Trends in Medium-Duty Truck Sales for 2005-06
While record-high gasoline and diesel prices are softening light-duty vehicle sales – especially large SUVs – sales of medium-duty trucks continue to surge. Demand for commercial medium-duty trucks has been on an upward trajectory since 2003.
Three key reasons are driving these production increases: a stronger business environment, pre-buying to avoid the upcoming 2007 EPA diesel emission standards, and the need to replace older trucks.
As a result, the medium-duty truck market is expected to grow by 37 percent in 2005. The growth is anticipated to continue well into the 2006 calendar year.
Another reason medium-duty sales continue to be strong is the nationwide shortage of truck drivers, especially those with a commercial drivers license (CDL). A solution for some fleets has been to order trucks under 26,000-lbs. GVW, since they do not require a CDL to operate.
Lifecycle cost is another factor fueling medium-duty sales. On average, medium-truck users keep their equipment eight to 10 years. Today, many fleets have a sizeable quantity of inventory in this age bracket, which has triggered a strong replacement market.
Pre-Buying to Avoid New EPA Regulations
Many companies are rushing to buy new trucks before more stringent federal emission regulations covering diesel engines take effect in 2007.
The new regs promise to raise the price of diesel-engine trucks in 2007, due to the installation of costly emissions equipment. The new EPA regulation becomes effective Jan. 1, 2007.
The new requirements threaten to impact new-truck sales.
“As a result of the new 2007 diesel engine emission regulations, we feel that there will be a ‘shortage’ of diesel-powered trucks during the 2006-model year due to the fact that many large fleet diesel engine users are going to order additional units over and above their normal replacement cycle to beat the large price increase associated with the new standards,” said Dave Decker, manager of truck engineering for Wheels Inc.
“As emission regulations change in 2007, and again in 2010, fleets are pre-buying to mitigate issues with first-run engine changes. Emission changes increase costs by increasing the initial cost of a truck. There is increased on-going maintenance, and the impact on resale values is unclear,” added Joe Noonan, truck regional sales manager for GE Commercial Finance Fleet Services.
Another option for truck fleet managers is delaying purchases until after the effective date of the new regulations to avoid anticipated initial problems that may occur with the new diesel engines.
“As the next round of diesel emission regulations looms for diesel engines, there will likely be a waning of new truck demand starting early 2006 as fleets try to manage their replacement schedules to delay purchase until past the effective date,” said Ken Gillies, manager of truck services for Donlen Corporation in Northbrook, Ill. “This is in the hopes that someone else will experience the early problems associated with the additional controls and systems necessary to bring the engines into compliance.”
“As diesel truck emissions get driven to tougher standards, this has increased the complexity of engines and added concern about reliability, longevity, and added cost,” said Mark Stumne, senior truck application engineer for GE Commercial Finance Fleet Ser-vices in Eden Prairie, Minn.
According to Stumne, a number of fleets have taken a strategic look at when to acquire new trucks based upon the emission regulation changes scheduled in 2004, 2007, 2010, 2014, and beyond. Fleets that have not been planning far enough in advance or have unplanned growth are realizing the upcoming impact (increased acquisition cost, increased maintenance, reliably questions, longevity concerns). Options are few:
1. Find ways to get budgets adjusted and take advantage of the pre-buy.
2. Extend the life of their existing fleet.
3. Look to the various remarketing avenues to fill their fleet needs.
“Fleets that wait too long to make the budgeting decisions will find the 2006 model year built-out and will be forced into the 2007-model year or find other ways to fill the gap,” said Stumne.
The demand for used trucks will definitely be trending up as the availability of 2006 models decline, added Stumne.
Impact of Low-Sulfur Diesel Fuel
To meet the 2007 regulation, the sulfur content of diesel fuel must drop from an average of 500 parts per million (PPM) to 15 PPM. This situation is somewhat similar to the changes that the auto industry went through in the mid-1970s as gasoline was changed to unleaded to enable the use of catalytic converters.
"Existing diesel engines will also have a catalyst and will need a particulate trap, both of which will motivate another change in managing a fleet,” said Gillies. “First, from a maintenance
perspective, it will affect maintenance cost since the trap will need periodic cleaning and the catalyst system will need maintenance. Second, fleets that maintain their own fuel storage and dispensing facilities will need to prevent mixing of the low and high sulfur fuel. In some cases, this will be the last straw, and many fleets will finally cease to use and maintain the tanks and pumping systems.”
Manufacturers Add Shifts to Increase Production
To meet increased demand, Ford, GM, Freightliner, and Mack have stepped up production of medium-duty trucks. Freightliner added a third production shift at its Cleveland, N.C., assembly plant and another 100 jobs at a chassis and cab parts factory in Gastonia, N.C. Ford increased commercial truck production by 30 percent during the second half of 2004. A second shift was added to produce TopKicks and Kodiaks last September at GM’s Flint Truck Assembly.
Due to the growth of the medium-duty truck market and the rising costs of materials and components, component suppliers are having trouble keeping up with demand.
“All new truck and trailer manufacturers are experiencing supply chain issues with tires, axles (bearings), steel, and potentially engines,” said Stumne. There are a couple of factors driving this issue. First, steel is in high demand around the world, creating a shortage and driving up price. Second, truck orders are at record levels due to improved economy and pre-buy before the 2007-model year. As a result, original equipment manufacturers (OEMs) and major component suppliers in the trucking industry will continue to be challenged to meet the current level of sales, and the predicted unit volumes for next year. This will only make the current situation more difficult for suppliers.
“Many manufacturers believe they will be in a ‘sold out’ situation for the current diesel emission standard trucks by mid-summer 2006,” said Decker.
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