossings staffed with inspectors. The compromise bill also allows U.S. trucks to cross the border and operate freely in Mexico.
Commercial biz soft
So what does all this mean for commercial tire dealers?
Well, everyone in the prognostication business is keeping his or her fingers crossed that an economic upturn will occur during the second half of the year.
As a result of the increase in freight that should pick up in the summer and fall, a modest rebound of 2.2 percent is forecast for replacement, medium/wide-base truck tire sales.
So look for weak tire sales through the first and second quarters but a firming of the market and slight growth during the second half of the year.
OE demand for medium truck tires fell nearly 38 percent in 2001 but should stay at this level in 2002. This low production level will continue to put pressure on tire prices, as excess truck tire capacity still will be available and as tires normally earmarked for new truck and trailer manufacturers are directed to the aftermarket.
All the tire companies have announced or are considering price increases of around 3 percent on commercial truck tires that will take effect the first quarter of 2002. With demand for truck tires soft, especially during the spring and early summer, it will be tough for these prices to stick. Therefore, thin sales margins on commercial truck tires most likely will continue until the later part of the year.
Rising energy costs will affect everyone who runs a retread shop and/or service trucks. The high cost of fuel will help to eat up profits and during the first half of the year, in a market where pressure is on reducing pricing, it may be impossible to recoup these costs. Take steps now to reduce energy consumption in your operation if you haven't already done so.
With diesel fuel costs rising, insurance costs out of sight, and labor costs increasing as well, many fleets will be forced out of business or will be bought or merged with other companies in 2002. Keep a careful eye on your fleet customers' credit. Do not extend more than you are willing to lose.
Fleets, especially those in the truckload segment of the industry, are in the most precarious situations. If you find that your fleet customers have been bought or merged into another fleet, you can expect the new owners will change tire preferences, tire maintenance policies and practices, as well as where and who makes the new tire and retread purchase decision. You may find you have to travel several hundred miles to talk to the new tire purchaser rather than across town.
Another challenge that 2002 will present is the entrance of Mexican truck fleets into the U.S. This undoubtedly will result in more truck tire service business and more tire sales. It would be wise, however, to have Spanish speaking employees on some of your service trucks and answering your telephones if you intend to service these brand new entrants to the U.S. market.
In summary, it looks like the first half of 2002 will call for continued cost cutting, belt tightening and inventive sales efforts. However, don't fear. The light at the end of the tunnel is not a train barreling towards you but an upturn in the economy during the year's second half-one that should put your business in a strong position to take on 2003.
Peggy Fisher is president of Fleet Tire Consulting, based in Rochester Hills, Michigan.