Truck Industry Struggles With Weak Sales, But Strong Orders Point to Rebound

April 27, 2017 by Craig Guillot, @cguillot

After a troublesome period, the commercial truck market may be in the initial stages of a turnaround.

While analysts are forecasting a second consecutive down year for heavy-truck sales and a stable year of growth in the medium-duty market, truck manufacturers are reporting strong growth in their order backlogs during the first quarter of the year.

“We think there’s a reasonable expectation that sales should start to increase because we’ve had a long enough level of order activity,” said Jonathan Starks, chief operating officer for FTR Transportation Intelligence.

Production is starting to ramp up to support rising orders for Class 8 trucks. In March, orders rose 41 percent to 22,800 vehicles, signaling a recovery on the horizon.

For example, Volvo Group, which sells Mack- and Volvo-badged trucks in North America, said Tuesday that deliveries plunged 34 percent to 7,065 vehicles in the first quarter compared with the same period a year earlier. However, orders surged 27 percent to 11,334 in the first three months of the year.

Paccar Inc., the maker of Peterbilt and Kenworth brands, said Tuesday that first-quarter deliveries of its trucks in the U.S. and Canada dipped 8.1 percent to 17,000 compared with the same period last year.

But the company thinks the rest of the year will improve.

“We had good broad-based order intakes across all segments,” said Ron Armstrong, chief executive of Paccar. Demand for vocational has been steady for several years, and orders for long-haul are “good.”

Daimler, which sells Freightliner and Western Star trucks, also acknowledged the difficult heavy-duty truck market in North America when it reported on its finances earlier this week.

The automaker said it expects deliveries of trucks in the Class 6 through 8 weight segments to fall about 5 percent this year in North America, with the bigger trucks experiencing a larger sales decrease.

“Nonetheless, it is assumed that the market will gradually stabilize as the year progresses,” Daimler told its shareholders.

Sales and production down for Class 8

First-quarter production and sales in the commercial truck market varied widely by class. For Class 8, a lack of growth in freight and a surplus of truck inventory on the market have dampened production and sales.

Both sales and production of Class 8 trucks have been “disappointing,” with quarterly performance that hasn’t been seen since 2011, said Steve Tam, vice president of industry consulting firm ACT Research.

Manufacturers built 50,832 Class 8 trucks in the first quarter of 2017, a 20 percent decline from 63,907 during the same period a year earlier, according to ACT.

U.S. sales of trucks in the heaviest Class 8 segment fell 29 percent during the first three months of this year to 36,937 vehicles compared with the same period a year earlier, according to WardsAuto.

All of the manufacturers have seen sales drop.

Daimler sales fell 36 percent to 14,709 Class 8 trucks, WardsAuto reported.  Paccar saw sales drop 22 percent to 10,501 trucks. Volvo had the smallest decline – 12 percent to 7,699 trucks.  Sales at Navistar, which owns the International brand, fell 38 percent to 4,019 trucks.

A freight market that has not grown in six consecutive quarters and an “overbought” truck market in recent years are responsible for falling truck manufacturing and sales, Tam said.

“We just have excess capacity with too many trucks chasing too little freight,” Tam said. “You’ve got all these numbers telling you 2017 is going to be a down year in the [Class 8] truck market.”

The March Cass Freight Index, which measures North American freight volumes, reported that shipments are up only 0.9 percent since March 2016, with a 0.5 percent increase since February 2017.

market share chart

(Source: WardsAuto InfoBank)

Although trucking shipments are gaining momentum, tepid results by bricks-and-mortar retailers are taking a toll on the long-haul segment, according to industry data from the American Trucking Associations.

Most truck manufacturers and dealers may have to “just sit around” until consumers and businesses increase the demand for freight, Tam said.

The overall Class 8 market this year will fall 5 to 10 percent from last year, but sales and production should bottom out in the second quarter, Starks said.

A turnaround in the manufacturing and energy markets could help shrink inventories to lower, more normal, levels and improve demand, he said.

Growth in medium duty

ACT Research data indicate continued healthy and steady growth in Classes 5 through 7 because of robust economic activity in the service fields.

Medium-duty truck production slowed a bit in 2016 but has still has experienced a “continuous growth cycle” since the end of the economic decline that started in 2007, Tam said.

Truck makers built nearly 25,000 Class 6 and 7 trucks in the first quarter of 2017, which is flat compared with the same period a year earlier. At 24,183 units, sales were flat.

The medium-duty truck segment is holding steady because the vehicles aren’t as dependent on freight and are used more for services like electrical work, plumbing, construction and telecom, Tam said.

The medium-duty market is more stable and will continue to have “slow, modest, incremental growth,” Starks said.

Isuzu Commercial Truck of America anticipated a slowdown in the first quarter after a strong 2016, said Brian Tabel, marketing director for Isuzu. But demand has continued to remain strong with “across the board” growth.

Isuzu has seen growing demand in rental and lease and in everything from landscape and construction trucks to refrigerated units, Tabel said.

In mid-April, the manufacturer began taking orders for its new Class 6 F-truck series that will have a segment-first four-cylinder diesel engine and meet the growing demand for highly maneuverable medium-duty trucks in major congested urban areas like New York and Chicago, Tabel said.

“2016 was a record year for us, and we’re seeing the same steady growth,” he said.

Customers moving classes, new trucks coming on market

Changes in how customers use trucks and build their fleets is also driving the commercial truck market.

For example, customers in the Class 5 segment looking to reduce added maintenance costs and better adhere to emissions requirements are turning away from diesel and considering alternatives, Tabel said.

Customers are also moving down in class because they don’t want to pay premiums for added vehicle weight they don’t need, he said. And customers in the food industry have tailored their businesses or routes to be product specific, reducing the need for larger trucks.

“There’s a trend of them moving to trucks to be more specific to what job needs to be done. They’re no longer using one truck uniform across the board. We’ve seen that with a lot of customers,” Tabel said.

Automotive manufacturers are tapping into the trucking industry with alternative fuel big rigs that can fill specific needs. Toyota recently tested a hydrogen fuel cell powered Class 8 truck that would be used for drayage at the Port of Long Beach. Tesla founder Elon Musk recently said the company would unveil an electric Class 8 truck in September.

The demand for Class 8 vocational trucks has also held up better than the tractor trailer side of the business because of the prospects for an improved construction market, Tam said.

Analysts say President Donald Trump’s campaign promises to embark on infrastructure spending is a “wild card” that could drive growth in multiple classes. According to Trump’s budget director, Mick Mulvaney, the president is proposing a total of $1 trillion in infrastructure investments.

“They’re going to need trucks, so we’re watching that arena to ensure that if it pops, it would be one of our biggest growth areas,” Tabel says.

Related: Here’s Why Tesla Wants in on Trucking

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