NINETY-FIVE PERCENT of fleet customers say their business will be as good or better this year than it was in 2005, according to a report compiled by FCC Equipment Financing — a Caterpillar company — and based on direct fleet customer research and industry market data.
During his keynote speech, Jim McReynolds, general manager of Caterpillar On-Highway Engines and Power Systems North America and a 24-year Cat veteran, shared information from the mostly positive report, “North American On-Highway Market Issues: Current Status and Future Outlook.” The report was designed to track industry trends and growth factors and how these will impact the acquisition of Class 6 to 8 trucks.
Other key results:
More than 50% of the fleets said the volume of freight they plan to haul would increase over last year.
81% indicated that their capital budgets would be the same or better, with more than 25% saying budgets for new equipment would increase in 2006.
75% predicted that new truck pricing would increase in 2006 over 2005, with 25% believing the increase would be significant.
62% believed that trailer pricing would increase in 2006, but only 12% felt this increase would be significant.
82% said they are implementing fuel surcharges to offset the rising cost of diesel fuel.
64% indicated that the biggest cost challenge in their business was fuel, while 23% said it was drivers.
“As you can see from these preliminary results, 2006 looks like a very strong year and a continuation of the hot market we've enjoyed for the last several years,” McReynolds said.
McReynolds also shared the sentiments Cat compiled during in-depth interviews with leading fleets and industry experts.
He said customers indicated that reliability and fuel economy were their biggest concerns in terms of engine selection.
Said McReynolds, “One industry expert put it this way: ‘Today and tomorrow, the issues will remain price and fuel economy. Ten years ago, there were many things that could wander into the equation because there wasn't that much difference in products across the board. Now it's really down to money, and money is also defined by downtime.’
“Fuel economy is an issue due to emissions regulations. The industry spent more than $10 billion in fuel last year — an astonishing increase. So customers certainly would like to find ways to reduce fuel costs, including alternate fuels. While no viable solution has yet to surface, customers indicated that alternative fuels are still worth pursuing.
Concerns about costs
He said they told Cat that one of their biggest concerns is the sharply rising truck prices and the increasing cost of operations.
A sample comment: “The capital expenditure in our industry today is huge, and with the changing and future emissions requirements, tractor prices are probably going up another $10,000 per unit in 2007. We're going to have to learn to deal with that — either by extending our lifecycles by two years, and/or keeping our trucks longer than we would like at this point.”
Said McReynolds, “Let's face it. It costs more to have a clean world environment. It costs more to manufacture clean power and environmentally friendly trucks. And it costs more to use ultra-low-sulfur diesel fuel. But I think we all can agree it's the right thing to do. We all breathe the same air, and we all have a vested interest in protecting the environment — today, and for our children and grandchildren as well.
“Still, customers want a total solution from truck OEMs and component suppliers. In effect, they are looking for truck manufacturers and major component suppliers to keep fuel and maintenance costs down to offset the increasing cost of the new trucks as much as possible.”
He said customers also are concerned about the growing trend of vertical integration, because the majority of them would like to have a choice of major components.
A sample comment: “My biggest complaint with vertical integration is penalty up charges. You've got to always have two choices in the market. Right now, I know that I'm paying an up charge for the engine I want and if it's unreasonable, I can't offset it. Sometimes I feel that OEMs may be less concerned about my needs versus their own.”
“At the same time, customers expect component manufacturers to collaborate with truck OEMs in order to find the best total solution,” McReynolds said. “At Cat, we call this ‘virtual integration’ because — as a manufacturer of complete products ourselves — we know how important it is that all the systems on a vehicle be integrated to maximize performance and provide the lowest operating cost. Virtual integration means there is such a close alliance between an OEM and a supplier that they design and develop as if they are one company.”
He said less than 50% of customers have made a final decision on their choice of emissions technology for 2007 — partly because they saw little major difference in performance between the various engine technologies.
“One industry expert provided this insight: ‘Given what end users experienced in 2002 to 2004, and what they fear for 2007 … they know there is going to be an increase in the cost of trucks by 2007. They are also concerned about reliability, because some engines have not performed well lately. The more complex engines get, the more fearful that market becomes,’” McReynolds said.
“Customers also told us that the most important factor in determining which truck make, major component, and emissions technology they will use is based on the strength of dealer support on the back end. With all the changes in technology, customers indicate they will rely on the truck OEMs, major component suppliers, and dealers who have taken care of them in the past.”
Temper growth projections
McReynolds said the Caterpillar view of the US economy is that it is prudent to plan on future growth — with a solid growth rate of 3.2% predicted for 2006, even though the GDP may be down slightly.
But he said those growth projections need to be tempered with some concern about the economy: flattening of the yield curve; the effect of the national disasters; high and unstable oil prices; the housing bubble; and a decline in leading indicators.
“Nevertheless, the US economy should enjoy another year of growth in 2006 because inflation and interest rates are low and business profits remain strong,” he said. “This continuing, strong market should also produce significant ‘catch-up’ investment opportunities.”
He said heavy-duty industry demand remains strong, but is at near capacity, and although component bottlenecks have subsided, supply disruptions are still possible. He said these factors could impact the Class 8 market:
OEMs are holding inventory so 2006 engine demand is expected to be close to tractor demand.
Phase-in production of new technology for 2007 is expected to be an issue for OEMs and customers alike.
Continued improvement in truck freight demand is the key to 2006 and 2007 unit volume.
The number of heavy-duty units built per day continues to rise moderately while heavy-duty backlog declines.
The average profit margin for publicly traded truckload carriers continues to increase.
“As for the mid-range truck market, we have assumed no 2006 end user pre-buy,” he said. “According to conventional wisdom, typical Class 5-7 buyers are unaware of pending price increases, since they are only in the market for trucks every few years.
“Assumptions of no pre-buy may not apply to OEMs who need to phase in new technology into production and have no incentive to do so before 2007. Therefore, the mid-range market will be affected by what the OEM engine inventory plans are for the end of 2006, and what their production phase-in plans are for 2007.”
He said globalization is another key issue for the industry.
“There is no doubt that manufacturers are moving to a world truck,” he said. “First of all, virtually all of the major OEMs are global producers today, whether they are based in Europe, Asia, or North America. Almost every day, we see a new joint venture announced between two or more major OEMs or component suppliers to develop and manufacture major components.
“Other countries, including China and India, are becoming factors in the truck business, and virtually all of the OEM and component suppliers are scrambling to develop joint ventures in these countries, if they have not already done so. For years, North America has been the center of the heavy-duty universe, but no more. And this shouldn't be a surprise to any of you, because North America now accounts for only 19% of the total global demand for on-highway engines. There is no doubt the truck and bus business is a global market and each manufacturer, whether vehicle, engine or component, will need to design their products for global use.”
McReynolds said there is concern about maintenance and repair of the growing truck population, which includes two distinct worlds of technology in the market today.
“The old world of service comprises the parts and service needed for trucks manufactured prior to the October 2002 emissions standards,” he said. “The new service world includes the parts and service needed for the new technology engines manufactured after October 2002, such as emissions systems, air systems, and aftertreatment systems.
“Of course, it doesn't stop with engines. There are also new technologies in brakes, transmissions, communications, and suspension. All of these make up the new world of truck service facing us as an industry.
The growing population of trucks will require more of us to keep our customers up and running. Currently, the total vehicles in operation is approximately 8.5 million. In our case, there are now 1.4 million Caterpillar-powered trucks on the road. Much of this growing population of trucks is older technology.
“Beginning with the introduction of the EPA standards in October of 2002, customers did one of three things: delayed purchasing, purchased used trucks, or pre-bought prior to the new technology engines. If customers delayed purchasing, they basically invested in the parts and service needed to keep older units running. But the net-net result is a substantially larger aftermarket of older technology trucks. This same process is being repeated today, as customers make the same three decisions prior to the introduction of the 2007 engines. This puts added pressure on the parts and service aftermarket to take care of these customers, while simultaneously getting prepared and trained to take care of customers with new technology.”