Surge in business is a boon for commercial vehicle industry

LAS VEGAS — The commercial vehicle industry is enjoying a surge in business as the U.S. economy grows, construction projects increase and consumers buy more merchandise.

For now, "trucking is enjoying a very good time," according to Antti Lindstrom, principal analyst, NAFTA medium and heavy trucks, for IHS Markit.

"In my forecast, the total production and sales of trucks are peaking in 2019 for the U.S. and then taking a little breather," he added.

"The economy is the driving force behind commercial vehicles. What the economy does, the trucking market does also," he said, noting that the gross domestic product (GDP) predicts demand for trucks in the U.S.

"GDP is a pretty accurate predictor of the truck market in the U.S. The reason being is that two-thirds of the GDP is determined by private consumption.... Whatever consumers are buying needs to be transported, so therefore there is a truck relationship," he told an audience at the Automotive Aftermarket Products Expo (AAPEX) in Las Vegas in November.

More recently, the American Trucking Associations (ATA) reported its advanced seasonally adjusted For-Hire Truck Tonnage Index rose 3.7 percent in 2017 over 2016, marking the largest annual gain since 2013, when it increased 6.1 percent.

"Despite the decline in December, last year was a solid year for truck tonnage, especially during the second half of 2017," ATA Chief Economist Bob Costello said.

"I remain optimistic for 2018 for a host of reasons, including a pickup in factory activity, better housing construction, solid retail sales and an expected shot in the arm from the new tax law."

Trucking serves as a barometer of the U.S. economy, representing nearly 71 percent of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods, according to the ATA.

Meanwhile, the three largest truck manufacturers in the U.S. are predicting an upbeat market going forward.

Daimler A.G., maker of the Freightliner-brand commercial vehicles, increased its market share in Class 6-8 vehicles to 39.8 percent in North America last year on higher unit sales.

"In the United States, the available leading indicators point towards a continuation of the economy's solid upswing," the company said in its annual financial statement.

"In view of stable domestic demand, moderate inflation and low unemployment, the U.S. Federal Reserve is likely to maintain its slightly restrictive monetary policy with only small interest-rate rises. In connection with stimulus from the tax reform passed in late 2017, this could result in overall growth of just above 2.5 percent and thus slight acceleration compared with 2017."

PACCAR Inc., manufacturer of the Kenworth and Peterbilt brands, achieved record sales in 2017, with an increase in Class 8 truck sales in the U.S. and Canada to about 218,000 units.

"Truck demand is increasing due to good economic growth, increased consumer spending, and strong commercial and residential construction, which has resulted in record freight tonnage and high fleet capacity utilization. U.S. and Canada Class 8 truck industry retail sales are expected to increase to a range of 235,000-265,000 trucks in 2018," Gary Moore, PACCAR executive vice president, said in the company's annual financial statement.

Navistar International Corp., maker of the International commercial vehicle brand, reported increased sales in 2017, due primarily to higher volumes in its truck segment.

"Class 8 industry volume declined in 2017, but we anticipate industry volumes to increase in 2018 as general economic and industry-specific indicators are trending well into 2018," the company said in announcing its annual financial results.

"In addition, improved new truck fuel economy along with rising freight demand and rates show the trucking industry remains healthy.

"However, an oversupply of Class 8 used trucks throughout the industry continues to suppress used truck trade-in values, negatively impacting new Class 8 truck sales. The medium truck and school bus markets are expected to maintain the strong demand in 2018."

Forecast

"We are expecting that there will be about 300,000 Class 8 trucks sold in North America by 2019, and after that there a little bit of a pullback where another peak will form in a few years, 2023-24," Mr. Lindstrom said during the AAPEX presentation.

"Medium-duty (trucks) on the other hand will reach a peak in 2019 (with 250,000 Class 4-7 trucks), but we anticipate that they will bounce back as soon as the heavy-dutys just because the volume of the medium-dutys are cycled differently than the heavy-duty," Mr. Lindstrom said, noting that fleets cycle through Class 8 trucks faster, so they need to be replaced more often.

The average service life for a Class 8 truck is about three years, he said.

"What we're seeing in the U.S. market is that production is peaking a little bit later than sales in 2020-21 but then after that softening."

Mr. Lindstrom predicted that 2022 will mark the first time annual truck sales surpass 1 million units in the U.S.

Currently, OEMs are churning out new models of trucks in the heavy-duty segment in North America.

"We're going through a period of very rapid model renewal right now," he said, as demand for trucks continues to grow.

Class 8 heavy-duty trucks account for about 45 percent of total trucks in operation, Mr. Lindstrom said.

Meanwhile, delivery companies are buying medium-duty trucks for "last mile" deliveries. These deliveries are keeping trucking companies busy because UPS, FedEx and other package delivery firms are looking to reduce delivery times with local trucks.

"That means the heavy-duty truck is serving the long distances and is under pressure to bring the goods to more regional distribution centers and then the local deliveries are taking place in smaller vehicles — Class 4, Class 5, etc…," he said.

"The whole picture of the deliveries and local distribution is changing."

Larger fleets are doing most of the truck purchasing right now, he added. "Since the large fleets are buying, the overall market is picking up."

Challenges

"The commercial vehicle market overall worldwide is facing a lot of challenges these days. There is regulation pressure very notably in the North American truck market right now," he said.

Among the trends in the trucking industry include:

Electronic Logging Devices (ELD) that enable trucks and drivers to keep electronic logs of engine status, miles driven and other data;

Environmental concerns over emissions and aerodynamic designs to reduce fuel consumption;

Technology, such as electric power train systems, that are prompting medium-duty truck companies to use hybrid technology;

Connectivity between truckers and dispatch using the Internet, displacing CB radios and telephones; and

Economic fluctuations that directly impact the trucking industry.

"Economic uncertainty is always an issue in the background for truck operators because if the economy is not doing well, then it means we can't be counting on expanding our fleets, for example," he said.

"Whatever the economy is doing, then the truck market is doing the same thing," he said.

In 2009 there was a decline in both the GDP and the truck market. Then 2015 became a peak year for Class 8 truck sales due to a surge in fleet investment in new tractors, causing 2016 sales to drop as a reaction to the intense buying the year before, he said.

Mr. Lindstrom claimed the fleets overinvested in on-highway trucks at a time when the U.S. dollar was so strong that exports were on a decline, and manufacturing was struggling with a slow resurgence. Now the market is experiencing a renewed upswing with sales picking up in 2017, he said.

In 2017 tractor truck sales gave way to straight trucks due to a boon in the construction market. The construction industry uses a large number of "straight trucks," such as heavy dump trucks and cement mixers, he said. These straight trucks are in demand while the construction industry is doing well, he noted.

The upbeat truck market is expected to continue for the foreseeable future, Mr. Lindstrom said.