Co-Authored by Michael Held, director, and Shiv Shivaraman, managing director and leader of the heavy equipment practice, both of AlixPartners, a global management and corporate restructuring consulting firm. This is one in a series of periodic guest columns by industry thought leaders.
As the last three years have shown, manufacturers of Class 8 trucks have been in a slump, and they can no longer rely on global economic growth to drive performance.
After a significant correction, AlixPartners’ research shows that the trucking industry is poised to recover over the next two to three years. However, truck manufacturers need to make major structural changes and focus on innovation if they are to reap greater profits and growth.
After reaching its peak in 2014 with sales of almost 1.8 million units, worldwide sales of commercial vehicles dropped 10 percent over two years, barely hitting 1.6 million units in 2016, according to ACT Research.
While Western Europe, India and Japan had marginal growth in the same period, other major markets – mainly North America and China – slid 30 percent. Brazil was down nearly 60 percent.
Despite 2016’s bleak performance, the sector is already improving as evidenced by key demand drivers. Global GDP, a strong indicator of commercial vehicles sales, is projected to grow from 3.1 percent in 2016 to 3.4 percent in 2017. Additionally, global population growth and U.S. initiatives such as the rebuilding of affected regions following Hurricanes Harvey and Irma are projected to stimulate economic activity.
Considering these macroeconomic drivers, the overall industry is forecast to grow 18 percent over the next three years, according to ACT.
There are three other major factors that will drive long-term growth and sustainable profitability: structural change, product innovation and exploiting future regional markets. Focusing on product innovation and emerging trends may completely overhaul the driving and ownership experience.
Product innovation implies developing products that simultaneously improve performance and total cost of ownership. Such innovations are making new vehicle purchases more affordable, while connectivity, autonomy and electrification – as with the automotive industry – are changing the landscape forever, as seen by Tesla’s rapid development of an electric Class 8 truck.
Between 2011 and 2016, major truck manufacturers faced challenging markets and saw revenue decline almost $25 billion globally. However, commercial vehicle companies have continued to invest in capital expenditure and research and development.
AlixPartners research indicates that a few truck companies have made significant progress toward advancing innovation and technology, but others may be lagging.
Such technological improvements are expected to increase employee productivity, safety and asset utilization while reducing maintenance and operating costs. As commercial vehicle replacement demand builds over the coming years due to the 2016 downturn, manufacturers should be ready with these technological upgrades that fleet operators and drivers will have come to expect.
Five technological trends that will impact commercial vehicles
- Telematics and Internet of Things
- Using embedded sensors to monitor equipment usage in the field through real-time performance information, as well as manufacturing and assembly processes at the OEM plants.
- Constant communication between equipment, origin and destination locations, allowing precise access to information about asset usage, maintenance records, condition and delivery metrics.
- Upgrade from simple location tracking to detailed information such as fluid levels, temperatures, operating pressures and dynamic loads.
- Data analytics
- Predictive analytics and visualization to enable real-time review of vehicle performance, condition, uptime and maintenance.
- Better asset utilization, deployment and the ability to use real-time data analytics to actively manage vehicle performance across the duty cycle.
- Expanded use of Electronic Logging Device data and capability.
- Traffic modeling and connectivity
- Real-time vehicle traffic sensing and optimization based on patterns and special events.
- Automated traffic pattern analysis and use of what-if scenario models.
- Machine-to-machine communication technology to enable platooning to improve productivity and safety.
- Reduces cost of fuel and total cost of ownership for fleet operators.
- Enhances driver lifestyle and raises productivity, while addressing many safety concerns and reducing insurance premiums.
- Likely first step is active safety systems, platooning as well as some Level 3 autonomous capabilities, as defined by SAE International. Fully automated driving – Level 5 – will come later.
- Electric and hybrid powertrains increase fuel economy and efficiency, providing the stimulus for improving the industry image.
- Europe is starting to shift away from diesel to electric because of a series of high-profile emissions cheating scandals, so technology development should accelerate.
- Battery cost per kilowatt is decreasing faster than forecast, and China is making a big play in electric vehicles.
To be successful, manufacturers must anticipate customer needs and the benefits that each new technology will deliver from an integrated value chain perspective. Some of the increased benefits may not offset the costs of these new technologies, but the technology revolution sweeping the automotive industry will rapidly make inroads into the commercial sector.
Successful manufacturers need to ensure that the value proposition for technologies such as autonomous, data analytics, electrification and traffic mapping is aligned with trucking industry economics. It will be critical to avoid taking a one-size-fits-all approach, and tailor product technology offerings to market demand. Finally, capturing and leveraging early stage and startup innovation also will be critical, but there will clearly be winners and losers.
Winning will require moving beyond reducing structural costs and quickly getting technology to market with fewer glitches. The new millennium marked a shift from product-centric discrete markets to service-centric global ecosystems, or “servicisation.” This paradigm holds true for trucking, too. Data analytics-driven services and solutions will displace asset-based economic value creation. Manufacturers should continue to focus on products and cost, and at the same time develop integrated services that unlock the potential of servicisation for their customers.
Though falling sales, revenue and net income has taken its toll on the trucking industry, the commercial vehicle sector has endured a correction over the last three years. With the markets poised for recovery, manufacturers that focus on these three initiatives – structural change, product innovation and exploiting future regional markets – will transform tepid regional growth into longer-term profit performance down the road.