Why Are Heavy Duty Truck Orders So Low In North America?

How bad is the situation?Wolf Street’s analysis of Class 8 truck orders

shared FTR Transportation Intelligence data showing just 179,000 orders for 2019. This was a drastic 64% reduction compared to the 497,000 orders in 2018. This sharp year-over-year decline highlighted the severe difficulties the truck manufacturing industry faced before the freight market eventually stabilized.

Looking back at early 2020, Freight Waves’ analysis of Class 8 truck inventories highlighted the severity of the market, sharing: “The ratio of retail sales of Class 8 trucks to inventory in January 2020 ranked second-highest in the industry history, trailing only the worst month of the Great Recession a decade ago.” This metric signaled that the heavy-duty vehicle market would continue its downward trend throughout that period.

What’s the cause?

The cause of the current turmoil faced by the Class 8 truck manufacturing industry can be broadly bifurcated into two parts.

The first reason stems from the slowdown in the manufacturing sector. It has a direct impact on the orders fleets place for new trucks. If the sector is doing well, there is a demand to increase the fleet size, hence more orders for new trucks. On the other hand, when it is experiencing a slowdown, trucking companies hold back on increasing their fleet size – exactly what is happening now.

The current economic and political scenario in the country has put a strain on the manufacturing industry. The US-China trade war, which began in 2018, and the tariffs imposed by the two countries on each other have been detrimental to business and allied service providers, including truck manufacturers. If we are to consider the disruption that the Coronavirus is causing in global trade, we can presume that it will be a while before the freight business picks up again.

The other reason industry experts are giving for the drop in Class 8 orders is a market correction. Monitor Daily quotes Act Research’s President and senior analyst, Kenny Vieth, explaining the downturn: “After peak sales and build in 2019, significant declines are ahead in 2020, as heavy-duty sales and build follow the net orders trend down. But if our forecast of ongoing (but slower) economic expansion holds in 2020, the drop will be a correction (along the lines of 2015 and 2016), not a devastating recession (as in 2008 and 2009).”

What’s the impact?

The declining order book for Class 8 trucks has already started to show its impact. According to reports, quite a few truck makers, including larger manufacturers like Volvo, Mack Trucks, Daimler, and Navistar, have already gone through a round of layoffs or are considering cutting their workforce and reducing their production plans. For example, Cummins, the engine maker, is reported to have planned to lay off around 2000 workers in early 2020, and Navistar has already gone through two rounds of layoffs last year. When the bigger companies are taking such drastic measures, it will be difficult for the smaller manufacturers to tide over this recessionary phase.

The cost of maintaining and managing the excess inventory will be another issue that the truck manufacturers will have to deal with. According to reports, the inventory-to-sales ratio was 3.9 months in January, which is much higher than the industry’s normal average of 2 to 2.5 months. Till this excess inventory is sold off, the truck makers may have to further cut production plans and bear an additional burden on their operating funds.

This problem doesn’t end with the manufacturers. Even the dealers who may have taken additional inventory of Class 8 trucks when the market was good will now have to either hold the inventory till there are buyers in the market or sell their inventory at a discount. Either way, it will have a negative impact on their bottom line

However, companies that have built-in diversity in their supply chain — keeping in mind the cyclical and uncertain nature of trade and keeping a rigorous check on it — have a better chance of surviving such downturns.