US trailer market: The long road to recovery

The implications of America’s loss of its gold-plated, AAA credit rating to AA+ by ratings agency Standard & Poors is a subject not only being hotly debated in global government circles, but also in business and consumer circles.

Speculation as to potential outcomes is running from a second, double dip recession – but with better inbuilt safety buffers – to a flat, wait-and-see economic environment where borrowing costs may increase and there are implications for the US dollar’s reserve status.

With fallout from the 2007/2008 sub-prime mortgage crisis – which reached its peak in 2009 – still reverberating across numerous industry sectors, the difficulty for commentators lies in unravelling what represent market corrections and natural industry evolution and what amounts to a new mood of cautious optimism.

The trailer manufacturing industry is a case in point. A cursory look at the figures suggests an industry that is shrugging off uncertainty and ramping its numbers back to pre-GFC levels in order to meet demand. It saw a sharp decline in production from 2007 when 217,000 units were produced, to 140,000 in 2008 and a 50 per cent plunge to 70,000 in 2009. Since then, as needs have increased, manufacturers have geared back up. There has been a gradual upward trajectory – numbers increased to 210,000 orders for 2011, with projections for up to 300,000 for 2012/2013 – which is good news in any climate.

The new CEO of SAF-Holland, Detlef Borghardt, in an interview with GTR (see page 80) says this major component manufacturer and number three player in the American market, does not see another looming slowdown in North America. “In fact, we are experiencing increasing demand in both Europe and the US”, and he did not see any market intelligence pointing to decreasing demand.

SAF Holland’s own research is indicating double digit growth in Europe and the US every year until 2015. By comparison, China will grow about five per cent a year, along with India and South America. The overall global market will grow by around seven per cent a year over the same period. “If we don’t experience an unforeseen crisis, I am very confident,” Borghardt says.

In 2011, this strength was apparent across all segments of the North American commercial vehicle market, according to data reported by ACT Research Co. The ACT statistics reflect solid commercial vehicle demand through 2011 and well into 2012; but this indicates pent-up replacement needs and improved financial performance in the fleet sector, supported by improved credit availability for well-qualified clientele.

“While we have reduced our expectations for US economic growth somewhat, we still expect the overall economy to progress close to trend over 2011 and into 2012,” says Frank Maly, Director of ACT Research’s Commercial Vehicle Transportation Analysis and Research Department. “And, I am optimistic that the commercial road transport equipment industry will do so as well.”

But, given the long lead times for orders in the US market – between six and 18 months – and what appears to be a market in the process of rebalancing after a sharp recessionary decline, while any production increase spells good news, other commentators point to lower profit margins being realised on trailers produced. In the US market, the average life of a trailer is five years and industry observers also point to the fact that the industry there on-sells or strips for parts up to 600,000 trailers at a time when they reach their end date. These “trade ins” find a ready market in countries such as Russian and Mexico. On these figures, therefore, only half are being fully replaced.   

Recent data is also delivering a mixed picture. July saw the fourth consecutive monthly decline in total US commercial trailer net orders, with the industry posting a 2 per cent decline from June. That drop, in combination with an increase in trailer production, resulted in industry backlogs falling four per cent month over month. The industry order board ended June at 93,600 units.

“The fall-off in net orders was greater than anticipated,” Maly admits. “But, a positive factor to keep in mind is that cancellations of existing commitments on the order boards were not an issue; new order weakness was the cause.”

Nonetheless, fleet order rates will need to be closely monitored over the next couple of months to determine if the recent order softness is a short-lived pause or the start of a new trend in the industry recovery. Business analysts say that the reason for the recent order softness is a seasonal low.

According to Market Watch’s Jeffry Bartash, the soft patch was created by temporary events, such as the run-up in commodity prices; disruptions in key industries due to the Japanese earthquake in March; and poor weather and severe storms that slammed the US in spring 2011. Most economists share Bartash’s view, stating that the US is experiencing a lull in the recovery and that growth will accelerate in late 2011.

Another impacting factor is the deep breath being taken by some companies post-GFC as they continue to examine more cost-effective and innovative products coming onto the market. This quest for a combination of top quality and affordability may be causing some hesitation, industry insiders say.

ACT’s modeling projects that the US trailer population will have fallen by 11 per cent between the end of 2007 through the end of 2011, dropping from 3.06 million to 2.73 million units. “By the end of 2011, average fleet age will have risen to 8.2 years, marking the fourth consecutive year to be designated as having the oldest fleet on record,” says Frank.

But there is a positive side. Thanks to the ancient fleet and rising profitability for truckers, heavy trucks and trailers may see demand rebound. For trailers, orders already improved through 2010 before jumping sharply beginning in the fourth quarter of 2010.

For now though, the performance of the commercial road transport industry in 2011 indicates that the lull may be a surmountable bump on the road to recovery. “A strong first quarter followed by a mid-year lull is not unusual and following the industry’s normal order pattern,” Bartash says. “Even if the overall expansion was slowing down in mid-2011, the manufacturing sector has continued to expand and the commercial transport industry is no different.”

So, is the industry in a good way? “Yes,” says Maly, referring to the performance of the dry van segment, which is a widely accepted business indicator used to help determine the state of the industry.

In North America, dry and reefer vans, in combination with flatbed trailers, make up the lion’s share of new trailer demand: From 1999 through 2008, those three types accounted for 82 per cent of the trailer units shipped in the U.S.
The remaining 18 per cent of the market were application specific trailers and special equipment, such as dump trailers and low bed variants, which are especially impacted by commercial construction, road building, mining and oil exploration.

“Hence, when things go wrong in the dry van market, there is a profound impact on the overall trailer market,” says Maly. In 2009, things did go wrong. Only 37 per cent of factory shipments in the recession were dry vans, rising to 50 per cent in 2010. Not surprisingly, those two years were the two worst years since the mid 1970s. Today, the sharp fall-off in dry van demand is history and the segment has recovered to old strength as the industry makes up for a lack of capital investment in trailers since 2007.

In 2012, experts expect a third year of growth as the industry approaches volumes of the previous 2006 cyclical peak. But with growth comes a new concern. As the industry has ramped up production, component concerns have become issues. While most component issues are temporary in nature, one that promises to linger is tyres. “This obviously critical component continues to be a source of anxiety in the industry with regards to both availability as well as cost,” says Maly. “It’s not too much of a stretch to suggest that tyres may end up being the arbiter of just how many trailers are built in 2011.”

According to ACT data, it has been reported that for some new trailer production, fleet-supplied retreads are the tyre of choice, “and we have heard that some OEMs are sending out price quotes without tyres. Fortunately, though, the trailer market in the U.S. tends to be domestically sourced. Hence the Japanese earthquake had little if any impact on production.”

In past cycles, when concerns over component availability began to be heard, cost pressures quickly followed. “This cycle appears to be no different. Along with raw material and component cost pressure comes a very close monitoring of pricing by OEMs to ensure that margins will remain adequate as order backlogs are built-out. Ultimately, demand will set production scheduling while cost will impact pricing and margins,” Maly explains.

Taking into account the strong cyclical upturn the trailer industry experienced before June 2011 and the fact that the only factor capable of slowing down production is a shortage in component supply, the question is whether the economic lull is just a Wall Street myth?

“Overall, we have to accept the fact that the economic growth is slowing down,” says Maly. “But interestingly, the trailer manufacturing market is quite untouched by the overall development. The order books appear to be very solid, and cancellations have been extremely low. We have to admit though, that the strong fleet purchasing is just based on meeting pent-up demand for equipment replacement, not to add capacity.”

Therefore, the ACT expects build rates to grow slightly through the rest of 2011 and into 2012 – despite a murky US economy.

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