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Key Trends Driving Medium-Duty Truck Sales in 2005-06

August 2005, by Mike Antich - Also by this author

While record-high gasoline and diesel prices are dampening 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. The three key factors driving these production increases are 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 Diesel Emission 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. "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. "Many manufacturers believe they will be in a 'sold-out' situation for the current diesel emission standard trucks by mid-summer 2006," said Decker.

"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 ongoing 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." "In addition, the increased emission controls on trucks will increase maintenance operating costs," said Wayne Reynolds, manager of the truck department for LeasePlan USA in Alpharetta, Ga. "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 Services 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 regulates changes scheduled in 2004, 2007, 2010, 2014, and beyond. The 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 adjust budgets and take advantage of the pre-buy. 2. Extend the life of the existing fleet. 3. Look to the various remarketing avenues to fill 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. {+PAGEBREAK+} 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. GM Isuzu Commercial Truck Corp. (GMICT) predicts its sales will increase nearly 20 percent in 2005. GMICT expects deliveries to total 64,000 units this year, up from 52,000 in 2004. "We are selling at a record pace. We're at the lowest inventory we've ever had," said Jim Underwood, GMICT president and CEO. In 2006, GMICT expects another 15 percent sales increase." With the anticipated decline in diesel truck sales in 2007, there is also an anticipation that gasoline-powered medium-duty sales will subsequently increase. Approximately 5,000 gasoline-powered N- and W-Series trucks will be built in 2005 by GMICT. "We're sold out," said Todd Bloom, vice president of marketing for GMICT. "We want to add production of 300-500 units this year. We hope to sell close to 6,000 in 2006." Supplier Constraints
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," added Stumne 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. Steel Shortage Affects Upfits
The high cost of steel, like the high cost of fuel, is starting to financially impact fleets, such as increased cost for truck bodies, trailers, liftgates, and other upfit equipment. "Vocational chassis sales for off-road applications have been negatively affected by parts, tire, and steel shortages. Delays in waiting for the OEM to complete a chassis has been normal for the past few years. But now part shortages are creating assembly delays as well. Upfitters are sourcing multiple suppliers in order to assemble specialty trucks for complicated fleet applications," said Dan Kratz, truck manager, maintenance & safety solutions for GE Commercial Finance Fleet Services. "Where upfitters in the past have used single source suppliers for equipment such as cranes, hydraulic lifts, and other parts they now find themselves 'shopping' multiple suppliers. Delays will continue through 2005 and 2006," added Kratz. Strong Resale Market
The resale market continues to be strong for medium- and heavy-duty trucks. "Fleets are purchasing used trucks to avoid engines with increased emissions controls for the past few years," said Kratz. Another factor that has stimulated heavy-duty truck sales has been the new DOT hours of service regulations. "Demand for tractors, particularly those with integrated sleeper units still shows strong growth for dealers," said Kratz. "Part of the demand for used sleeper units has been the DOT hours of service regulations that require drivers to rest 10 hours after each driving period. The previous regulations required only eight hours. Fleets are changing operations and utilizing sleeper cabs in order to be compliant with regulations while staying operationally effective." Kratz predicts a strong resale market for medium-duty trucks to continue through 2006 and into 2007.
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