Truck builders battling worst recession in their history
Throughout its nearly 100-year history, the commercial truck manufacturing industry has experienced plenty of changes and economic ups and downs. Nothing compares with what truck builders are experiencing right now, though.
That assessment was delivered by Jim Hebe, Navistar International senior vice-president. He discussed the industry in a presentation entitled “Trucking Challenges from the Class 8 Perspective” made during the NTTC's 61st annual conference May 10-12 in San Diego, California.
“My life has spanned about two-thirds of the truck manufacturing industry's history, and I've seen a steady succession of cycles,” he said. “Cycles are part of a normal capitalist economy. However, the cycles that our industry is experiencing seem to be occurring more often, and they are becoming more extreme.”
Every recession since World War I was preceded by a rise in fuel prices, and this one is no different, Hebe said. US diesel prices soared to a record average of $4.76 a gallon in 2008, and the trucking industry consumed approximately 39.1 billion gallons of diesel at an estimated total cost of $156.8 billion.
This recession has been particularly painful for commercial truck builders, according to Hebe. Heavy-duty truck production dropped 70% since the current recession began in 2006. He said he believes the recession could continue into 2011.
Economically, US truck builders are in the midst of what Hebe described as the perfect storm. In addition to soaring diesel prices in 2008, the industry has been hit with emission regulations and other factors added new costs to truck manufacturing, and the worldwide economic slowdown has cut new truck demand significantly.
“We have been hit much harder than the automotive industry,” Hebe said. “However, we don't want help from the federal government. We want the government to stay away, and we will survive.
“We weathered difficult economic times before and survived. We've seen many predictions that the US truck manufacturing industry would go away. During the 1980s, for instance, we heard predictions that diesel prices would reach $10 a gallon, and Japanese companies would take over the US commercial truck market. It didn't happen.”
While expressing confidence for the future of truck manufacturing, Hebe cautioned that the trucking as a whole is being forced to change by a number of economic and regulatory changes. He made it clear not all of these changes are good for the United States.
The Obama Administration's massive economic stimulus program has a trillion-dollar price tag that will affect consumer spending in coming years. Consumers will have less disposable income, which will change buying patterns. This will have a dramatic impact on freight levels.
Even without the effects of the stimulus program, the trucking industry is in a state of transition that will have a big impact on future new truck sales. Hebe said he believes longhaul just-in-time freight shipments are becoming a thing of the past.
“More secondary storage is being built all across this country, which reduces demand for longhaul trucking,” he said. “Niche carriers with very focused products and services are carving out a bigger share of the market. The largest truck fleets have hit critical mass and are downsizing by 20% to 25%. These fleets are becoming more selective about cargo and service area.
“The owner-operator sector has been in decline since the 1970s, and the pure independent owner-operator is gone. The only successful owner-operators today are those working under contract with trucking companies.”
Credit availability is one reason for the owner-operator decline, and lack of credit also is hurting trucking companies and truck manufacturers. “Less money is available to finance truck purchases,” Hebe said.
Regulations will have a bigger impact on the trucking industry under the Obama Administration. “We are back in a regulated industry today,” Hebe said. “Worse, this industry has little ability to control its political destiny at this point.”
The industry will see significant regulatory activity on alternative fuels. “Going green isn't a fad anymore,” he said. “We will be forced to use alternative fuels — such as LNG and CNG (liquefied natural gas and compressed natural gas) — because politicians like Harry Reid (Senate Majority Leader) are committed to those fuels. Cost doesn't matter to them. They don't care how it will affect the trucking industry.”
Many states are writing new environmental rules that will impact trucking. For instance, Oregon mandates call for truck fleets to use various alternative fuels, comply with carbon standards, and run various aerodynamic devices to boost fuel economy.
Federal legislative initiatives, such as the labor union card check and the cap-and-trade programs, would have a broad impact on the entire trucking industry, including truck manufacturing. The Waxman-Markey “cap and trade” global warming bill narrowly passed by Congress would impose new taxes and what are essentially government price controls on energy.
Card check (more formally known as the Employee Free Choice Act) would eliminate the secret ballot in unionizing elections. “Advocates in Congress don't care how many jobs will be lost to card check,” Hebe said
He predicted that the surge in regulatory action and new taxes will drive more trucking related manufacturing out of the United States. “Most of the US heavy-duty truck manufacturers now have plants in Mexico,” he said. “Navistar has a plant there. Freightliner just opened a new plant in Saltillo (Coahuila). Component makers are following the truck builders, and jobs are going with the manufacturing. We're also going to see further reduction of medium-duty truck production in the United States. All of this means there will be no big ramp-up in US commercial truck production when the economy recovers.”
Hebe also addressed factors related to the rollout of new diesel engines that comply with the 2010 emission requirements. He said that selective catalytic reduction and advanced exhaust gas recirculation (EGR) are both viable technologies that can meet the emission targets.
“Both technologies work, and that gives fleets a choice,” he said. “At Navistar, we are ready for 2010 with our advanced EGR technology, and we will roll it out in August.”
Regardless of the emission-reduction technology used, the new engines will increase new truck prices by $5,000 to $10,000. “I doubt that fleets will be able to recover any of the additional cost for these engines,” Hebe said. “Smaller production volumes have been predicted for 2010, and that will contribute to the higher cost. Used truck values will be a factor, in part because the used truck export markets are drying up.”
He went on to say that the Environmental Protection Agency rules that mandated development of the 2010 engines were unnecessary. “We didn't need these regulations,” he said. “We've lost sight of our environmental objectives and goals in this country. The cleanest diesel engines in the world are right here in the United States. European diesels are dirtier. They need to clean up their systems and stop criticizing us. We've had cleaner diesel engines since 1998.”