ROCHESTER HILLS, Mich. (Jan. 5, 2009) — The Ball in Times Square couldn't drop too soon on New Year's Eve as we rang out a pretty dreadful 2008 and welcomed in a hopeful 2009.
Boy, 2008 was a year that held no cherished memories for those of us in the tire and trucking industries. It was a terrible year! But will 2009 be any better? That's the big question. Should we just slit our wrists now or venture into this brave New Year with hope and idealism?
Well, brace yourself and expect things to get worse before they get better.
Crystal ball gazing
Right now it looks like we could be in for a long and rough economic ride that could be the worst in 25 years due to the U.S. housing troubles, tight credit and weaker growth overseas. The experts forecast industrial production will fall farther in this recession than it did in the 2001 recession and be more like the 1981-1982 recession as unemployment will rise higher.
Economists expect 2 million jobs will be lost before the economy will show any sign of turning around and that the U.S. unemployment rate could reach higher than 8 percent—or about 2 points higher than the 6.7-percent unemployment rate reached in November.
A soft freight market will be impacted further by the credit crunch, causing businesses to pull back on production and freight demand. In fact, it's quite possible that we will have at least four quarters of a shrinking economy, which means this recession will be relatively long lasting.
Everyone in the know is expecting the recession to end in June or July with a recession of -1.2 percent. Manufacturing is expected to continue to contract and probably won't stabilize until March. The transportation sector has been in recession since the second half of 2006 and always leads the economy. At this time there is no improvement in freight tonnage to report.
The slowing freight and the credit crisis are having a dismal impact on truck and trailer manufacturers. Earlier forecasts of 225,000 to 240,000 sales of Class 8 trucks have been revised down to 150,000 after allowing for 20,000 to 25,000 due to lower freight demand and as many as 40,000 units that will not be pre-bought against the 2010 EPA emissions mandate.
No one is going to buy trucks just to park them next to the trucks already parked against the fence.
Shot in the arm
The one thing that could really jump start the economy as well as benefit the country as a whole and the trucking industry in particular is President-elect Barack Obama's promise to sponsor the largest infrastructure-building program in more than 50 years, which he outlined in his weekly radio address on Dec. 6. He said he wants to “create millions of jobs by making the single largest new investment in our national infrastructure since the creation of the federal highway system in the 1950s.”
Improvements in infrastructure would create jobs and stimulate the economy—which would lead to a more rapid recovery from recession as well as reduce congestion, expedite highway traffic and reduce fuel consumption.
According to the American Association of State Highway and Transportation Officials, there are more than 5,000 ready-to-go projects worth $64 billion that could be under contract within 180 days, which would support 1.8 million jobs. The U.S. Conference of Mayors identified more than 11,000 infrastructure projects that could cost $73 billion to complete.
I don't think you have to look very hard to find roads and bridges that need to be repaired, replaced or expanded. If the money became available, you can bet every state will be jumping on it.
This economic stimulus plan is separate from the reauthorization of the national six-year surface transportation program that is set to expire this coming September. This bill consistently funds infrastructure spending over a six-year period. It will be interesting to see if Congress recognizes its importance or simply writes it off thinking the one-time economic stimulus package addresses it.
The credit problem likely will hit medium- and small-size freight carriers and, of course, owner-operators the hardest. That's because available cash for the small operator from banks and other credit institutions and the cash from their own resources or from the family is just not there.
For companies with good credit, the captive programs of the OEMs will be available to finance deals, but the cost of this money will still reflect the tighter credit market.
Carriers that can weather the storm of thin freight volumes and tight credit will be rewarded with good times ahead. So much truck capacity has left the industry and is still leaving the national fleet that when the economy does turn around, there's probably going to be a shortage of trucks to haul freight and freight rates will go up. The fleets left standing are going to do very well. But when will this happen? Probably not until 2010 or maybe even 2011.
Fuel perks
The upside of the sluggish global economy is that the price of petroleum is expected to remain low due to lower world demand. The U.S. and global economic downturn has led to a decrease in global energy demand and a rapid reduction in crude oil and other energy prices.
The condition of the global economy is expected to remain the most important factor driving world oil prices. Crude oil prices, which form the basis of diesel fuel prices, continue to swing wildly in world markets. In the U.S., the price has fallen to around $40 a barrel, reflecting the worldwide economic slowdown.
Some analysts even see oil as low as $30 a barrel as the worldwide economic slump worsens. (Remember when crude oil hit a record $147.27 in mid-July?)
According to the Energy Department, on-highway diesel fuel will average $2.73 a gallon in 2009—which is $1.08 a gallon less than the average price in 2008 of $3.81. Gasoline will average $2.37 per gallon. This is sweet music to every fleet operator's ears.
Lower oil prices and an expected government stimulus package should help the economy start growing again during the second half of the year. In the 12 months ended September 2008, the U.S. spent $200 billion more on petroleum products than on products that move by truck. If fuel prices stay low as predicted, consumers will use this money to buy things instead of gas for their cars and this will help fuel the economy's recovery.
Weather the storm
So what does all of this mean to you, the commercial truck tire dealer?
Well, it means you'd better batten down the hatches, take some steps to deal with the credit crunch and position yourself for when the economy does turn around.
The tire companies are doing that now. They are laying off people, cutting back on production and idling truck tire plants in order to deal with the truck tire glut.
Since there will be no truck/tractor pre-buy in 2009 and fleets will be running fewer miles delivering freight, fewer truck OE and replacement tires are going to be needed. A recent study of global tire production capacity indicated that capacity rose almost 6 percent in 2008 and is projected to grow 2.6 percent in 2009 and 2 percent in 2010.
With the rapid decline in the global economy that affects both car and truck production, it's obvious that production capacity is growing far more rapidly than tire demand.
Since truck production is expected to drop again in 2009, the Rubber Manufacturers Association (RMA) forecasts a decrease in OE tire shipments of approximately 8 percent or 300,000 units in 2009 for a total of 3.6 million truck tires. Replacement commercial truck tire shipments also will fall in 2009 by 300,000 units to approximately 15.1 million units. That is a 2-percent decline as fewer goods will be transported and fewer truck miles will be run.
With the deterioration of the truck tire market and the high costs for raw materials and transportation, the playing field for U.S.-based tire manufacturers has been leveled.
Now foreign manufacturers don't have the price advantages of bare bones, low-cost production, and they have to sell based on quality and technology that will lower a fleet's cost per mile. These factors effectively reduced the number of imports into the U.S. in 2008, and I would expect it will be much harder to sell imported tires in 2009 as well.
Manage assets wisely
What should you do? Watch your inventories and manage them wisely. Don't stock up on weird tire sizes or enormous quantities of tires no matter how good the deal is. There may be some deals out there since market conditions—including dropping raw material prices due to lower global demand—may put downward pressure on tire pricing.
Keep close ties with your customers, especially small- and medium-size fleets and stay alert for signs of their financial problems. Many fleets will go out of business, so be wary of extending credit or payment terms to them. You don't want to be holding the bag for their unpaid tire purchases.
Since lenders are becoming increasingly selective in loan approvals, particularly for new clients, it is important that you cultivate long-term relationships with a bank. Improve cash management and operating performance and cultivate relationships with your lenders.
Lenders are getting stricter about the information they require from borrowers and are focusing more intensely on cash flow projections from one to three months. This projection typically will have to be accompanied by a plan for improving operating performance and will have to be fairly detailed as to how you will achieve your goals.
Hone your sales force's selling skills. Invest in sales training if necessary. Since the price advantage has been eliminated in the cheaper, imported tire lines, it will be necessary to sell on value and cost per mile rather than peddle on price alone. If your sales team has been selling a few low-cost customers this way for the past few years, it probably needs a refresher course.
Explore with your customers their near-term future needs. Determine the services you can provide that they are interested in when the economy does turn around and they are busy grappling with their own businesses.
Start making the investments in training and equipment to prepare your company and its personnel for the turnaround. If you do this work now, you won't be caught flat footed when your customers need you to jump.
Yes, 2009 is going to be a tough year, no doubt about it. But it looks like we will be digging out of this recession in the second half and truck fleets and commercial truck tire dealers will survive.
So put that razor blade away. With some good fiscal management and planning, you can position your company to be ready for the economic upturn.