PETER NESVOLD of Bear Stearns believes analysts have beaten to death the topic of the 2007 downturn. What about the long-term outlook for heavy trucks?
And thus was born the Heavy Duty Dialogue's session titled, “Ten Trends For the Next Ten Years (And How to Profit From Them),” featuring a panel of leading executives.
“We're not here to dream up some pie-in-the-sky, futuristic vision of where heavy truck is going,” he said. “We're here to think about ways that we can position our businesses to sustainably make money.”
Here they are, presented in a format that would make them suitable for The David Letterman Show:
#10: Extension of life cycles.
Nesvold: “This cuts across a lot of areas. The useful lives of both components and vehicles will continue to improve. For example, will we see more rebuilds move away from OEM control and toward secondary markets?”
Terry Keating, chairman and CEO of Accuride, Corporation, said vehicle life will continue to improve, and fleets may have longer ownership cycles, with more rebuilds moving to secondary markets.
“We're seeing trailers last longer,” he said. “Engine rebuild cycles have gone from three years to seven. I think it's going to continue to increase. Engine rebuilds are coming out of OEM control and possibly going out of OEM control as we go to rebuilds in the seventh or eighth year of ownership.”
#9: The urge to merge: global consolidation.
Nesvold: “Consolidation is rising at all levels — suppliers, fleets, and even the OEMs. Witness MAN's hostile bid for Scania. And my view is, if that deal falls through, a MAN/Navistar combination would make a lot of sense. Is this a threat or an opportunity? Will larger OEMs try to squeeze supplier prices even harder, or does it present a chance to sell more volume into the combined company?”
Keating said pressure in the industry is going to force the new consolidated customers to design more of their components to be more uniform across their various chassis.
“As a result, we are going to see vehicle component demand increase in standard parts and therefore promote a broader competitive base to drive the price and cost down,” he said.
Jim Sweetnam, president of Eaton's Truck Group, said vertical integration is its own form of consolidation,but it's only one method of integration — not the only method.
“We prefer the term virtual integration,” he said. “This involves partnerships with OEMs, partnerships with end users, innovation and technology, creating the best overall system that delivers the highest value, leveraging economies of scale and experience, and the unwavering support of our customers — at their plants, dealerships, and fleets.”
#8: In the tank: decreasing US dependence on foreign oil.
Nesvold: “Certainly, this trend has multiple drivers — political, economic, even environmental. Think hybrid transmissions, fuel cells, even good ol' biodiesel.”
Sweetnam: “We must adopt a more responsible approach to using our most precious and limited commodity. We must reduce the emissions our vehicles pump into our environment, to preserve our way of life. There is no single best bet out there right now as to how to save fuel and reduce emissions. Multiple solutions will be employed to get us where we need to go in the next 10 to 20 years. Green is hot. But it's not just the PR sizzle — commercial fleets are seeing the return on investment. Our fleet customers want the efficiency that proven hybrid systems can provide right now. Green isn't just the right thing to do. It's good business.”
#7: Vertical integration.
Nesvold: “Both International Truck and PACCAR will start making their own 13-liter engines by 2009. Volvo has increased its internal penetration rate from 10% in 1994 to about 65% today. Volvo has recently announced its own automated transmission, and my prediction is that International will announce a private-labeled transmission in the next two to three years. How does a supplier respond?”
#6: Idle talk: The inevitable regulation of vehicle idling.
Nesvold: “This creates demand for auxiliary power units, or APUs. Entrants there include Thermo King, Eaton, and Carrier Transicold. But some fleets tell me they don't want the added weight. So are there other opportunities?”
#5: Global sourcing.
Nesvold: “International Truck seeks to buy a billion dollars of components through its Indian JV partner, Mahindra & Mahindra, by 2009. PACCAR just opened its first purchasing office in China. Wabash National sources more than 90% of its direct materials within 300 miles of its main facility. That's going to change. Is this a threat or an opportunity for suppliers? Also, at the OEM level, how do we avoid just competing away these savings? And finally, remember that if truck demand rebounds suddenly late in 2007, the entire supply channel needs to refill quickly. Well, how does this recent wave of global sourcing impact that?
Have we really considered that lead times are significantly lengthened when we source from the other side of the world, particularly if we use ocean-freight and intermodal moves.”
Gary Edwards, president and CEO of Phillips & Temro Industries, said that five months ago, his company had facilities in North America and England. Now it is in the process of building a 50,000-square-foot facility in Yizheng, China, three hours west of Shanghai, to serve domestic customers with cold-start technology, radiator fans, exhaust systems, and cab power.
“The process that led up to this was enlightening for a small company — trying to deal with a constantly changing political environment as they work through our challenges of new policies and interpretations of those policies,” he said. “The challenges of global sourcing and trying to create a complete local supply chain — it's very difficult for a small manufacturer to compete for the attention of local supply companies when we're trying to build a company. We have to become educated on the cost sensitiveness of the China market.”
Chuck Kleinhagen, executive vice-president of Haldex, said the company, which has been in China for 10 years, has new production sites in China and Hungary. Europe now accounts for 46% of sales revenue, with Asia at 3% and South America at 3%.
Sweetnam: “Globalization is not going away. Our customer base for the most part is now global. Our manufacturing, our sourcing, product strategies, and networks are all global. The Asian commercial vehicle manufacturers are busy trying to establish distribution channels for their trucks outside of Asia. They're moving to the Middle East, eastern Europe, South Africa, and most recently Mexico. So the question you have to ask yourself is, Are Europe and the US that far behind? We believe that the winners of the future will have a global manufacturing footprint with a rational, robust, and nimble worldwide sourcing strategy and products that meet local needs while retaining global efficiencies. All the players of the industry must continue to challenge themselves to rethink their core capabilities. We believe in the global survival game. Those who don't adapt will lose in the end.”
#4: Safety.
Nesvold: “One example is the stopping distance rule. NHTSA has a new 60 mph rule in the works. There's been talk of a 75 mph rule, or a brake fade rule. If these pass, we'll probably see a shift away from drum brakes and toward air disc brakes. Would that impact your business?”
Sweetnam: “It's the number one goal within our business. The industry needs to lead rather than lag in the adoption of proven safety technologies. And we need to be a lot more proactive in the implementation of these innovations to make trucks even safer on the roads. The industry must do a better job of telling our safety story to the public and in trying to correct the mistaken impression that trucks are inherently unsafe. We need to tell the public what safety improvements have been made in the past 10 years. Insurance companies need to reward their fleet customers with good safety records. We can make greater progress with the government as a partner — not as a victim.
“It's much better that we as an industry become proactive, and act before government legislates. If we wait until they legislate, we always find that it wasn't exactly what we were hoping for. As these new technologies develop and government becomes more aware of what their capabilities are, there's going to be a strong push to start legislating onboard meters to track what's going on — the black box they've been fighting.”
#3: You're hired: Driver shortage.
“I think we all agree that this is one of the biggest issues facing our industry,” Sweetnam said. “Shortages are bad and getting worse. It constrains our business growth and success, whether it's fleets, truck makers, suppliers, or anybody in the chain. It could slow down our general economy. Hiring and keeping the best drivers providesa competitive advantage. Our industry must do three things better: make driving a truck easier and safer; expand recruiting beyond traditional pools; and fleets may need to re-define their business model.”
He said the same issues apply to the shortage of technicians.
#2: The shrinking diesel emissions strike zone.
Nesvold: “The key takeaway is, emissions regulations only go in one direction: They get stricter.”
#1: Freight of the nation: The lurking congestion epidemic.
Nesvold: “This is probably the widest sweeping trend. The American Highway Users Alliance published a 100-page report on the subject. And most of the statistics I mention here are from that group. Congestion impacts many things. Fuel consumption: 5.7 billion gallons of fuel are wasted annually due to congestion. Safety: More crowded highways increase the likelihood of fatalities. Air pollution: Vehicles in stop-and-go traffic emit far more carbon monoxide and volatile organic compounds than they do without frequent braking and acceleration.
“Driver productivity: There are 3.5 billion hours of delays each year in the top 75 metro markets. Stated another way, freight moves during rush hour take 52% longer due to congestion. Drivers sitting in traffic aren't generating revenue. If we include just travel time and excess fuel, the annual cost is $71 billion. If you throw in the environmental and safety impact, the cost would be much, much higher. Now that's a market opportunity. It's bad, and it's getting worse. Between 1960 and 2003, total highway miles grew 12%. Total freight tonnage grew 150%. If you assume freight growth of only 3% annually, tonnage will double by 2030. Highway miles might increase only about 5% over that time. So you think you have a long commute now — wait another five years or so.”
Keating said roads will not keep pace with growing freight.
“I was happy to hear the ATA pushing for 97,000-pound total weight — that would move us 40% higher in road-carrying capacity and about 3% growth a year in freight over 10 years,” he said. “We'll need about all of that by the 23rd Heavy Duty Dialogue (in 2017) just to carry freight.”